Halving

Halving is a pre-programmed event in the code of certain cryptocurrency networks, most famously Bitcoin, that cuts the reward for mining new blocks in half. Imagine a magical goose that lays golden eggs. The halving is like a rule written in the goose's DNA that, every four years, makes it lay eggs that are only half as golden as before. This process is designed to control the creation of new coins, making the asset scarcer over time. By systematically reducing the rate of new supply, halving creates a predictable form of digital scarcity, mimicking the finite nature of precious commodities like gold. This controlled inflation rate is a core feature, intended to prevent the currency from being devalued by an ever-expanding supply, and it’s a key reason supporters often refer to certain cryptocurrencies as a deflationary asset or a store of value.

To understand halving, you first need to grasp the basics of a blockchain. Think of it as a public, digital ledger. This ledger is maintained by a global network of powerful computers called miners. These miners compete to solve complex mathematical puzzles. The first one to solve the puzzle gets to add the next “block” of transactions to the chain and, as a reward for their work, receives a predetermined amount of new cryptocurrency. This is known as the “block reward.” The halving event simply slashes that block reward by 50%. In Bitcoin's case, this happens approximately every four years (or more precisely, every 210,000 blocks). Let's look at Bitcoin's history as an example:

• 2009: The initial block reward was 50 BTC.
• 2012 Halving: The reward was cut to 25 BTC.
• 2016 Halving: The reward was cut to 12.5 BTC.
• 2020 Halving: The reward was cut to 6.25 BTC.
• 2024 Halving: The reward was cut to 3.125 BTC.

This process will continue until the last Bitcoin is mined, estimated to be around the year 2140, at which point the total supply will be capped at 21 million coins.

For investors, the halving is a fascinating event because it directly impacts one-half of the classic economic equation: supply.

A halving creates an immediate supply shock. The flow of new coins entering the market is suddenly and permanently reduced. According to the laws of supply and demand, if demand for an asset stays the same or grows while the new supply is cut, the price should theoretically increase. It's the digital equivalent of OPEC suddenly announcing it will cut oil production in half, or a major gold mine collapsing. The asset becomes harder to get, which can make it more valuable. Historically, Bitcoin's price has seen significant upward trends in the 12-18 months following each halving event, leading many to view it as a bullish catalyst.

This is where we pump the brakes. While the historical charts are tempting, a core principle of value investing is to look beyond hype and price action.

• Is it a Self-Fulfilling Prophecy? Much of the price run-up around a halving could be driven by speculation. Traders anticipate the price will rise, so they buy in, which causes the price to rise. It's a powerful narrative, but narratives can be fickle.
• The Market Knows: The halving isn't a surprise party. It's a public, scheduled event known years in advance. An efficient market would, in theory, already have this information “priced in.” Betting on the halving is betting that the market is inefficient and has somehow overlooked this widely publicized event.
• Where's the Value? From a strict value investor's perspective, cryptocurrencies are a puzzle. Unlike a company, they don't produce cash flow, have a balance sheet, or pay dividends. Their intrinsic value is incredibly difficult, if not impossible, to calculate using traditional models. Their value is derived from network effects, adoption, and collective belief.

The halving is more than just a potential price driver; it's a fundamental part of the long-term economic model for cryptocurrencies like Bitcoin. It ensures the finite supply cap is reached gradually and predictably. However, it also raises important questions about the future security of the network. As block rewards diminish toward zero, miners will become increasingly reliant on transaction fees—the small fees users pay to have their transactions processed. Whether these fees will be enough to incentivize miners to keep the network secure in the distant future is a topic of ongoing debate. For the savvy investor, the halving is a phenomenon to understand, not a signal to blindly follow. It highlights the unique economic design of certain digital assets but doesn't change the fundamental challenge of valuing them. Treat it as one fascinating data point in a very large, very new, and very volatile asset class.