The fourth halving: what to expect in 2024 and beyond

One of the most dominant themes in the cryptocurrency markets at the start of 2024 has been the upcoming halving. These events, which investors closely monitor because of the historical effect on bitcoin’s price, only come around every four years, and the next one is due in April. This article explains how the mechanism works and explores how the market might react, taking into account the presence of other catalysts and bitcoin’s response to the three previous halvings.

Overview of Halving

Satoshi Nakamoto launched bitcoin in early 2009, shortly after the great financial crisis. To counteract one of the most severe slowdowns in living memory, central banks pumped money into their economies using a monetary tool called quantitative easing (QE). While QE aimed to stimulate the economy, it also debased domestic currencies. To avoid this effect, Satoshi capped the circulation of bitcoin at 21 million (>19 million have already been issued as of 14 March 2024).

New bitcoins are minted through block rewards earned by miners in return for validating transactions, a process which involves solving complex mathematical problems. To maintain scarcity, a key property of bitcoin, Satoshi embedded a mechanism into the underlying protocol which cuts rewards in half after 210,000 blocks of transactions are mined (roughly every four years). These events have become known as ‘halvings’ among the crypto community.

The initial reward, after Satoshi mined the ‘genesis’ block (the first batch of transactions), was 50btc, but it has dropped to its current rate of 6.25btc as a result of subsequent halvings in 2012, 2016 and 2020. The fourth halving will occur sometime in April when the block reward will fall to 3.125btc, and the last one in 2140, when all bitcoin will be in circulation. 

Key Events Leading to the Fourth Halving

While the halving was on investors’ radars for the majority of 2023, other factors helped bitcoin recover from the crypto winter and surge through the end of the year.  

One of the most powerful catalysts was the possibility of spot bitcoin exchange-traded funds (ETFs) coming to the US market. 13 providers submitted applications to the Securities and Exchange Commission (SEC), including some of the world’s largest financial institutions. The applications alone boosted bitcoin’s credibility as an asset class and caught investors’ attention due to the potential rise in demand, particularly from institutional adoption. The SEC eventually approved the products in early January 2024, and inflows surpassed $4.5 billion on the first day, dominated by the Grayscale Bitcoin Trust ($2.09 billion) and BlackRock’s iShares Bitcoin Trust ($1.01 billion). Trade volume hit nearly $14 billion within the first week.

Bitcoin also benefited from the rising risk appetite amid expectations that interest rates would start falling. Central banks raised rates to combat soaring inflation resulting from economic stimulus measures implemented during the pandemic and disruption to supply chains after Russia invaded Ukraine. Once these hikes took effect in mid-2023, investors bet central banks would reverse their policies, so they shifted funds into riskier assets like cryptocurrencies.

In total, inflows into crypto investment products reached $2.2 billion in 2023, according to research by CoinShares. This doubled the previous year’s volume and ranked as the third-highest since records began in 2017. But this figure has already been surpassed in 2024, with spot bitcoin ETFs and bitcoin ETPs attracting over $2.45 billion inflows as of February 19th 2024 only. 

Historical Performance Post-Halving

Investors keenly anticipate halvings because of the historical impact on the market. After all, bitcoin is subject to the law of supply and demand just like traditional asset classes, and this mechanism is designed to limit supply. Here’s a brief summary of the events so far:

• The first halving took place in November 2012 when the block reward dropped from 50btc to 25btc. Bitcoin rose from $12 to $1,000 over the next 12 months, its first bull market and the first time it crossed four figures.  

• The second halving happened in July 2016 when the block reward fell to 12.5btc. Bitcoin rose from $650 to $2,500 within a year, and went on to hit a new all-time high of nearly $17,500 by the end of 2017. This rally also coincided with the boom in initial coin offerings, the crypto version of IPOs.

• The reward fell to 6.25btc at the next halving in May 2020, by which point bitcoin had started to gain more widespread traction. The price rose from $10,000 to $56,000 a year later during its biggest rally to date, although it had peaked at $63,000.

So what are the common patterns? In each case, bitcoin climbed steadily for several months and then rallied strongly before experiencing a correction. The lesson investors should take from previous events is to remain patient while waiting for the bull market and put risk management strategies in place to help manage the correction, such as maintaining a diversified portfolio. 

Anticipated Changes in Mining Landscape   

CoinShares recently published its 2024 Mining Report, which explores the current state of the bitcoin mining industry. The next halving features prominently, given its impact on the income generated from maintaining the protocol. According to the report, the average cost of producing bitcoin (which includes energy) should rise to $37,800 after the halving, meaning only a select number of miners can remain profitable with a bitcoin price below $40,000. The others will operate at a loss unless they cut selling, general, and administrative expenses.

Learn more about the impact of the halving on the mining industry.

Conclusion

Every four years, the block reward earned by miners (who are responsible for validating bitcoin transactions) cuts in half in an event the crypto community refers to as ‘halvings’. Halvings contribute to bitcoin’s scarcity as they slow the circulation of new coins.

Investors keenly anticipate these events because of the impact on price. Bitcoin has surged after each one- the rally of more than 600% between 2020 and 2021 was the smallest to date. But corrections have also occurred, so investors need to make sure they have risk management strategies in place.

Given the next halving is expected sometime around April, it’s likely to be a major catalyst in 2024. The SEC’s approval of spot bitcoin ETFs and the prospect of falling interest rates have also contributed to the positive market sentiment leading up to it.