How to trade Bitcoin during the halving period?

Explore the dynamics of Bitcoin halving and its historical impact on price trends while preparing for the upcoming 2024 halving.

The Bitcoin halving is a crucial event in the cryptocurrency space that occurs approximately every four years, reducing the reward that miners receive for validating transactions on the Bitcoin network. As the name suggests, a Bitcoin halving event cuts the rewards in half for miners mining Bitcoin blocks that add transactions to the Bitcoin ledger. The process is hard-coded into the Bitcoin protocol to control its supply and retain its scarcity and limited supply status. 

The Bitcoin halving is crucial for traders due to its direct impact on Bitcoin (BTC), its market supply and, consequently, the price dynamics in the broader cryptocurrency market. This article explores Bitcoin trading strategies during the halving, cryptocurrency market dynamics, price trends, trading signals and opportunities and overall investor behavior during the Bitcoin halving periods.

What is Bitcoin halving?

Bitcoin operates on a decentralized network of computers known as nodes. Bitcoin mining is the process of creating valid blocks that add transaction records to Bitcoin’s public, decentralized ledger. Miners are individuals or entities that play a crucial role in securing and validating transactions on the Bitcoin blockchain. In return for their efforts, miners are rewarded with newly created Bitcoin.

Bitcoin mining uses hardware to solve complex mathematical problems, which validate and secure transactions on the network. Miners use computational power and compete to solve these puzzles, and the first one to solve it gets to add a new block of transactions to the blockchain.

The Bitcoin halving refers to the reduction in the reward given to miners for solving complex mathematical problems and validating transactions on the Bitcoin blockchain. It is a mechanism built into the Bitcoin protocol by Satoshi Nakamoto, the creator of Bitcoin, and it occurs roughly every four years (or every 210,000 blocks).

During this event, miner rewards for successfully adding a new block to the blockchain are cut in half. For the broader crypto market, halvings reduce the supply of new Bitcoin entering the market.

Initially, miners received 50 Bitcoin as a reward for each block they added to the blockchain when Bitcoin was first launched. At the first halving, the reward fell to 25 Bitcoin, and subsequent halvings in 2016 and 2020 decreased the reward to 12.5 and 6.25 BTC, respectively. In April 2024, it will drop to 3.125 BTC, and the process will continue until all 21 million Bitcoin are mined.

Reducing mining rewards controls the issuance of new Bitcoin and mimics the scarcity characteristics of precious metals like gold. Bitcoin’s supply is capped at 21 million, and by making it progressively harder and more resource-intensive to mine new BTC, the issuance rate slows down, creating scarcity and potentially driving up the value of each Bitcoin.

Related: Bitcoin halving 2024: Everything you need to know

The 2024 Bitcoin halving

Although the timing of the next halving is uncertain because the Bitcoin algorithm governs the occurrence of halving events based on the creation of blocks, experts have pointed to a likely date in April 2024, aligning closely with the historical four-year cycle.

The final halving is predicted to occur in the year 2140, when the number of BTC circulating will reach its maximum supply of 21 million. At this point, no more new Bitcoin will be mined.

The Bitcoin halving is designed to be somewhat predictable to avoid causing significant disruptions to the network. Despite this, the lead-up to and aftermath of a halving often sees heightened volatility in the price of Bitcoin.

What is the historical impact of the Bitcoin halving on BTC price trends?

The price trends from historical data and fundamental analysis show that Bitcoin halvings tend to impact the price of Bitcoin favorably. The halving events typically instill optimism and a bullish trend in the cryptocurrency markets, translating into positive price movements.

The positive momentum can be attributed to various factors, primarily economic demand-supply dynamics. The decrease in Bitcoin’s supply issuance makes it more scarce, boosting demand and driving up its value.

Moreover, the halving event draws attention to the cryptocurrency space, changing investor behavior, attracting new investors and promoting fear of missing out (FOMO), bringing price predictions by influential commentators on social media and established media and higher community engagement, which often contributes to an uptick in trading activity.

The period preceding a halving frequently initiates conversations and educational campaigns regarding the foundational principles of Bitcoin, blockchain technology and the economics of cryptocurrencies.

However, while historical trends indicate a correlation between halving events and price increases, this is not guaranteed, and investors should do their own research to understand the price trends during each halving.

Consistent trends have become evident in price analysis during each Bitcoin halving. In 2016, the value of BTC stood at $665 before halving, surging to $2,250 a year later.

The halving in 2020 occurred in May when Bitcoin was priced at $8,740. By the end of that same year, BTC had soared to $29,000. Therefore, since a bullish market trend has typically followed each previous Bitcoin halving cycle, forecasts suggest the 2024 cycle will be no different.

Market volatility and trading opportunities during the Bitcoin halving

The anticipation and occurrence of a Bitcoin halving event are often accompanied by increased market volatility. This historical volatility creates both challenges and opportunities for traders. While the uncertainty may pose risks, it also opens avenues for strategic trading, especially for those adept at navigating price swings.

Traders can follow the prevailing trend in the lead-up to and after the halving, either to go long in a bullish trend or short in a bearish trend. Traders can identify key resistance or support levels to execute trades when the price breaks out of these levels.

Breakouts can help signify potential trend reversals or the continuation of an existing trend. Support levels are price levels where the Bitcoin price may stop falling, and resistance levels are where it tends to halt its upward movement.

Traders can identify these levels using technical analysis tools like trendlines, moving averages or horizontal support and resistance lines, waiting for the price to break decisively above a resistance level or below a support level. The breakout is confirmed when the price closes above or below the identified level, signaling a potential shift in market sentiment.

For example, in 2016, before the halving, Bitcoin’s price was trading at around $665. Traders observing a resistance level at $700 may have adopted a breakout strategy, and if the price broke decisively above $700, it could signal a bullish breakout.

Once the breakout is confirmed, traders may enter a long position (buy) if it is a bullish breakout or a short position (sell) if it is a bearish breakout. Stop-loss orders and take-profit levels are typically set to manage risk and secure profits.

Traders should continue to monitor the trade, adjusting their strategy as the market evolves. Breakout trades aim to capture the momentum generated by the price breaking through a significant level.

Breakout trading carries risks, and false breakouts can occur. Therefore, traders must exercise caution and do their research to filter out potential false breakouts.

Additionally, traders can explore price differentials across various crypto exchanges. Bitcoin’s volatility may create temporary pricing imbalances, and traders can capitalize on these arbitrage opportunities by buying on one exchange and selling on another.

Related: Bitcoin halving 2024 — Miners predict potential outcomes of reduced BTC rewards

Risk assessment amid the Bitcoin halving

Although the Bitcoin halving is commonly perceived as a positive occurrence, there are inherent risks, particularly in the short term. The period leading up to the halving often triggers speculative market behavior, introducing the potential for heightened volatility.

Additionally, it is crucial to recognize the possibility of a bear trend or temporary price corrections if market expectations are not aligned with the actual outcomes. Furthermore, traders must ensure that their cryptocurrency holdings are stored securely. Consider using a hardware wallet or a secure software wallet and enable two-factor authentication for added security.

Market sentiment, regulatory developments, and global economic factors can contribute to the overall risk landscape associated with the Bitcoin halving, emphasizing the importance of a well-informed and adaptable approach to investment strategies.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.