In the annals of financial history, very few phenomena have garnered global attention and imagination quite like Bitcoin’s (BTC) meteoric rise. But behind the scenes, a silent countdown is underway. An unparalleled event that captures the eyes of millions, akin to the anticipation of a World Cup or the Olympics in the realm of cryptocurrency, an event that occurs once every four years and consistently heralds unprecedented shifts in the value of Bitcoin. The Bitcoin halving, coupled with the launch of Bitcoin exchange-traded funds (ETFs), presents an exciting era for the cryptocurrency market.
While the halving event reduces the supply of new Bitcoins, Bitcoin ETFs increase market accessibility, creating a dynamic interplay of supply and demand factors. With these pivotal events simultaneously occurring, we may be witnessing the dawn of unprecedented market shifts and a potential surge in Bitcoin's value. But what exactly is the Bitcoin halving, and what are its implications?
Since Bitcoin is not a physical asset, it cannot literally be split in half. Instead, "halving" refers to the reduction in the supply of new Bitcoins, known as block rewards, currently entering circulation every 10 minutes by half. Essentially, "miners" generate these block rewards by using computers and mining hardware to participate in Bitcoin’s blockchain, aiming to generate a cryptographic number equal to or less than the number set by Bitcoin’s network difficulty algorithm.
Approximately every four years, or every 210,000 blocks, the number of bitcoins mined is halved. In 2009, when the halving was first implemented, miners could mine 50 bitcoins every 10 minutes. This number halved to 25 bitcoins in 2012, 12.5 bitcoins in 2016, and so on until now. With the next halving set to occur on April 20, 2024, only 3.125 bitcoins will be mined every ten minutes.
The relationship between inflation and the Bitcoin halving is a fundamental idea. Unlike traditional currencies, which can have an endless supply determined by governments or central banks, Bitcoin has a finite supply. Currently, 19.6 million bitcoins are in circulation out of a possible 21 million. The halving aims to reduce inflation by decreasing the number of new bitcoins entering circulation, thereby controlling the supply. This acts as an inherent monetary policy to control inflation and stabilise the cryptocurrency's value over time—a novel idea in the world of digital currencies.
Inherently this makes Bitcoin a deflationary currency. With people seeing Bitcoin as an investment rather than legitimate currency individuals are not incentivised to spend or trade their Bitcoin, as the value appreciates people will simply seek to HODL (hold on for dear life) their investments further shrink.
Since Bitcoin has no underlying value—only a cost to produce— its price is entirely subject to supply and demand dynamics. As such, events like the halving can have significant impacts on its price due to altering supply dynamics.
Looking at the timeline of Bitcoin's halving, we can see that Bitcoin has seen significant price surges, seeing minimum gains of a 284% year-to-date with an average return of 3000% (2971%). To contextualise, this minimum gain exceeds Nvidia’s current legendary stock rally, which saw a 258% yearly return and led to Nvidia breaking Wall Street's largest one-day gain in market cap (277b).
Couple this fact with Bitcoin's new Exchange-Traded Funds (ETFs) simultaneously launch as of January 10, 2024, and a storm is brewing with bullish investors even more optimistic about the coming halving due to demand-pull inflation (aggregate demand exceeds aggregate supply) caused by newly issued ETFs by companies such as BlackRock, Fidelity Investments, and Grayscale. ETFs are a type of investment fund and exchange-traded product with shares that are tradable on a stock exchange. ETFs hold assets such as stocks, bonds, or commodities. An ETF seeks to track and replicate the performance of an index so as to give investors a diversified and well-balanced portfolio that is aligned with the index's performance.
In contrast, Bitcoin ETFs represent a relatively new frontier in finance. A Bitcoin ETF tracks the price of Bitcoin, allowing people to invest in the cryptocurrency without having to buy it directly. This eliminates the complexities and security issues associated with handling digital assets like Bitcoin. Bitcoin ETFs offer a more accessible and mainstream way for investors to indirectly invest in Bitcoin's price movements. They represent a significant step towards integrating the cryptocurrency market with traditional finance, offering greater liquidity and easier access to retail investors.
Since the ETF was introduced on January 10th, Bitcoin (BTC) has risen by 60%. Considering that the S&P 500 index has gained 84% over the past five years, this surge is particularly noteworthy. Significant amounts of Bitcoin have been purchased by BlackRock, the world’s largest asset manager with 10 trillion in assets under management, and fidelity, a multinational corporation managing 5 trillion. With BlackRock acquiring 6,000 BTC (620m) daily. This buying activity resulted in the ETF recording nett inflows for 50 consecutive days, a feat only ever achieved by 30 other ETFs. Notably, BlackRock's bitcoin ETF traded $3.3 billion in one day, doubling its previous volume record and indicating a high. All spot BTC ETFs combined saw a trading volume of $7.7 billion, shattering all previous records. For buyers who otherwise would not have access to Bitcoin, the ETF offers it. As demand from this group increases, BlackRock and other companies will undoubtedly be looking to buy more.
