Bitcoin halving explained and how to trade it

Jitanchandra Solanki
11 Min read

2020 has been an historic year for financial markets with every asset class experiencing huge market volatility and price swings. However, it is May 2020 that is set to shake up the cryptocurrency market. Dubbed the 'bitcoin halving', the production of the digital coin is set to drop by 50%. The event is written in the rules of bitcoin's underlying code with no one in control of the process, creating unique trading opportunities for those in the know. Read on to learn more and find out what these opportunities could be.

What is the bitcoin halving?

Bitcoin's unique digital design means that every four years a seismic shift in the digital currency happens. For the third time in its 11-year history, it will undergo another major change in May 2020. To understand the bitcoin halving, or as the digital underworld called it 'the halvening', it's important to understand the principles of bitcoin itself.

Only 21 million bitcoins can ever be produced. Around 18 million bitcoins have already been produced through 'crypto mining'. Bitcoin mining is a big business in which miners use high-spec computers to help process bitcoin transactions. These transactions are added as 'blocks' to the blockchain ledger which is the technology that underpins cryptocurrency.

The miners who carry out this work need considerable computer power which comes at a cost. This is why when a block gets added to the blockchain, the miner that processed it is compensated in bitcoins, otherwise known as the 'miners subsidy' or 'block subsidy'. This is also how new bitcoins are added to the supply chain where a fixed amount of new bitcoins are released on each block transaction. The miners can then sell their earned bitcoins via an exchange.

The halvening refers to the 50% reduction in compensation to miners that maintain the bitcoin network. What has traders and investors most excited is what could happen to the price of bitcoin during this time.

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When is the bitcoin halving and what will happen?

The halvening takes place roughly once every four years or whenever 210,000 blocks have been mined. The halvening in May 2020 will happen at block 630,000. While blocks get added to the blockchain roughly every 10 minutes the precise date and time can be difficult to pinpoint as the compounding effect of small variations can make a big difference.

Many analysts suggest the halvening is likely to take place between 10-12 May but this could vary either side. The halving will see miner's rewards decline from 12.5 bitcoins per block to 6.25 bitcoins. When bitcoin was first released the mining reward was 50 bitcoins. On 28 November 2012, the amount dropped to 25 bitcoins and on 9 July 2016, it dropped again to 12.5 bitcoins.

However, what has most traders, investors and crypto enthusiasts most excited about is the fact the number of bitcoins entering the supply chain will shrink while demand - all else being equal - will stay around the same levels. This shift in supply versus demand could help drive the cryptocurrency's price higher. As the halvening has happened twice before, let's take a look at bitcoin's price change during those times.

How will price react to the bitcoin halving?

While it is impossible to say for certain how prices will react to the bitcoin halving, we can look to see how the price of bitcoin has reacted to previous halvings, as the image shows below:

Source: Coindesk

In both previous halvings, bitcoin's price has seen its value rise both a year before and a year after. Both instances were against an overall bullish backdrop in the cryptocurrency market and global economic stability - making 2020 a very different situation due to the impact of Covid-19.

Another important factor to remember is that this event is highly anticipated and therefore some of the potential rise in bitcoin's value may already be priced in. Nonetheless, to be able to capitalise on any potential move from the halvening, having the right tools at your disposal is essential.

A great way to get started is to open a free demo trading account so you practice your trading ideas and strategies in a virtual trading environment until you are ready to go live. It's a great way to build your trading skills until you are ready for a live account. Plus you get access to a range of benefits including free market analysis, access to advanced Trading Central indicators and tools and much, much more!

Get started today and open your FREE demo trading account by clicking on the banner below:

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How to trade the bitcoin halving

There are two main ways to trade bitcoin. The first is to buy physical bitcoin through a cryptocurrency exchange. Many of them are unregulated entities that have been prone to hacks and theft in the past. In 2018, Japan's Coincheck was hacked and more than $500 million worth of digital currency was stolen.

The second way to trade bitcoin is to speculate on its price movement through cryptocurrency CFDs (Contracts for Difference). In this instance, it's best to use a broker that offers high regulatory oversight. For example, investment firms operating under the Admirals trademark include regulation from the UK Financial Conduct Authority, the Australian Securities and Investments Commission, the Estonian Financial Supervisory Authority and the Cyprus Securities and Exchange Commission.

