What is the bitcoin ‘halving’ and will it cause another price rally?

The first bitcoin halving in four years is set to take place on 19 April, 2024

An attendee at the Bitcoin 2021 Convention in Miami, Florida on 4 June, 2021 (Getty Images)

On Friday, 19 April, a seismic shift to bitcoin’s underlying foundations is set to take place, transforming not only how new bitcoins are created, but also, some believe, the cryptocurrency’s future price trajectory.

The bitcoin halving, as it is known, is programmed to take place roughly every four years, making this week’s event only the fourth time it has ever happened in the digital currency’s 15-year history.

Previous halvings have preceded record-breaking price rallies, with some cryptocurrency analysts pegging bitcoin’s price cycles to the quadrennial event.

With bitcoin already hitting a new all-time high last month, the halving could potentially prompt another surge into unchartered territories. So what is it and why do some claim this year’s halving will be historic?

The halving all stems from bitcoin's unique digital design. Unlike traditional currencies, the number of bitcoins that will ever exist is fixed.

The mathematical code underpinning the cryptocurrency means that only 21 million bitcoins can ever be produced and no amount of quantitative easing can artificially inflate this.

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More than 19 million bitcoins have already been produced through a process called mining, whereby new units of the cryptocurrency are generated by networks of computers programmed to solve complex mathematical puzzles.

The imminent halving of bitcoin, however, is about to make the rewards for this process considerably less worthwhile.

What is the bitcoin halving and why is it necessary?

The halving event, sometimes referred to as “the halvening”, is essentially the opposite of quantitative easing – so much so that some crypto enthusiasts refer to it as quantitative hardening.

As the name indicates, the halving cuts the production of bitcoin in half in such a way that mining the cryptocurrency only generates 50 per cent of the yield it used to.

It takes place roughly once every four years whenever 210,000 blocks have been mined, and is predicted to take place on 19 April. This halving will see mining rewards fall from 6.25 bitcoins per block, to 3.125 bitcoins.

The event is not determined or governed by a centralised body. Instead, it is hard-coded into bitcoin’s underlying blockchain that was created in 2008 by its pseudonymous creator Satoshi Nakamoto.

Bitcoin was developed as an antidote to the perceived flaws in the established financial system, which had contributed to the global crisis of 2007-2008. By cutting the supply, the halving event is designed to ensure the scarcity of bitcoin while preventing extreme price inflation.

Will it affect the price of bitcoin?

Previous halvings have resulted in sharp price increases and severe market volatility for bitcoin and other cryptocurrencies, as traders and miners adjust to the new production limitations of the world’s most valuable virtual currency.

The halving in 2012 saw bitcoin’s value shoot up by 80 times, while the 2016 halving preceded a 300 per cent rise in bitcoin’s value. In the 16 months following the 2020 halving, the price of bitcoin rose more than 600 per cent.

The simplest explanation for these price increases is the basic economic principle of supply and demand: if the supply suddenly drops but demand stays the same, the price will inevitably rise. But the decentralised and semi-anonymous nature of bitcoin means it is difficult to attribute specific gains or losses to a specific event.

April’s bitcoin halving comes in the middle of global economic uncertainty. Some analysts claim that bitcoin is becoming a safe-haven asset similar to gold, and early evidence suggests that investors may already be looking towards it as an alternative store-of-value.

During the pandemic, the chief executive of one of the world’s largest cryptocurrency exchanges revealed data showing a spike in deposits of $1,200 – the exact same size as the US government’s stimulus cheque. ​

In January 2024, bitcoin was boosted by the first ever approvals of a spot exchange-traded fund, which saw billions of dollars worth of institutional investment enter the crypto market for the first time. This has helped put bitcoin’s trajectory on a positive trajectory – months ahead of the halving even taking place.

“Bitcoin’s momentum is now underpinned by a more mature and calculated approach with an understanding of its strength from the world’s biggest institutional players,” Alex Adelman, chief executive and founder of crypto app Lolli, told The Independent.

“Bitcoin’s scarcity will only increase with the upcoming bitcoin Halving. Bitcoin’s heightened scarcity, coupled with persistent institutional adoption will very likely drive bitcoin to new and unprecedented price milestones.”