The hooves of the halvening are upon us
There’s no denying it: things look bleak for crypto. Recent uptick notwithstanding, bitcoin is near its lowest point since the 2020 price run, and the industry’s reeling from two major scandals, first Luna then FTX.
Some are predicting Web3’s fading into that good night. But for bitcoiners into technical analysis, a silver lining is approaching: I’m talking about the halving (jokingly dubbed “the halvening” in association with M. Night Shyamalan), a quadrennial event historically associated with massive crypto booms.
To understand the halving, we need to take a closer look at the technical aspects of bitcoin.
Proof of work all day, party all night
Among other things, proof of work is how new bitcoin transactions are secured. The bitcoin network maintains a ledger—basically a list—of all transactions which take place using bitcoin. The ledger is updated through a series of steps:
1. A transaction is made, and it’s broadcast to all network nodes, basically copies of the ledger, which verify that the user has enough funds to make the transaction.
2. The transaction gets added to a new block—essentially a list of all recent transactions.
3. Bitcoin miners compete as to who will be the first to add that block to the network. The race is determined by whoever is first to brute-force solve a complex cryptographic puzzle, using the miner’s computer hardware.
4. The miner who wins earns the “block reward,” currently set to 6.25 bitcoin. New blocks are added to the bitcoin network approximately every 10 minutes.
Here’s where the halving comes in. The bitcoin block reward hasn’t always been 6.25. It was once 50 bitcoin. But every 210,000 blocks (roughly every 4 years), the bitcoin block reward reduces by half: as it did in 2012, to 25 bitcoin, in 2016, to 12.5 bitcoin, and in 2020, to 6.25 bitcoin.
Halvening Booms
Every previous halving has preceded a dramatic increase in bitcoin’s price. This shouldn’t come as a surprise—a halving reduces the supply of new bitcoin by 50%, while in theory demand stays the same. The last halving, which took place on May 11th, 2020, saw the price of bitcoin rocket up 1325%, from a low of $4,826 in March 2020, to an all-time high of $68,789.63 in November 2021. Likewise, the 2016 halving corresponded to a 284% price increase, and the 2012 halving saw the price explode 8069%.
The next halving will take place sometime in the Spring of 2024, which seems like a way off, but it’s not, really. Bitcoiners know a halving is coming—and they’ll often hoard leading up to it. The one-year periods preceding past halvings saw more modest price runs: 385%, 142%, and 17% respectively for 2012, 2016, and 2020.
Nor do halving only affect the price of bitcoin—one bitcoin booms, investors tend to reinvest in other cryptocurrencies, hoping to compound their gains. The halvening boat raises all ships.
So now that that’s established, we know what to do—throw a bunch of money in bitcoin, ride the post-halving boom, and reinvest in smaller coins. What could go wrong?
Fortunately or not, reality isn’t that simple. Bitcoin’s price is affected by myriad factors, not just the halving. And there’s some reason to believe this halving might break the trend.
Those pesky other factors
It’s worth noting that the 2020 price boom didn’t happen in isolation: it followed covid-19’s impact on the stock market, and the 2020 “summer of defi,” when crypto assets enjoyed a sudden burst of mainstream attention.
2024 might be different. There are too many factors to possibly enumerate, but here a few which could impact the crypto market leading up to and after the 2024 halving:
1. Ongoing suspicion following scandals
There are several schools of thought on scandals like FTX and Luna. One perspective is that the “bust” cycle of the crypto market when scammy projects die, that this is a natural part of the market cycle. Like a forest fire which consumes dead wood.
This may be accurate, but potential investors might not see it that way. In the past, most eyes on crypto were eyes which understood blockchain deeply, and believed in its power to impact the future. In that context, scammy projects were taken in stride.
But now, with crypto entering the mainstream, many investors understand the technology only shallowly, and are less committed to the industry. They’re less likely to see a scam as an isolated incident—or even as a systemic but limited problem—and more as a mark on crypto as a whole.