Not only that, but clients opening an account with Admirals UK Ltd benefit from a negative balance protection policy which will protect you from adverse movements in the market by preventing your account balance from falling below zero. Other benefits include:

  • Safety: Many cryptocurrency exchanges have been hacked in the past. Trading via a cryptocurrency CFD broker means that you could be trading with a regulated company, ensuring the safety of your funds.
  • Leverage: A retail trader can trade positions with leverage of 1:2. A Professional trader can trade positions with leverage of 1:5.
  • Trade in any direction: Go long or short on any cryptocurrency CFD. No actual crypto assets are required to trade.
  • Advanced risk management tools: Use stop loss orders and take profit levels to minimise risk.
  • Access a wide range of cryptocurrency CFDs including bitcoin, ethereum, litecoin, ripple and more.
  • 24/7 trading: Trade 24 hours a day, 7 days a week on cryptocurrency CFDs paired with the Euro, such as the BTC/EUR (Bitcoin/Euro) crypto pair.
  • State-of-the-art trading platform: View cryptocurrency CFD prices on secure and stable platforms such as MetaTrader 4, MetaTrader 5, and MetaTrader WebTrader and use advanced features like trading directly from the chart.

If you feel you are ready to open a live account, check out the Admirals cryptocurrencies page by clicking on the banner below and then open a live account by clicking on the 'Start Trading' option.

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Trading the bitcoin halving in MetaTrader 5

After opening your live or demo trading account you can start to view cryptocurrency CFD prices in the MetaTrader platform. To find bitcoin and other cryptocurrency CFDs to trade on, simply follow the steps below:

  1. Open MetaTrader 5 provided by Admirals.
  2. Open Market Watch from the View menu at the top or by pressing Ctrl+M on your keyboard.
  3. Right-click on the Market Watch window and select Symbols or press Ctrl+U on your keyboard.
  4. This will then open the window shown below which details all the markets available for you to trade on.
  5. Select either an individual symbol or the category group and click 'Show Symbol' and OK. The instruments selected will then be shown in the Market Watch window.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Now you can left-click on one of the symbols you would like to view and drag it on to the chart to view the current and historical price of the symbol you've chosen. From here you can now open a trading ticket:

  1. Right-click on the chart.
  2. Select Trading.
  3. Select New Order, or press F9 on your keyboard.
  4. A trading ticket will open for you to input your entry price, stop loss and take profit levels and unit size (volume).

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Bitcoin halving 2020 analysis

As discussed in an earlier section, the two previous bitcoin halvings in 2012 and 2016 led to higher prices in the digital currency. However, during this period of time, the cryptocurrency was already in a bullish uptrend, as the long-term chart of bitcoin against the US dollar (BTCUSD) shows below:

Source: Admirals MetaTrader 5, BTCUSD, Weekly - Data range: from 11 July 2010 to 1 May 2020, accessed on 1 May 2020 at 10:35 am BST. Please note: Past performance is not a reliable indicator of future results.

The first two vertical lines on the chart above show the two previous bitcoin halvings. Since the last halving in 2016, there has been significant volatility in the cryptocurrency market as shown by the volatile price swings above.

Perhaps the most interesting factor for cryptocurrency traders is the fact BTCUSD has stayed above its weekly 200-period moving average and has recently bounced from it, as shown by the blue wavy line in the chart below.

Source: Admirals MetaTrader 5, BTCUSD, Weekly - Data range: from 11 July 2010 to 1 May 2020, accessed on 1 May 2020 at 8:35 pm BST. Please note: Past performance is not a reliable indicator of future results.

Moving averages are often used as an indication of the trend as well as support and resistance levels for turning points. The unique situation of the bitcoin halving, combined with the technical picture shown above paint a compelling picture towards further upside for the cryptocurrency. However, the global economic picture is now very different due to the impact of Covid-19 and the havoc it has caused in the financial markets. Risk management is key in such conditions. How will you be trading it?

A great way to get started today is by opening a free demo trading account so you can trade in a virtual trading environment until you are ready to go live! Click on the banner below to start today!

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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