How retail investors can prepare

Bitcoin’s next halving is fast approaching, and investors are bracing themselves for the price volatility that has come to define the event. 

The last Bitcoin halving — where rewards for mining a block are sliced in half roughly every four years — saw Bitcoin’s (BTC) volatility index go beyond 9%.

So far, there have been three halvings — in 2012, 2016, and 2020 — with the next halving expected to occur in mid-April.

While investors holding Bitcoin don’t have to do anything, its impact on the market could mean a lot to them and the asset as a retail investment tool.

Managing expectations and educating yourself

Bitcoin’s rollercoaster cycles can be tempting to investors looking for short-term gains. And while Bitcoin’s halving events have historically been followed by price appreciation, every analyst will tell investors that past performance doesn’t guarantee future results.

In equities markets, analysts often say that “time in the market beats timing the market,” and the same can be said about Bitcoin.

Blockchain.com president Lane Kasselman told Cointelegraph that it’s “generally not recommended to try to time the market in the Bitcoin space.”

According to Kasselman, a “great deal of past predictive models have proven to be completely inaccurate.” Instead, a suggested strategy would be to dollar-cost average, which means buying small, fixed amounts of Bitcoin on a regular basis, regardless of its price.

Dollar-cost averaging is a method that helps reduce the emotional impact of investing, instead allowing investors to use a fixed schedule. While this means that investors may miss out on significant gains as they wait for their scheduled investment, they can also avoid the significant drawdowns that characterize the cryptocurrency market.

Kate Lifshits, partnerships lead at cryptocurrency exchange ChangeNow, told Cointelegraph that for retail investors, it’s “crucial to find that perfect balance between the excitement of amazing but potential gains and the hard reality of increased volatility.”

She advised investors to do their own research and “approach with caution, diversify their portfolios and manage risks effectively.”

Lifshits said that savvy investors know to look beyond the hype surrounding Bitcoin and consider factors that can influence its price, including inflation, macroeconomic trends and the technology underpinning the network.

Going beyond the hype and practicing proper risk management also involves proper education, as investors who have a clear strategy and know their risk profile are less likely to give in to emotions.

Emotional trading often leads to impulsive decisions, which in a volatile market can be made just before a major change in price direction.

Vishal Sacheendran, Binance’s head of regional markets, told Cointelegraph that it’s essential for investors to “thoroughly comprehend the crypto industry and the specific asset they’re investing in.”

According to Sacheendran, aligning individuals’ understanding of their unique risk tolerance with their own research “can help shape an investment strategy that serves their needs.” He added:

“The process of self-education helps investors understand these different characteristics, use cases, values and ultimately how to balance potential gains and risks.”

Sacheendran noted the “increasing wealth of information out there for everyone” to learn more about the space.

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Charles Chong, director of strategy at cryptocurrency mining firm Foundry Digital, told Cointelegraph that retail investors who aren’t engaged in daily trading “should adopt a long-term horizon,” as “understanding the core reason behind holding Bitcoin” is paramount.

This allows investors to “remain steadfast amid the market’s short-term fluctuations often following halving events.”

Inflation, interest rates and Bitcoin’s $1 trillion capitalization

While education and forming an investment strategy are important steps, investors must also be aware of the macro influences on Bitcoin price.

Bitcoin is still a relatively small commodity compared with other asset classes like equities or fixed income and isn’t immune to global macroeconomic factors like inflation and interest rates.

Thomas Perfumo, head of strategy at cryptocurrency exchange Kraken, told Cointelegraph that rising expectations of falling interest rates in developed countries have “supported the risk-on trend playing out across asset classes, including equities and crypto.”

Investors, he said, turned to assets like Bitcoin because of persistently high inflation, how easy these assets are to access and their ability to act as a store of value.

Becky Sarwate, head of communications at crypto exchange CEX.IO, told Cointelegraph that ahead of the upcoming halving, the overall health in equities markets, coupled with the launch of spot Bitcoin exchange-traded funds in the United States, could be supporting BTC’s recent price rise — but she noted that “boom times always come to an end.”

She said that part of what attracts investors to Bitcoin is its “internal safeguards against inflation,” which are partly exemplified by its halvings, adding:

“These structural bulwarks slow the trickle of BTC discovery and anchor its circulating capacity to avoid a glut in supply. As interest rates cool, traders and institutional investors will have more capital to deploy across speculative markets.”

Sound money accessible to retail first

Bitcoin’s popularity with retail investors can be traced back to its roots, as it started off publicized through newsletters and forums through word-of-mouth, with no central entity behind it. In its early years, liquidity was too thin for large players to enter the market without making a splash, and its unproven history kept institutions at bay.

