Bitcoin halving, an event that happens around every four years, took place on Saturday, April 20. Here we delve into what this means, why investors and fans have such high hopes about it and other key questions.
What is the Bitcoin halving?
The number of new Bitcoins that are made is halved, simply put. Basically, the number of Bitcoins made is limited to 21 million, under the technical protocol Bitcoin was given when it was founded in 2009.
However, not all of the Bitcoins are distributed at once. They are issued gradually by miners, who make their computing power available to add new blocks to the public Bitcoin database, known as the blockchain.
Miners who add blocks to the blockchain are paid in Bitcoin, which increases the total number of tokens in the network. "Originally, miners received 50 Bitcoins per block," says Markus van de Weyer, Managing Director of Frankfurt-based asset manager Alpha Beta Asset Management.
However, the Bitcoin protocol stipulates that the reward is halved at regular intervals - always after 210,000 blocks - in a halving process. That already happened in 2012, 2016 and 2020. After the fourth halving, miners will only receive 3.125 Bitcoin per block.
To what extent does halving affect the value of Bitcoin?
"Halving reduces the number of new Bitcoins in the Bitcoin network," says Jan-Patrick Weuthen, an asset manager based in Cologne, Germany. The artificial supply shortage leads to an increase in the value of Bitcoin while the level of demand remains the same.
"In the past, the halving led to a dramatic rise in the price of Bitcoin," says van de Weyer. Before the first halving, the Bitcoin price was just under $10, and then it rose to $1,100.
The second halving caused the price to rise from around $650 to a peak of up to $20,000, and the third from around $8,000 to more than $70,000. However, Van de Weyer is cautious about forecasts. While a significant price increase can be expected from the latest halving, you cannot necessarily expect dramatic increases of the scale of the earlier halvings.
Moreover, Weuthen says, investors should not expect the value of Bitcoin to rise immediately after the fourth halving. After all, the latest halving has been marked the calendars of cryptospecialists and everyone else for quite some time, so any expected gains have long been priced into the system.
After past halvings, the Bitcoin price often took several months to show the halving effect at all. "In some cases, the Bitcoin price only reached new record highs more than a year after the halving took place," says Weuthen.
Will the halving and potential Bitcoin price rise also impact other cryptocurrencies?
"As the first real cryptocurrency, Bitcoin usually sets the trend for the other altcoins," says Jan-Patrick Weuthen, referring to other cryptocurrencies.
Van de Weyer says price increase rallies of cryptocurrencies have always followed a similar pattern: Bitcoin moves first - and also the most - and leads the market by a wide margin. Once the Bitcoin rally slows down, Ethereum takes the lead as the second-largest cryptocurrency. "The so-called larger altcoins then follow with a certain time lag, followed by smaller, less capitalized coins," says van de Weyer.
The different cryptocurrencies may perform differently in the short term, Weuthen says. In the long term, however, they rarely go against the prevailing Bitcoin trend.
How much does it make sense to invest some of your assets in Bitcoin?
Asset manager Weuthen says investors have to ask themselves two key questions before adding cryptocurrencies to their portfolio. Firstly, can my nerves stand the potentially higher fluctuations on the crypto market? Bear in mind that price drops of well over 60% are not uncommon during correction phases. And secondly, do I want to consciously invest part of my assets outside the legal money system, with all the advantages and disadvantages that may bring?
Investors need to be aware that cryptocurrencies have no centralized checks and balances like the central banks or governments that oversee the regular money system. Transparency and checks are carried out via the blockchain network, meaning all the computers involved.
On the other hand - at least in the case of Bitcoin - no control centre can affect prices through multiplication, so it is solely regulated by supply and demand.
Weuthen says an investor who can answer the first question with a firm "yes" and already has a broadly diversified portfolio can certainly benefit from including a limited amount of Bitcoin. However, the weighting should then be no more than 3% to 5%, depending on your appetite for risk.
But views vary. Sven Langhan, Head of Investment at the Munich-based asset manager HRK Lunis, says private investors should be wary when it comes to crypto investments. "Unlike financial instruments such as shares and bonds, we simply cannot value Bitcoin." It is almost impossible to understand where price rises or falls come from, he says. "In this respect, we believe that Bitcoin is more of a speculative asset than an investment."
