Beware the halving hype: Why context matters

Bitcoins fourth halving is without a doubt the event of the year in the crypto space, and for good reason. Historically, if we can even use this term when referring to crypto, the halving has been correlated with major spikes in Bitcoins price. Looking at the three halvings that Bitcoin has undergone so far, we can see that the asset experienced an average increase of 60% in the six months leading up to the event, followed by a 340% rise on average within the next six months.

Its therefore normal for both investors and analysts to feel excited about this years halving event, especially since digital assets have had a pretty solid run over the past few months. Both Bitcoin and Ethereum performed positively as of late, with the crypto king topping its former all-time high in March and Ethereum surging more than 50% in the last 60 days (at time of writing), as shown in the Ethereum price chart.

However, its one thing to keep a close eye on the Bitcoin halving and consider its impact on the market and another to think of it as a guarantee for future price gains and a stimulus for investing in Bitcoin.

The halving mirage

Over the years, the halving has taken on almost mythical proportions, being regarded as a prophecy rather than a simple deflationary mechanism that may or may not elicit positive outcomes.

Whats even worse is that the hype is fueling the FOMO fire, which is already an issue when it comes to crypto investing, and one might come to believe that great gains are looming on the horizon. Seen from this perspective, people can get the idea that it would be reckless to miss out on such a huge opportunity and not jump on the crypto bandwagon, when, in fact, the recklessness thing to do is to give in to all the noise and pressure and start investing without doing any due diligence.

Too busy speculating and dreaming about the massive price appreciation that the halving might trigger in the second half of the year, many people tend to lose sight of other noteworthy aspects. As important as it may be, the halving isnt the only factor that influences Bitcoins price action. If that were the case, Bitcoin wouldnt experience such major fluctuations between halving events and its price trajectory would be much smoother.

Theres obviously a lot to learn from studying how the halving impacts Bitcoin and the broader market. But its equally important to keep in mind that the data these quadrennial events provide is rather limited. Therefore, the patterns that analysts have observed so far rely on speculation to some degree and it would be rather naïve to think they represent a foolproof method to predict future price performance.

The importance of macroeconomic factors

It was once believed that Bitcoin and other digital currencies by extension were immune to macroeconomic factors given their decentralized nature. Today we know thats not true. Although digital currencies are decentralized and therefore borderless, permissionless, and able to circumvent capital controls, they are not entirely isolated from the traditional economic system.

Weve seen time and time again how the price of different digital assets, Bitcoin included, was swayed in one direction or another by what was happening in the global financial market. By following this line of reasoning, we can clearly see that the last Bitcoin halving which occurred in May 2020 came during a time when the worlds economy was marked by the lowering of interest rates and stimulus policies aimed to counteract the negative effects of the Covid pandemic. That has a major contribution to Bitcoins increase that culminated in November 2021.

On a similar note, lets not forget that Bitcoins price rally this year was largely driven by the approval of the first spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission in January. This contradicts the theory that the approach of the fourth halving was the main driver of growth for the original crypto in 2024.

As for the current economic landscape, weve got a blend of rising inflation rates, a push for clearer crypto regulations, and a series of global events that are bound to impact peoples views and attitudes toward investing.

With inflation still climbing in many parts of the world, digital currencies which are often seen as deflationary assets, can attract even more attention from investors seeking to protect their portfolios from the erosion of purchasing power. This is especially true for Bitcoin since the halving is going to make the asset more scarce and theoretically more valuable.

Regulation-wise, these past few years have been a constant struggle for governments worldwide to find a viable solution for regulating digital currencies. Approaches to crypto regulations differ from one country to another and that has had a direct impact on the way people view and interact with these types of assets. As a result, in regions with crypto-friendly policies people are more likely to use Bitcoin and other coins, while in countries with restrictive crypto policies like China, India, or Russia, its difficult for the general population to gain access to crypto.

Given the fragmented regulatory landscape, the Bitcoin halving is going to reverberate differently throughout the world, so not everyone will be as excited about this event, which makes it even harder to gauge its impact.

Wrapping up

The halving is undoubtedly a major milestone for Bitcoin and a significant event for the entire crypto market. However, to give the halving more importance than it actually has and ignore all other aspects in the process would mean creating a false narrative that can only muddle the waters. That being said, one needs to analyze things with a clear mind, free of FOMO and other intrusive influences and put things into context when trying to assess the current state of the crypto market and its outlook for 2024 and beyond.

Text source: TronWeekly

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