Bitcoin Halving: Paving way for Institutional Investors in Crypto?

Bitcoin’s quadrennial halving event, which reduces block rewards for miners by 50%, raises many questions about the future of the cryptocurrency. Will miners go bankrupt? Will the hash rate collapse? Will the price of Bitcoin rise and then fall? Will there be an acceleration in crypto adoption? Despite the uncertainty, one thing is certain: every four years, miners’ block rewards are cut in half. In April 2024, when the 210,000th block is validated, miners’ rewards will decrease from 6.25 BTC per block to 3.125 BTC.

This year’s halving could be unique due to the introduction of spot market Bitcoin exchange-traded funds (ETFs) in January. These ETFs have helped drive the price of Bitcoin to all-time highs, bringing the entire crypto sector close to a $3 trillion market capitalization. This raises the question of whether the halving will accelerate the trend of institutional interest in Bitcoin. Some believe that institutions are still learning about the asset class and understanding Bitcoin’s monetary policy will only generate more interest.

The halving is an important demonstration that Bitcoin’s security can continue despite a lower “security budget.” For institutions that want to buy the coin itself, cutting the block reward in half is an enticement as it assures them that the BTC supply will not balloon. Not everyone agrees that the halving alone will attract large corporations or financial institutions to invest in Bitcoin for the first time. Some investors are waiting to see the impact of the halving on miners’ profitability and are looking for further regulatory clarity.

Historically, Bitcoin has experienced price increases in the months leading up to a halving, and this pattern seems to be repeating in 2024. The upcoming halving has been referred to as a “Bitcoin-halving-induced euphoria” by some analysts. There are two major narratives driving Bitcoin currently: the approval of spot Bitcoin ETFs and the upcoming halving. It is unclear which event is more impactful on the price surge.

The hash rate, which determines the overall computing power of the network, is crucial for the security of the Bitcoin network. In past halvings, the hash rate initially fell but quickly recovered within a month. The introduction of ETFs has changed the Bitcoin ecosystem by creating a demand shock to the limited supply. This will likely drive prices higher and reduce challenges for miners.

The supply shock resulting from reduced mining revenues may have some effect on the price of Bitcoin. The long-term history suggests that the hash rate will recover, and the price of Bitcoin will continue to rise. Traditional Bitcoin proxies like MicroStrategy may be more affected by the spot market ETFs than the halving itself.

The prospects for miners are directly affected by the halving. The mining sector has matured since the last halving and is in a better position overall. Smaller miners may struggle and may need to raise capital. Transaction fees on the Bitcoin network are crucial for miners in the long term, and many miners are exploring supplemental revenue opportunities and investing in the development of Bitcoin applications.

While the introduction of spot Bitcoin ETFs may be seen as more consequential than the halving, halvings are unique to Bitcoin and reinforce its monetary policy. It highlights Bitcoin’s scarcity and finite supply, making it the hardest money ever created. This characteristic may be what helps Bitcoin survive for more than 200 years.

The upcoming halving event raises many questions about the future of Bitcoin. While the impact on prices, miners, and institutional adoption remains uncertain, the halving serves as a reminder of Bitcoin’s unique characteristics and its ability to withstand change. Whether the halving or the introduction of ETFs is more impactful is a matter of debate, but both events contribute to the ongoing evolution of the cryptocurrency.