Until a few years ago, the realms of bitcoin and cryptocurrency were quite specialized, primarily appealing to “tech bro” investors who embraced significant fluctuations in their investments, taking a chance on the asset class.

Recently, however, bitcoin has transitioned from the confines of Reddit forums to mainstream discussions. While crypto investments remain largely unregulated, more investors are contemplating a modest allocation to this asset class within their portfolios. Moreover, the cryptocurrency has achieved a record price.

This week, the focus is back on this asset class due to the phenomenon of “bitcoin halving”. This process is designed to regulate the bitcoin supply, safeguarding the currency’s value and averting inflation. It occurs once every four years and can significantly influence the currency’s value.

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The upcoming bitcoin halving is anticipated to occur imminently, with some experts even suggesting Friday, April 19. Let’s delve deeper into the mechanics of this practice and its potential implications for the asset class.

Understanding Bitcoin Halving

To grasp the concept of bitcoin halving, it’s essential to comprehend “bitcoin mining”, the process responsible for introducing new bitcoin into circulation.

Upon bitcoin’s inception in 2009, Satoshi Nakamoto, the enigmatic developer (or group of developers), embedded specific rules into the cryptocurrency. For instance, to safeguard bitcoin’s value, it was decreed that a maximum of 21 million coins would be in circulation. Presently, nearly 19.7 million bitcoins exist.

Mining is the method through which new coins enter circulation. Miners utilize computer technology for this task. In essence, mining involves solving a mathematical problem. Once solved, the bitcoin transaction is officially recorded in a ledger called the “blockchain”. In return for their efforts, the first miner to solve the mathematical problem receives bitcoin as a reward.

Given the finite supply of bitcoins (21 million), the reward for miners diminishes by half every four years to decelerate the mining rate. Initially set at 50 bitcoins per transaction, this reward has halved thrice and currently stands at 6.25 bitcoins.

Timing of the Next Bitcoin Halving

Bitcoin halving occurs approximately every four years. The previous halving transpired on May 11, 2020, and experts anticipate the next event to unfold imminently, with many pointing to Friday, April 19.

Investors and traders are eagerly anticipating the halving, as historical data suggests that halving events significantly impact the cryptocurrency’s value. Some foresee a comparable trend this time, while others speculate a potential decline in the currency’s value.

Here are the previous bitcoin halving dates:

• November 28, 2012 (reward halved to 25 coins)
• July 9, 2016 (reward halved to 12.5 coins)
• May 11, 2020 (reward halved to 6.25 coins)

Impact of Bitcoin Halving on Cryptocurrency Value

Bitcoin has recently surged in price in anticipation of the halving, reaching a peak in March and currently trading around £52,000.

Jason Hollands, managing director at Evelyn Partners, commented on the impending halving’s impact, stating that the perceived supply constraint coupled with rising demand is likely to boost prices. He attributed bitcoin’s resurgence to its integration into mainstream US investment products.

Hollands noted, “Bitcoin’s resurgence appears to be driven by its inclusion in mainstream investment products in the US.” He highlighted the authorization of the first spot Bitcoin ETFs by the US Securities and Exchange Commission in January, leading to increased investments in bitcoin through various funds.

However, while bitcoin’s value has soared in anticipation of the halving, some experts predict a potential post-halving decline. CoinDesk reported that analysts from J. P. Morgan have cautioned about this possibility, citing the market’s overbought conditions based on their analysis of bitcoin futures’ open interest.

This contrasts with past trends, as bitcoin has historically performed well after previous halving events.

“CoinDesk reports that the bank anticipates a downside for the world’s largest cryptocurrency post-halving due to overbought market conditions,” CoinDesk reports.

Before making investment decisions, it’s crucial to acknowledge that bitcoin is a high-risk asset class, unsuitable for novices. Investors should be prepared to bear potential losses and remain cautious of the increasing prevalence of crypto scams.

For those still interested in exposure to bitcoin’s volatile value swings, a small allocation within a diversified portfolio could be considered. Traditional investments like equities and bonds should constitute a larger portion compared to high-risk alternatives like bitcoin.