Bitcoin Halving Explained | What to Expect and How to Prepare?

One of the most anticipated events in the history of Bitcoin is around the corner. For only the fourth time in its 15-year run, Bitcoin is about to undergo a critical shift in its foundations. Yes, I am talking about the halving event which is predicted to happen in April. This one event can have a huge impact on the value of Bitcoin in both the short and the long term and understanding it is crucial for everyone interested in this asset.

So in this blog, we'll go through the details of the halving event, its impact on the price of Bitcoin, and finally how we can prepare for it. So let's get started.

What is Halving?

To understand halving, first we we need to understand mining. Unlike traditional currencies, Bitcoin operates in a decentralized environment, which means there is no central agency to process transactions. This is made possible through a technology called blockchain, which consists of a network of computers called nodes that run Bitcoin's software. Every time a new transaction is initiated on the Bitcoin network these nodes download all the previous transactions, verify the new one, and add it as a new block in the blockchain.

But then not every node gets a chance to do this.

Every node has to solve complex mathematical problems and the node who solves it first gets the chance to verify the transaction. This is called Proof of Work Consensus. So anyone who has enough storage to download the entire blockchain and its history of transactions and can provide the infrastructure to do the proof of work can register as a node.

And in return for the effort, a reward is given to the node which wins and verifies the transaction. Now the nodes are called minors, the verification process is called mining, and rewards are given in the form of bitcoins. This process is how new Bitcoins are introduced into circulation.

Now Bitcoin halving is an event that occurs when the reward for successfully mining new blocks is halved. This happens every 210,000 blocks or roughly every four years. When Bitcoin was introduced in 2009, the mining reward for each block was 50 BTC. There were three successful halvings after that and the reward has since been reduced to 6.25 BTC.

The next one is likely to take place on April 19 and will further cut block rewards to 3.125 bitcoin. This will go on until 2140 when the 32nd halving will occur and the bitcoin supply will max out at 21 million coins. This count is embedded within the Bitcoin protocol and cannot be changed without altering the entire blockchain. After this point, miners will no longer receive block rewards in the form of new Bitcoins and the reward system will switch to transaction fees like credit card companies do.

Halving is a key part of the Bitcoin protocol design and is a mechanism to control the supply of new Bitcoin. With traditional currencies such as the US dollar, for example, the central banks have direct control of the amount of currency in circulation.

During the COVID-19 pandemic, many central banks printed more money to provide stimulus support for their citizens, and this led to high inflation and pushed the value of money down. And if not controlled properly this can lead to a crisis called hyperinflation where the price of everyday necessities rises rapidly, making it hard for consumers to afford them. Bitcoin was developed as an answer to such flaws in the current financial system and the regular halving events balance the inflation of Bitcoin by maintaining its scarcity.

What would be the Impact?

The halving event has a huge economic impact on both Bitcoin miners and investors. For minors, the reduction in rewards can affect their revenue. This will force them to seek more energy-efficient techniques to stay profitable. Smaller miners will struggle the most, while bigger players with greater resources, may dominate the industry.

For investors, halving events tends to have a positive impact because it further restricts the supply of new coins entering the market. And if the demand, in theory, stays the same, this can drive up bitcoin’s price. Also, halving events attracts more press coverage and public attention which can further drive up investor interest and value. But keep in mind that the jump in price never happens overnight.

Historically before a halving event, the price of Bitcoin tends to rise gradually as investors expect a price increase post-halving, and in most cases, the impact is already priced in by the time the halving occurs.

But previous halving events have generally been followed by bull markets that usually begin after six to twelve months.

However, it’s important to note that the halving itself is not the sole factor influencing bitcoin’s price. There are various other macroeconomic factors such as fluctuations in the money supply, interest rates, and geopolitical events that can have an impact. Therefore, while historical data can offer valuable insights, it should be considered alongside these broader economic factors.

It’s important to mention that this will also be the first halving event after the SEC approved the Bitcoin Spot ETFs in January of this year. This has led to increased interest from institutional investors and more than $6 billion have entered the market since then.

The halving event is expected to further add to this trend.

How can you prepare?

For the average Bitcoin investor, there is not much to do. The coins in your wallet will be unaffected with a halving. What you can do is to stay informed about the event's timing and potential market impacts

If history repeats itself, price fluctuations around halving events could provide buying opportunities. If you are interested in trading, you can set price alerts, speculate on a price rise, and make some profits. I am in for the long run, and personally, I would stay away from timing the market and avoid emotional decisions based on short-term fluctuations.

We’ve come a long way in the evolution of Bitcoin. The April 2024 Bitcoin halving isn’t just an event; it’s another key chapter in the evolving story of crypto. The important point to focus on for investors like you and me is not the specific dates of halving events but the growth of the overall network. As long as more people use and believe in Bitcoin the likelihood of Bitcoin fulfilling its potential as a global store of value increases. And along with that value of our investments too.

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.