Halving happens automatically when 210,000 “blocks” are created as part of the bitcoin mining process. This happens approximately every four years, and it discourages coin production by reducing the reward for mining new bitcoin by half. The last halving event was in 2020, and the next one is expected sometime in April.
Halving is meant to slow the supply of coins as it approaches its total supply, which is capped at 21 million coins. The built-in mechanism mimics the scarcity of gold and ensures that bitcoin mining becomes more expensive over time.
“The expectation is that the halving will lead to an increase in price because people expect supply to become constrained,” says Douglas Boneparth, president of Bone Fide Wealth and a member of CNBC’s Financial Advisor Council.
“When supply goes down, price goes up, assuming demand remains the same or greater,” says Boneparth, who holds investments in bitcoin and other cryptocurrencies.
Historically, the value of bitcoin has increased shortly after its three previous halving events, albeit with diminishing returns with each halving, according to CoinDesk.
Of course, the implications of bitcoin’s halving could be baked into its current price, since the imminent halving is widely known.
“It could be priced in, but now that the spot ETFs are here, the thinking is that institutions will need to buy more bitcoin on the open market to back the flows into their funds,” says Boneparth.
As with all cryptocurrencies, bitcoin is a highly speculative asset that’s extremely volatile, sometimes with price fluctuations of 5% to 10% in a single day.
While money can be made on bitcoin’s price swings, past performance doesn’t guarantee future success. There are no guarantees that it will retain any of its current value, either.
And unlike traditional investments such as stocks or bonds, bitcoin doesn’t represent ownership in a physical asset or a claim on future earnings.
Financial planners commonly recommend traditional investments like S&P 500 index funds, which offer less risk. Plus, the S&P 500’s average annual return is more than 10%.
That said, some experts may recommend a small stake in bitcoin as part of a diversified portfolio of investments. But even so, it’s still considered a high-risk asset.
“I think it makes sense for most folks to hold a small holding of cryptocurrencies, maybe 1% or 2% of an entire portfolio,” Chris Diodato, a CFP and founder of WELLth Financial Planning, previously told CNBC Make It.
“I’m hesitant to recommend more because, in addition to its significant volatility, it doesn’t produce cash flow like traditional investments — it’s only worth as much as someone is willing to pay for it.”
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