Bitcoin, the world's most prominent cryptocurrency, has received much attention due to the extreme fluctuations in its price, which presents significant risks and potential rewards for investors. But two things are certain in the crypto world: halvings are bullish, and crypto winters follow halvings.
To better understand these terms, a “halving” in the Bitcoin ecosystem is a pre-programmed event that reduces the rate at which new bitcoins are created or mined by half. Historically, this event has been viewed as bullish for long-term holders, with gains of 3,230% within one year following each halving. According to Koenjiku (Yay). But shortly after this rise, Bitcoin price usually experiences a major downward correction, indulging in what is often referred to as a crypto winter where its price falls by more than 80% on average (Ouch).
The Bitcoin network undergoes this halving event – a mechanism to control the rate of inflation and maintain its scarcity over time – approximately every four years. The last halving occurred on May 11, 2020, lowering the block reward for Bitcoin miners from 12.5 to 6.25 BTC. This next halving will reduce the mining reward to 3,123 BTC.
In general, halving hype tends to last for about a year, followed by a major correction the following year. The first halving occurred on November 28, 2012, and by November 2013, Bitcoin had seen a major decline, falling from $1,130 to $170 during the same year – a staggering 85% drop. The second halving in July 2016 showed a similar trajectory, with Bitcoin reaching $20,000 in November 2017 before falling to $3,191 in the following months – a drop of 84%. More recently, the third halving in May 2020 pushed Bitcoin to an all-time high of $68,789 in November 2021, but it then fell to $15,600 by June 2022 – a 77% correction.
Why does Bitcoin collapse after the halving?
Some events have affected Bitcoin's price performance on a fundamental level, such as the launch of Bitcoin futures, China's crackdown on the cryptocurrency industry, or even Tesla's tweets about dumping Bitcoin. But unlike these one-time events, the Bitcoin halving is a regularly scheduled event.
One possible reason behind post-halving crashes is profit-taking by investors who held their positions too long, often driven by “January effect“.
Investors believe that stock prices tend to rise in the first month of the year due to increased buying activity after the price decline in December. This is often due to tax loss harvesting, where investors sell losing stocks in December to offset capital gains tax liabilities and then buy them back in January, driving up demand and prices.
Investors may consider rebalancing their portfolios by selling risky assets like Bitcoin in December and reinvesting in stocks in January, a traditionally bullish month for stocks.
Another important factor is the phenomenon of “mining capitulation”.
During the profit season, miners accumulate Bitcoin and increase the network hash rate. However, there comes a point when miners need to sell their holdings to upgrade or purchase more equipment and remain competitive or more profitable as the network grows stronger. Although this selling pressure does not necessarily coincide with price performance, this selling pressure – coupled with other bearish market sentiment – can trigger a snowball effect that can lead to mining capitulation and a subsequent price collapse. When this happens, miners sell their reserves and equipment not to maintain their competitiveness, but to remain in operational condition.
According to data from Bitinfocharts chartsBitcoin's hash rate has declined over the last two halvings.
Despite these periodic corrections, Bitcoin has consistently proven its resilience and ability to recover from large drawdowns.
How do Bitcoin traders deal?
As MicroStrategy founder and CEO Michael Saylor, perhaps the most prominent Bitcoin user on Wall Street, advertiser In an interview with Emily Zhang in Bloomberg Studio 1.0 in 2022, “If you're going to invest in Bitcoin, the short time horizon is four years, [medium] The time horizon is ten years. The correct time horizon is forever.” Saylor asserts that Bitcoin is a good investment for those who want to hold it for at least one halving into the next.
“If you look over four years, no one is going to lose money holding Bitcoin for four years,” he said.
Likewise, Bitcoin's extremely bullish periods followed by major crashes and subsequent bullish periods suggest that it is not a speculative bubble. Rather, it is a volatile asset class that is gradually finding mainstream acceptance. In other words, these major corrections are relatively healthy for Bitcoin because they stabilize the mood among investors and avoid bubble-like scenarios that crash prices to the point of absolute futility.
Now, it is known that the end of the year following each halving historically marks the beginning of the crypto winter, but looking at a shorter time frame, September is particularly bearish A month for Bitcoin.
This poor September performance coincides with similar stock market downturns, with the S&P 500 seeing an average decline of 0.7% in September over the past 25 years — long before Bitcoin came along. the “September effect“This is due to investors exiting market positions after returning from the summer vacation to realize tax gains or losses before the end of the year.
So, for what it's worth, investors may want to avoid buying Bitcoin in September or around Christmas in the same year as the halving.
As Bitcoin's fourth halving approaches, with the price recently reclaiming $71,000, investors and enthusiasts are eagerly anticipating… Possible effects. History suggests that a post-halving correction may be on the horizon next year, but conditions today are different from any of the events that have affected Bitcoin as an asset in the past. Regulations have become clearer, Wall Street has poured billions of dollars into Bitcoin exchange-traded funds, countries have invested in the currency, and the network has become increasingly clear. Stronger than ever.
Wall Street traders tend to say that time in the market trumps timing the market. But for the Bitcoin community, HODL is a way of life. Deciding when to buy depends on you, but whatever decision you make, hurry: the halve is only two weeks away.
Edited by Stacey Elliott.
“Devoted student. Bacon advocate. Beer scholar. Troublemaker. Falls down a lot. Typical coffee enthusiast.”