Amid the headlines surrounding the spread of the novel coronavirus, a major upcoming financial event has been ignored by many media commentators. It’s something that doesn’t happen often but could enrich attentive and properly positioned investors.
Known as the bitcoin halvening or halving, it’s scheduled to occur on May 11 and 12. Cryptocurrency aficionados are anticipating the event as if it were the Super Bowl. But it’s not necessarily going to benefit everyone, as there’s a downside for the miners who help produce the bitcoins.
Still, some investors are speculating about the potential for a swift price move after the halvening event. Is there reason to believe that bitcoin could make a serious price move in the near future?
Let’s delve into the finer points of a phenomenon that might not be fully appreciated until huge profits have already been booked.
Breaking Down the Bitcoin Halvening
So, what exactly is this mysterious and underappreciated event? The halvening is a time when the reward for mining new bitcoins will be cut in half. It might not sound very nice to slash their rewards in half, but there’s a reason for doing this.
One of the main features of bitcoin is that there will only be 21 million of the currency units ever produced. The idea is to make bitcoin scarce, and therefore more valuable. This is in contrast to fiat currencies such as the U.S. dollar, which has no set production limit and is therefore susceptible to devaluation.
In order to make bitcoin even scarcer, once every 210,000 blocks the “blockchain reward” is halved. The blockchain reward is basically the payoff for mining a block of bitcoin, where a block can be thought of as a file on the digital ledger.
Until the upcoming halving event, the blockchain reward will be 12.5 bitcoins. After the halving, it will be reduced to 6.25 bitcoins. And as PoWx Co-founder Michael Dubrovsky sums it up, “The theory is that there will be less Bitcoin available to buy if miners have less to sell.”
That’s a lot to digest, but the main point here is that the incentive to mine more bitcoin currency units will be reduced. Consequently, the rate of bitcoin production will likely slow down, thereby potentially leading to a higher Bitcoin price.
And indeed, prior bitcoin halvenings have been followed by substantial price increases. Granted, there are only two previous instances of Bitcoin halvenings in the past. Therefore, it cannot be claimed that there’s a large historical data set on which to base any conclusions.
Preparing for Possible Outcomes
That being said, the bitcoin price movements after the two past halvening events were absolutely stunning. InvestorPlace Markets Analyst Luke Lango elaborates on the moon-shot price moves following these previous halvenings:
After the first halvening in 2012, bitcoin prices rose about 8,000% over the following 12 months. After the second halvening in 2016, bitcoin prices rose about 2,000% over the following 18 months.
You’d be hard-pressed to find returns like that in any financial market. On the other hand, not everyone’s eager to jump into the long-Bitcoin trade.
For instance, CoinShares Chief Strategy Officer Meltem Demirors expects that those who load the boat with bitcoin may be disappointed. “I expect bitcoin will see more trading activity around the halving—most likely ‘buy the rumor, sell the news,'” posits Demirors.
Thus, it is not recommended that investors take a very large position in bitcoin. Even with the exciting news of the halvening event looming, we have to keep in mind that cryptocurrencies are speculative and involve risk.
And be aware that a crowded trade isn’t necessarily the best trade. While the mainstream financial press hasn’t covered the halving extensively, there’s no shortage of cryptocurrency speculators out there.
A Sensible Approach to the Bitcoin Halvening
Now that you know the basics surrounding the upcoming bitcoin halvening event, what’s the right way to play it for potential profits?
CoinCorner Chief Executive Danny Scott’s pre-halving warning not to “focus on short-term price movements” could actually be the best advice in this situation.
If you believed in Bitcoin’s potential before the halvening, you can continue to believe in it afterwards. And if the bullish thesis on cryptocurrency is right, then a reasonably sized position in Bitcoin could gain value in the long term.
