The upcoming bitcoin halving

When Satoshi created bitcoin, instead of dumping all 21 million coins on the market at once and risking concentrated supply (as the only holders would have been the cypherpunks who were familiar with the technology and concept back then), the issuance was based on the number of blocks mined.

In 2009, 50 bitcoin (BTC) was the reward for mining a block, which takes place approximately every 10 minutes. After the mining of every 210,000 blocks, which takes approximately four years, the reward for mining a block is cut in half, hence the term ‘halving’. In 2012, the amount of bitcoin per block rewarded to miners halved to 25 BTC, then to 12.5 BTC in 2016 and to 6.25 BTC in 2020, which is where we are currently. In a few days, the next halving will occur, and the reward will drop to 3.125 BTC. This cycle will continue until 2140, making bitcoin a truly scarce asset.

Historically, the halving has been positive for bitcoin. There have been three halvings to date, and while not representative of future performance, each has led bitcoin into a new bull market that has produced a new all-time high.

Halving #1

• The first halving occurred on 28 November 2012 and reduced the block reward to 25 BTC from 50 BTC.
• Price at time of halving: $13
• Following calendar year’s peak: $1,152

Halving #2

• The second halving occurred on 16 July 2016 and reduced the block reward to 12.5 BTC.
• Price at time of halving: $664
• Following calendar year’s peak: $17,760

Halving #3

• The third halving occurred on 11 May 2020 and reduced the block reward to 6.25 BTC.
• Price at time of halving: $9,734
• Following calendar year’s peak: $67,549

Crypto-linked equities may benefit from a higher bitcoin price in many ways. More activity benefits crypto exchanges and asset managers, as well as software and hardware producers. Higher prices could also help companies such as MicroStrategy, which tends to hold bitcoin on the balance sheet, or benefit miners who usually hold and sell their bitcoin with the aim of maximising profits.

However, if bitcoin is only being mined at half the rate, could that be a negative for miners?

Smaller mining firms may find it more difficult to remain profitable. Some of these firms may be cash-strapped and could be forced into mergers to gain access to liquidity to cover loan repayments. However, this can be a boon for larger, publicly listed companies as it may help cement their long-term position and become dominant players.

As the crypto landscape continues to evolve, it may be that only the strong will survive. By investing in a fund such as BetaShares Crypto Innovators ETF (ASX: CRYP), the investor can obtain exposure to a portfolio of global companies at the forefront of the dynamic crypto economy, which may stand to benefit in the long term, regardless of the short-term price action of bitcoin and the crypto market.

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BetaShares Crypto Innovators ETF (CRYP)

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An investment in CRYP should be considered very high risk. CRYP provides focused exposure to companies involved in servicing crypto-asset markets or which have material investments in crypto-assets. Crypto-assets are highly speculative in nature and companies with significant exposure to crypto-asset markets can be expected to have a very high level of return volatility. An investment in CRYP should only be made by investors who fully understand the features and risks of such companies or after consulting a professional financial adviser, and who have a very high tolerance for risk and the capacity to absorb a rapid loss of some of their investment. CRYP will not invest in crypto assets directly and will not track price movements of any crypto assets. For more information on risks and other features of CRYP, please see the Target Market Determination and Product Disclosure Statement, available at (VIEW LINK).