Looking back, 2024 might turn out to be one of the best years for cryptocurrencies. We won’t know until the year wraps up, but one thing’s for sure — Bitcoin (BTC-USD) is on a roll.

The world’s largest cryptocurrency has surged more than 65% to start the year, now trading above the $73,000 level. That move has been driven by continued capital inflows into this digital asset via spot Bitcoin ETFs. Approved by the Securities and Exchange Commission in January, institutional investors have flooded into these funds as investors scramble to gain exposure to crypto.

This heightened demand comes at a time when many investors expect Bitcoin to become even more scarce. The crypto’s upcoming halvening, in which mining rewards will be cut in half for Bitcoin miners. Thus, we could be in for a price spiral higher, or at least that’s what the market is anticipating.

Let’s dive more into what this Bitcoin halvening — or halving — is, and why it matters for investors.

Importance of the Bitcoin Halvening

In simple terms, Bitcoin halvings happen roughly every four years. These halving events result in a 50% reduction in newly-issued Bitcoin. With around 19.5 million Bitcoin already minted and a cap of 21 million put in place when the token was first created, the cost to mine new Bitcoin will increase dramatically. That is a feature of Bitcoin’s fundamentals, and not a flaw, driving much of the value increase this token has seen in the past.

Since there will only ever be 21 million Bitcoins circulating in the market, the fact that fewer new bitcoins will be created is a big deal. Scarcity matters, particularly for stores of value like Bitcoin. So, the recent price appreciation we’re seeing certainly makes sense.

Impacts of the Bitcoin Halvening

With Bitcoin’s inflation rate essentially dropping by 50% overnight, this is one asset class that investors can rely on for diminishing inflation over time. Relative to other cash-like instruments (or even cash itself), Bitcoin’s value should theoretically hold up better during periods of inflation. That’s another key aspect of this halving which is less-discussed, but I think just as important.

However, this mechanism does not shield Bitcoin users from inflationary effects when converting it to fiat currency for transactions. Inflation will still exist, whether consumers like it or not. But for those looking to park capital for periods of time, Bitcoin certainly looks like a compelling option, given its run into the halving.

Driven by possible gains, investors now flock to the cryptocurrency market. That creates an unexpected demand for Bitcoin, too. However, investing in Bitcoin may become more speculative as participants seek to capitalize on potential value appreciation from halving events. So, some semblance of caution is warranted here.

Miners, either individuals or companies, have traditionally found Bitcoin mining lucrative due to the rewards the parties receive. However, halving events reduce those rewards, potentially impacting profitability. The reduction also adds more challenges in large-scale mining operations. If that happens, more substantial investments are needed, including but not limited to maintenance, equipment and upgrades.

3 Things to Know About the April Event

Now that we know the importance and relevance of the most anticipated Bitcoin halvening, investors must know the event alone is not only the solution and basis for determining Bitcoin’s price.

While there can be many market factors that can cause and happen after the halving event, the macroeconomic conditions also influence the price of Bitcoin. As the event is slowly approaching, investors should anticipate more volatility, a strong surge in Bitcoin price and impacts on mining in general.

Volatility Will Likely Increase

Historical data suggests that Bitcoin has undergone notable price fluctuations during halving years, with past trends indicating upward movements. However, it’s essential to recognize the potential for contrasting outcomes based on historical precedent.

As the newly launched ETF drives Bitcoin prices back up, attention turns to the impending mid-April halving event. The Bitcoin halvening cycle, occurring roughly every four years or every 210,000 blocks, reduces blockchain rewards for miners, aiming to maintain Bitcoin’s scarcity. With each halving, the rate of new Bitcoin introduction decreases, ultimately capping the total supply at 21 million Bitcoins.

The event attracts new investors and boosts trading activity, yet its impact on price increases may diminish. Examining July 2010 to February 2024 returns, we assessed how halving periods influenced Bitcoin’s price distribution.

Analyzing the distributions of returns and volatility over time reveals the maturation of the Bitcoin market from a niche interest to a mainstream asset. With each halving event, returns and volatility have decreased, suggesting a more stable investment landscape.

However, investors should temper expectations for dramatic gains seen in Bitcoin’s early days. Halving also impacts miners directly by reducing block rewards, potentially leading to industry consolidation as smaller miners struggle to remain profitable.

Ultimately, miners will need to adapt gradually over the coming decades as Bitcoin mining shifts towards reliance on transaction fees.

Bitcoin’s Price Should Trend Higher

Aimed at preserving Bitcoin’s scarcity, the upcoming halving has historically led to price surges as supply decreased. After previous halvings, Bitcoin surged from under $9,000 to about $60,000 within a year. However, some analysts, like JPMorgan (NYSE:JPM), warned of potential price drops due to higher production costs, suggesting a more cautious outlook. Nonetheless, attention from major financial institutions has highlighted the growing significance of Bitcoin in recent years.

Deutsche Bank’s (NYSE:DB) Jim Reid noted the growing institutionalization of the crypto asset class, citing the influx of new ETFs. He highlighted the upcoming fourth Bitcoin halving in April, reducing new coins available to miners to maintain scarcity, and emphasized the importance of regulatory clarity. Reid stressed that its institutionalization is undeniable regardless of one’s stance on Bitcoin

Historical trends suggest that halving the supply of Bitcoin typically leads to a doubling of its value, making it a profitable investment strategy. Analyst Kar Yong Ang notes that Bitcoin rises about six months before a halving event and peaks over a year afterward.

In the years following previous halvings, Bitcoin experienced substantial growth, with increases of approximately 30,000% in 2012, 786% in 2016 and 712% in 2020. However, traders should be aware of factors such as hacks, bankruptcies, market conditions and regulatory changes that could mitigate the impact of future halving events.

Mining Will Fundamentally Change

One of the possible things that can happen during the Bitcoin halving is the number of new Bitcoin miners will also decrease from about 900 units to 450. However, miners will also experience hurdles, such as adaptation of reduced rewards and managing a surging operational cost. Such projects may also double up to $40,000 after the halving event.

Bitcoin mining also requires more capital-intensive investments, such as infrastructure and equipment, as well as upgrades and maintenance. Mining operations rely more on substantial debt financing for more fund expansion and sustain operations.

However, declining profit margins due to halving events can strain these firms, leading to bankruptcies and industry consolidation. The 2024 halving is anticipated to intensify this trend, especially considering the influx of new entrants and increased reliance on asset-backed loans during the recent crypto bull market.

Bottom Line

While miners anticipate the impact of halving, investors remain uncertain about its effects. Some may mimic strategies from 2016, while others opt to buy Bitcoin ahead of the event. Predicting BTC’s post-halving price movements proves challenging due to the market’s evolving nature, underscoring the importance of prudent investment decisions.

Bitcoin halving events, occurring approximately every four years since 2012, are crucial in reducing inflation and maintaining demand. While historically beneficial for investors due to resulting price changes, these events have posed challenges for smaller miners by reducing block validation rewards.

Considering their significant impact on Bitcoin’s price dynamics, investors must be aware of upcoming halving events and invest accordingly.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.