What the third bitcoin halving means for crypto investors

On Monday evening, the bitcoin Halving will arrive for the third time in bitcoin’s history. Yahoo Finance's Editor-at-Large Dan Roberts joins The First Trade to discuss.

Video Transcript

BRIAN SOZZI: Big day is on tap for investors in Bitcoin. Let's get right to Yahoo Finances. Editor-at-large Dan Roberts here to discuss. Dan, today is bitcoin halving. What is it, and what does it mean to the price?

DAN ROBERTS: Yeah, it's the halving, Brian. It happens every four years. This is the third halving in Bitcoin's history. Bitcoin came around in 2009. So we had a halving in 2012, a halving in 2016, and then a halving coming later today. What's interesting here, by the way, the timing is not exactly set in stone. It's a moving target because it depends on when a certain number of blocks-- and those are bundles of bitcoin transaction data-- have been mined or verified on the blockchain.

So what actually happens with the halving is that the reward that miners get for mining gets cut in half. So we know that miners have these expensive, big equipment machines, bitcoin mining rigs, and those are solving in real time, complicated formulas and computations in order to win, basically, contracts to upload or verify bundles of transactions on the blockchain. Every time that you, a bitcoin miner, do that, you receive a small amount of bitcoin as a reward.

But every four years, that reward gets cut in half, and that is a supply effort to keep the supply of bitcoin scarce. And of course, a lot of people who believe in Bitcoin and cryptocurrency as an investment, they say that its scarcity is its value, its digital gold. And so hypothetically, every time the halving happens, you would think that the bitcoin price would go up afterward because it's a reminder of bitcoin scarcity. There is only going to ever be 21 million bitcoins in circulation, and it's not going to hit that 21 million cap for many, many years. But that's what the halving is all about. It's baked into Bitcoin's design.

Now will the price actually go up? That remains to be seen. Every time's different. A lot has changed in the last four years with Bitcoin. The market has matured. The last two halvings, nothing really happened the day of the halving or the few days that followed. But in the weeks and months that followed, both times, the bitcoin price went up. And after the first halving in 2012, it went up hugely in that first year. But the caveat to that is, Bitcoin was really in its early days. There were believers cheering it on, fueling that.

After the second halving in 2016, the price went up in the year that followed but not by nearly as much as after 2012. So this time, it's anyone's guess.

ALEXIS CHRISTOFOROUS: Dan, if you look at Bitcoin, it's up more than 20%. I think it's up 24% year-to-date. You talked a moment ago about it being sort of digital gold. We know that people flock to gold as a traditional hedge. Do you think that investors are treating bitcoin as a hedge during this pandemic?

DAN ROBERTS: So it's really interesting, Alexis. In the first two weeks of March when the coronavirus cases were rising quickly and it had hit the US but New York hadn't quite shut down yet, the East Coast hadn't shut down, but it was in the state of Washington, it was in the state of California, and stocks were taking a huge hit, so was oil, so was Bitcoin. I remember writing about that at the time. In fact, back then, at the beginning of March, Bitcoin was crashing even worse than stocks every day.

But in the two months since then, or if you go to March 16-- which I think is a fair date. That's when New York shut down. Since March 16, Bitcoin is up 80%. So it has quietly performed very well in quarantine. It's up a lot more than the S&P, which is up by 22%, and that's how we know its stocks have bounced a lot back in the last two months. But, man, Bitcoin, I think, has been seen as a hedge.

Now, on the other hand, I always think that there's a lot of factors going on when crypto prices rally. It's very headline driven. It's also very driven by whales making big trades, either dumping or buying. So I don't know if you can completely interpret that and say, oh, see? Everyone agrees. Bitcoin is a good store of value. It is a good hedge during uncertainty. But hypothetically, that's what people think, that during times, especially when central banks and governments are very uncertain and when mainstream markets and equities aren't doing well, a lot of people might buy some bitcoin, just as a hedge, and just to diversify their portfolio.

BRIAN SOZZI: All right. Dan Roberts. Happy Bitcoin halving day.

DAN ROBERTS: We'll see what happens, guys.