Hitting the headlines again recently, Bitcoin was the first ever cryptocurrency, introduced in 2009 by an anonymous group of computer programmers under the pseudonym Satoshi Nakamoto. This type of high-value finance can be exchanged for, or used in place of fiat currency (the type of traditional currency declared legal tender by a government), making it an attractive proposition for wealthy investors. Some will be worried however about the recent halving event, which took place on 19th April 2024, and what this means for their money.
In this article we explore in more detail how Bitcoin works, the benefits of including this as part of a diverse portfolio, and how the recent halving event could affect your investments.
How does Bitcoin work?
Bitcoin is a digital asset, which has no centralised governance. It relies on public key cryptography, in which users have a public key that is available for everyone to see, and a private key known only to their computers. The public key is a kind of account number used to make a transaction, which is then recorded in a ledger file that exists at each node of the network. The identities of the users remain relatively anonymous, but the transaction is available to see in the ledger. This ledger records and verifies transactions across a decentralised network, providing investors with enhanced security, and mitigating risks associated with fraud, data tampering, and unauthorised access.
Bitcoin is underpinned by a technology called blockchain, where transactions are grouped in blocks, and organised in a chronological sequence, making it extremely difficult to hijack, double send, or counterfeit.
What are the benefits of Bitcoin for the high-net-worth?
Sometimes known as digital gold, Bitcoin can be an attractive proposition as part of a balanced investment portfolio, because it provides seamless asset trading with reduced settlement times, compared to traditional assets.
Bitcoin is considered liquid asset finance because of its high number of exchanges and substantial trading volume. For this reason, Bitcoin can be used as a lever for securities-backed lending. The most common securities to borrow against are stocks and bonds, but Bitcoin provides an alternative collateral, should you need to access funds quickly and without selling your investments.
As central banks consider lowering interest rates, investors often seek alternative assets, and Bitcoin has demonstrated resilience when it comes to economic turbulence. Bitcoin is now seen by many as an alternative investment class, which can be used as part of a diversified portfolio, in conjunction with more traditional assets. Major financial institutions, including BlackRock, Franklin Templeton, Fidelity, and ARK Invest, now recognise the potential of this digital asset and offer Bitcoin-backed products to their clients. Cryptocurrency has become so mainstream that The FT has launched Cryptofinance, a new hub and weekly newsletter dedicated to the digital asset industry, which provides insight and intelligence into the crypto market and broader digital finance industry. As with all investments, however, Bitcoin also comes with its risks, and your investment can rise and fall.
What is Bitcoin halving and how does it affect the price of my investments?
The first halving event occurred when block number 210,000 was mined on the blockchain, in November 2012. This event triggered a reduction in the block reward for the first time, from 50 Bitcoins per block to 25, a standard set by the blockchain's creators to continuously reduce the rate at which the new Bitcoins are introduced into circulation.
Other halving events occurred in July 2016 (12.5 Bitcoins per block) and May 2020 (6.25 Bitcoins per block). As of the recent event on 19th April 2024, which reduced this figure further to 3.125 Bitcoins per block, there are an estimated 19.69 million Bitcoins in circulation, leaving only around 1.31 million to be released via mining rewards. The next halving event is expected to occur in 2028 when the block reward will fall again to 1.6253.
This may all sound a little strange. However, for investors, a halving event represents a reduction in the new coin supply, making it a scarce resource. The general idea is that by lowering the available amount of new supply, the price will rise. The prior three halving events (2020, 2016, and 2012) have resulted in an average price increase of 16% over the 60 days that followed.
While Bitcoin’s price has historically risen before and after each halving event, it hasn’t always been a straight lineup. Prices subsequently tend to pull back before reaching a new peak months later. For example, in 2016 there was a price decrease of 6% in the period between 60 and 120 days post-event, the price then rallied strongly throughout 2017.
How will the Bitcoin halving event affect high-net-worth individuals already invested?
While Bitcoin remains a speculative and sometimes volatile investment, its growing mainstream acceptance and increasing institutional adoption have made it a focus for investors looking for alternative investment opportunities.
A 2023 report by the financial services company deVere Group, revealed that 82% of millionaires had sought advice on Bitcoin investment, asking their financial advisers about including cryptocurrencies, such as Bitcoin, into their portfolios.
Those recently invested millionaires may be wondering how their portfolios will be affected by the recent halving event in the coming weeks and months. Historical data as outlined above, suggests that the path to new all-time highs won’t necessarily be straightforward. And, although the April event is Bitcoin specific, historically the Bitcoin price has also affected the rest of the cryptocurrency market, largely because of the increased press and public interest surrounding these events.
“Realistically, no one knows what will happen to prices as a result of the recent halving event, but many analysts suspect the price of Bitcoin may rise again. One positive sign for Bitcoin’s short-term price action is the recent net inflow into Bitcoin ETFs (Exchange-Traded Funds), indicating that institutional investors are more likely to be buyers than sellers at this stage.
As the market adjusts to the new supply dynamics and miners adapt to the reduced block rewards, investors should expect heightened volatility. This volatility can present opportunities for those looking to gain exposure to Bitcoin.”
Enness Global specialises in finance for high-net-worth individuals and can help investors better understand this volatility as well as the options available to use cryptocurrency to access six, seven, and eight-figure securities-backed lending. An alternative to the disposal of liquid assets to raise capital, that may potentially rise in value in the future.
If you have any questions regarding cryptocurrency-backed loans or securities-backed lending in general please get in touch here.
The views and opinions expressed in this piece are those of the author and do not constitute advice or a recommendation. They do not necessarily reflect the official policy or position of Enness and are not intended to indicate any market or industry viewpoints or those of other industry professionals
Enness does not give investment advice and does not deal in, transact on, or give advice on Bitcoin, Crypto, or any other digital assets. Enness does not give advice or recommendations on securities banked landing and business introductions are unregulated.
Islay Robinson, a founder of Enness, is widely regarded as one of the UK's leading mortgage brokers. He has been instrumental in delivering some of the most complex and high value mortgages in the UK.