Good riddance, the diehards might say. But without mainstream investors, bitcoin prices are unlikely to rise above their current levels.
2. Bitcoin skepticism
Bitcoin’s market dominance is hovering around 40%—meaning its value is 40% that of all cryptocurrencies. This is obviously down from the era when bitcoin was crypto’s one-and-only.
If bitcoin’s market cap continues to sink, we can expect the halving to matter less, perhaps not at all. And there’s reason to believe this might happen: bitcoin has issues, not the least of which are high transaction fees, and slow send times. The Lightning Network is poised to resolve these issues—and time will tell whether it succeeds.
Another avenue of bitcoin-specific criticism centers on bitcoin’s energy usage. Proof of work requires heavy hardware running at all times. While counterarguments exist—like that bitcoin’s energy usage is dwarfed by that of the banking industry, or the production of paper currency—bitcoin currently uses 120 terawatt-hours of energy per year, or 0.5% of the world’s energy total, which is significant. Whether we think this is a problem or not, the majority will likely frown on this, and that could impact bitcoin’s price.
Image from way back in 2020
3. Bitcoin increased market dominance
Conversely, some argue that with the industry’s rot exposed, bitcoin’s market dominance will increase. This is certainly possible—bitcoin remains the dominant and most recognizable cryptocurrency. Further, bitcoin’s market dominance hasn’t shown a steady downward trend: rather, it tends to be low when the market is down, as it is now, and bounces when the market booms.
Bitcoin has elements which make it unique among cryptocurrencies, not the least its mysterious origin: bitcoin was invented in 2008 by the anonymous Satoshi Nakamoto. Its initial design and development make it difficult to control by any single party, arguably more than any other cryptocurrency. Between crypto scams and NFT exhaustion, it’s possible we’ll see a “back to basics” movement, with the industry recentering around bitcoin. This would bode well for the significance of the halving. But it could mean a lesser runoff into other crypto projects after bitcoin booms.
4. Market Maturity
Finally, there’s the argument that crypto markets may become more stable, and less susceptible to the wild price moves of the past. Bitcoin, after all, has a theoretical maximum market cap at the global GDP (the global GDP of 100 trillion divided by 19 million bitcoin gives us a price per bitcoin of approximately 5.3 million).
It could be that the crypto market has outgrown the age of speculation. If this is the case, we should expect a gentle rise in the price of bitcoin, but nothing like the price runs of the past—a 50% decrease in block rewards shouldn’t raise the price of bitcoin by more than double (or less—it restricts the flow of newly created bitcoin, but 90% of bitcoin has already been created).
5. Uncertain global events
Finally, it needs to be said: bitcoin’s price is impacted by a multitude of factors, and those which will be most relevant in 2024 may not have happened yet. By 2024, the global economy might have collapsed. We could be in World War 3. Or things might seem more normal than they have since the 90s.
Bitcoin’s correlation with the stock market is tricky—there are times where they move together, and times where they run opposite. This makes sense: when people have less money in general, they’ll have less for bitcoin. But at the same time, bitcoin is often seen as a hedge against the mainstream “fiat” economic system. When the fiat system seems to be failing, many turn to bitcoin.
Halvening Counterargument
Some claim the halving is more myth than fact—a highly anticipated but mostly symbolic landmark, which doesn’t affect price much. The main thrust of the argument is that the crypto boom and the halving don’t coincide closely enough in time—and indeed, the halving/price run connection includes a time lag. It could be that bitcoin booms happen periodically due mostly to global events, and people are seeing a correlation to the halving which doesn’t really exist.
To some extent, this is true of all technical analysis—on some level, it’s divination. Any pattern, no matter how clear, is liable to collapse due to myriad factors outside our awareness.
But that doesn’t mean the patterns aren’t there. The numbers don’t lie: every single past halving has preceded a major price jump, within a clear set timeframe (a year). There’s strong reason to assume the coming halving will also precede a price run, though due to factors discussed, it might be of smaller magnitude than price runs of the past.
There’s only one way to know, and that’s to wait and watch as history unfolds.