However, with the upcoming halving, reducing the daily mining reward from 900 to 450, combined with the limited supply of Bitcoin, could see demand outpacing supply and driving up prices. Zachary Townsend, the CEO of Meanwhile, a crypto-focused insurance firm, clarifies the issue by saying, 'The drop in the amount of mined Bitcoin a day means something has to give—and, in this case, that means price has to give. Given this dynamic, we expect previous record highs for Bitcoin to durably be surpassed.'” This unique combination of increased accessibility and reduced supply makes for a volatile yet exciting market.
Although there is a tendency for Bitcoin to outperform following a halving, not everyone is of the same opinion. Nikolaos Panigirtzoglou, who leads a team of analysts at J.P. Morgan suggests that “The Bitcoin halving event and its effect are predictable and in our opinion are well factored into the current Bitcoin price,” implying that Traders in anticipation of April’s halving have already priced in its effects.
The two significant developments in the cryptocurrency space that have already had a significant effect on the market are the halving of Bitcoin and the introduction of Bitcoin ETFs. With a dynamic interplay of supply and demand factors produced by the halving, lowering the supply of new Bitcoins, along with the increased accessibility through ETFs. The value of Bitcoin has already seen an increase of 60% since the launch of Bitcoin ETFs, largely due to large purchases made by major financial institutions like Fidelity and BlackRock. But an even bigger gain in value might result from the impending Bitcoin halving, which will lower the daily mining reward and further restrict the amount of Bitcoin available. It's critical to keep up with these developments and any possible consequences as we navigate this fascinating time in the cryptocurrency market. With user friendly ETF brokerages, buying BTC is now as easy as buying stocks, attracting new customers, and increasing market volatility. This streamlined accessibility has heightened BTC’s demand and led to sharper price fluctuations. As these shifts play out the market awaits whether this enhanced accessibility marks a turning point for the broader Bitcoin adoption or presents new challenges to its stability.
References
[1] Conway, L. (2024, March 6). What is bitcoin halving? Definition, how it works, why it matters. Investopedia. https://www.investopedia.com/bitcoin-halving-4843769#:~:text=A%20Bitcoin%20halving%20event%20occurs,block%20reward%20of%206.25%20BTC.
[2] Hertig, A. (2024, March 8). Bitcoin Halving, Explained. CoinDesk. https://www.coindesk.com/learn/bitcoin-halving-explained/
[3] McLachlan, M. (2023, May 1). Will bitcoin become money? Economics Students. https://economicstudents.com/databases/articles-database/will-bitcoin-become-money
[4] Denton, J. (2024, March 13). Bitcoin ‘Halving’ is just weeks away. What it is—and why it matters. Barron’s. https://www.barrons.com/articles/bitcoin-price-halving-when-meaning-28609049
[5] Wright, L. ’. (2024, January 18). If BlackRock continues 6k BTC daily buys we get a supply crunch within 18 months, here’s why. CryptoSlate. https://cryptoslate.com/if-blackrock-continues-6k-btc-daily-buys-we-get-a-supply-crunch-within-18-months-heres-why/
[6] Wright, L. (2024a, March 26). Bitcoin ETFs on better win streak than 95% of traditional funds. Forbes. https://www.forbes.com/sites/digital-assets/2024/03/25/bitcoin-etfs-on-better-win-streak-than-95-of-traditional-funds/?sh=58cd0d0f7148
[7] Sandor, K. . (2024, March 8). Bitcoin ETFs Break Volume Record Led by BlackRock Amid Wild Crypto Price Action. CoinDesk. https://www.coindesk.com/markets/2024/02/28/blackrock-bitcoin-etf-breaks-volume-record-as-bitcoin-rallies-to-64k-before-plunging/
[8] Denton, J. (2024, March 13). Bitcoin ‘Halving’ is just weeks away. What it is—and why it matters. Barron’s. https://www.barrons.com/articles/bitcoin-price-halving-when-meaning-28609049
[9] Denton, J. (2024, March 13). Bitcoin ‘Halving’ is just weeks away. What it is—and why it matters. Barron’s. https://www.barrons.com/articles/bitcoin-price-halving-when-meaning-28609049