This meant that sentiment about Bitcoin often revolved around price action, not activity on-chain or the cryptocurrency’s development. Social media hype specifically targeting retail investors focused heavily on what’s going on in the markets rather than under the hood.

Sacheendran said that crypto is a “unique asset class where retail investors manage to gain exposure earlier than institutional investors.”

This, Sacheendran said, has resulted in “robust community involvement” that can see a lot of hype around significant events like halvings that generate a lot of noise, making it critical for investors to be able to “remain focused on the essential aspects when making decisions.”

To Kraken’s Perfumo, there’s more to it. Bitcoin’s halvings, he said, remind us “of Bitcoin’s sound money design,” as the cryptocurrency combines limited supply with global liquidity, divisibility, value density, decentralization and censorship-resistant access to an online market. He added:

“We think it’s the most superior form of sound money. This fourth halving is symbolic in that the growth in Bitcoin’s annual supply will fall to less than 1% for the first time in its history, and ~94% of all Bitcoin that will ever exist will have been mined by this April.”

However, given that halvings are highly predictable — occurring every 210,000 blocks — and Bitcoin has risen over 70% so far this year, one has to wonder whether the event is already priced in.

Pricing in future, predictable changes

The halving’s predictability could, according to the efficient market hypothesis — which states that asset prices reflect all available information — mean that its impact is already reflected in the market.

Nikita Zubarev, chief analyst at exchange directory BestChange, told Cointelegraph that the halving is “absolutely” priced in and is one of the factors behind BTC’s rise this year.

According to Zubarev, historical data “shows that the halving factor is included in the price a year before the event” but is only reflected months after the halving due to the “time lag between miners accumulating and selling” their coins on exchanges.

Binance’s Sacheendran noted that despite broad awareness of the halving, past events have nevertheless led to dramatic price swings and surges.

Kraken’s Perfumo said the question of whether the Bitcoin halving is already priced has arisen during every previous cycle and always ends in surprise when the market performs well.

He suggested that instead, observers should look at how far cryptocurrency adoption has come along.

Perfumo said that as of 2023, estimates “suggest that 10% or less of the global population has adopted crypto in some capacity,” adding:

“These market cycles bring a lot of new interest, which accelerates the adoption rate of crypto. If you believe in the empirical trajectory of adoption in other technological disruptions, adoption usually hits a ‘tipping point’ where it starts to accelerate significantly. This is the bigger story, and the question is whether the halving in of itself supports growth in adoption.”

Given this context, the symbolism of this halving dramatically strengthens Bitcoin’s narrative of sound money and could be more relatable to a mass audience. Nevertheless, Perfumo suggested that the halving is “unlikely to drive wider use of Bitcoin as a currency.”

For adoption to grow, Bitcoin would have to be less volatile and used to buy everyday products and services while being more affordable for these transactions. Innovations, including layer-2 scaling solutions, are moving in that direction, but the halving wouldn’t help here.

To CEX.IO’s Sarwate, halvings are “great for generating buzz,” but there’s little about them that “argues for BTC’s everyday use.”

Instead, these events underline Bitcoin’s scarcity, a sentiment echoed by ChangeNOW’s Lifshits, who noted that by reducing issuance, halvings reinforce “Bitcoin’s deflationary nature.”

Lifshits added that halvings make Bitcoin’s potential as a “long-term store of value and medium of exchange in the digital age” clear and move the conversation away from price speculation to its broader utility in the future of the financial system.

The future of finance

The future of Bitcoin and the makeup of the industry supporting it will be defined by the long-term impact of these halving events, according to Charlie Schumacher, vice president of corporate communications at Bitcoin miner Marathon Digital Holdings. He told Cointelegraph that halvings are of crucial importance for miners, who play “an indispensable role in upholding Bitcoin’s integrity” and must find innovative ways to ensure their work continues profitably.

Blockchain.com’s Kasselman said that halvings have historically represented a significant shock for Bitcoin’s supply, with the first bringing the number of BTC produced yearly from 12% to 6% of the total supply.

Kasselman added that the second halving brought that number to 3%, and because 90% of Bitcoin’s total supply has now been mined, these havings will start having a smaller impact.

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To him, investors shouldn’t focus on the short-term implications of these events but should instead move to understand why Bitcoin has been getting so much attention since it first launched:

“These halvings that take place every four years demonstrate that Bitcoin is now the most scarce fungible asset in the world, which has the potential to completely change the way we think about money, savings and investments.”

The upcoming Bitcoin halving is a reminder of Bitcoin’s core appeal as a scarce, decentralized asset. And while its impact is hard to predict with certainty, it’s a reminder that Bitcoin’s long-term scarcity remains assured.

Approaching the halving with caution and doing your own research while maintaining a long-term perspective is critical as Bitcoin ultimately moves, over time, closer to truly being the future of finance.

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.