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Bitcoin’s Halving Event: What It Really Means And Why It Matters

If there is one topic dominating conversations in the cryptocurrency market right now, it is the eagerly anticipated Bitcoin halving event expected to happen next week on April 20. But why is this event so important?

The most straight forward answer to that question is that this event has a significant impact on the supply dynamics of Bitcoin, which in turn affects its price.

Let’s remember that in order for cryptocurrencies like Bitcoin to work effectively, there is a group of miners who check transactions and keep the network safe. Their participation is incentivized through block rewards, which are paid out in newly bitcoins. However, since the system is designed to have a finite supply of 21 million bitcoin, it must undergo periodic events, in which the number of bitcoins rewarded to miners for each block they mine is cut in half. These are the halving events!

Such reductions in the creation of new bitcoins effectively slow down the rate at which new coins become available for use, thus, as there are fewer new bitcoins being produced and entering circulation, the overall growth rate of Bitcoin’s supply decreases. This reduced supply would typically stimulate higher demand, and with this demand-supply imbalance, prices tend to go up, essentially because buyers outnumber sellers in the market.

Since Bitcoin was introduced, there have been three halving events, and each one of them has displayed a consistent pattern of price appreciation as displayed in the following table:

And while past results do not necessarily guarantee that this year’s halving event will follow the same pattern, it is still a precedent that reinforces the perception of these events as drivers for bull runs, since the gains seen after each halving event have been nothing short of remarkable.

Furthermore, it is worth noting that this year’s halving is actually standing out as the approval and introduction of spot Bitcoin exchange-traded funds (ETFs) have fundamentally changed the market dynamics for Bitcoin. Significant inflows into these ETFs have already contributed to Bitcoin reaching all-time high values this year, and if this trend continues and inflows into ETFs grow, it could indeed result in even higher demand for Bitcoin, thereby pushing its price higher.

Besides, there has been a noticeable decline in the amount of Bitcoin available for trading compared to previous halving cycled, This decline can be attributed to investors choosing to retain their Bitcoin holdings rather than selling them, which suggests a broader recognition of Bitcoin’s value as an asset worth holding onto.

However, bear in mind that the price of Bitcoin does not immediately skyrocket post-halving. In fact, during the last two halving events, Bitcoin has taken between 7 and 8 months to surpass its previous all-time high.

Thus, for those considering to potentially profit on this halving event, adopting a long-term approach may prove more advantageous as patience is key.

One strategy that has historically resulted in significant benefits is what we call the “halving cycle strategy”. This strategy involves gradually buying Bitcoin over a three month period – the month before the halving, the month of the halving itself, and the month after, with the aim of capitalizing from the potential upward price movements that often follow a halving event.

In addition, another strategy that can be appealing for profiting from halving events is Dollar Cost Averaging (DCA). This approach aims to minimize the impact of market volatility while steadily increasing your Bitcoin holdings. Thus,  Instead of trying to predict the best time to invest, with DCA, you would simply commit to regularly putting a fixed amount of money into Bitcoin.

Whether it is every week or every month, rain or shine, you just stick to your plan, and by doing so, you spread out your purchases over time. This, in essence, can help you benefit from both high and low prices, while also reducing the risk of investing all your money at once when prices are high.

Moreover, although halving events can make people excited about the chance to profit when Bitcoin stabilizes, it is important to know that prices can also drop significantly afterward.

In fact, historical data from previous halving events show that following the initial enthusiasm, there often occurs a substantial price correction in the subsequent year. For instance, after the first halving in 2012, Bitcoin saw a notable 85% decline in value within the following year, and similar downward trends were observed after the 2016 and 2020 halving events.

Therefore, while this outcome is not guaranteed to repeat in the next halving event, it is essential to approach it with a level-headed perspective and prepare for various scenarios.

One potential scenario to consider is that once the halving occurs and the expected supply reduction is realized, some early investors may decide to capitalize on their gains by selling their holdings. This influx of selling pressure could contribute to downward movements in prices.

Additionally, there are some suggestions that there is the possibility of a “price correction”, wherein Bitcoin prices could experience a downturn as market expectations may have already priced in the positive effects of the halving.

And, since the U.S. tax filing deadline is just around the corner, happening five days prior to the halving event, it may lead Bitcoin’s price to decrease as investors may need to withdraw funds to cover their tax obligations. This increased demand for cash could result in a temporary reduction in available funds for investing in assets like Bitcoin.

Ultimately, while excitement surrounds the halving event, with many believing it will further boost Bitcoin’s value, adopting a conservative approach to trading during this period, along with maintaining a long-term investment perspective, seems to be the most appropriate strategy to withstanding possible market fluctuations.

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