Today’s newsletter focuses on the fourth Bitcoin halving that is expected to take place tomorrow. There has been a lot of media coverage and price predictions. Mick Roche Since Zodiac Markets provides a simple explanation of how Bitcoin halving works, its importance, and its potential impact on the price of Bitcoin. SO, Bryan Courchesne Since SUEDE answers questions he receives on the topic in Ask an Expert.
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Bitcoin miners are rewarded for verifying new blocks on the Bitcoin network and securing them. For this effort, they are paid in Bitcoin (BTC) at the current rate of 6.25 BTC per verified block, plus transaction fees. It takes around 10 minutes to verify a new block, and around 144 blocks are verified every day, which equates to 900 BTC rewards every day. So the supply of BTC increases daily by this amount.
For every 210,000 blocks mined, the available mining rewards are reduced or halved. This happens approximately every four years. After this next halving, the fourth in the 15-year history of the blockchain, a miner will receive 3.125 BTC for verifying a block, instead of 6.25 BTC. This will reduce the new daily BTC supply to around 450 BTC.
What is the current market situation?
Daily BTC trading volume varies depending on the source, but looking at the Messari volumes, we see a daily volume range of around $30 billion. At current prices (BTC = $64,000), the new reduced supply will equate to $29 million, or approximately 1% of average daily trading volume, up from 2% previously.
However, miners cannot sell all of their new coins. Research of Coin Shares suggests that the average cost of mining one bitcoin after the halving will be around $40,000, depending on many variables. Thus, miners whose operational costs are lower than the current market rate can choose to hold their coin and not trade it. However, this has always been the case. Some miners sell all rewarded BTC when they obtain it (either to make a profit, cover operational costs, or for capital investment) and others hold excess Bitcoin awaiting price appreciation.
Another consideration is the “free float” (actively traded coins) in BTC. Currently, approximately 93.5% or 19.635 million of all BTC have been mined. This side, about 75% are considered long-term held (when BTC has been in a wallet for more than 155 days). This would leave a free float of around 5 million BTC, increasing the supply by 0.01% per day.
Also worth considering are the new spot bitcoin ETFs. THE average daily entry volume in new ETFs (including grayscale exits) amounts to $202 million. This has much more influence on prices than reducing supply.
What could this mean for the price of Bitcoin?
While it is obvious that a decrease in supply should have a net positive effect on the price of any commodity, this should also be true for Bitcoin. The question is how much should it increase and has the price increase already been priced into the current price? As we’ve seen with ETF announcements, most predetermined headlines turn into “buy the rumor, sell the fact” events, and we see a risk here as well.
We do not find it useful to look back at previous halvings, as there are not enough data points to be statistically significant. Additionally, it is difficult to try to extrapolate correlations to halvings of an instrument that went from $0 to $70,000 in a short period of time.
ETF flows will have a much greater influence on the price of Bitcoin, as these have the potential to change significantly based on sentiment. These flows can easily exceed the reduction in supply resulting from the halving.
We believe the halving will have a much bigger impact on miners than the price of Bitcoin. Miners will need to adjust their operations to adapt to the lower rewards they will get, whether by investing in more efficient equipment, reducing operational costs, or, of course, selling more of the mined bitcoins.
One of the goals of those in the digital assets industry is to increase institutional adoption. Reducing the new daily supply of $31.5 million in a market that already processes around $30 billion is relatively trivial. If the market can’t handle a reduction in daily supply of $31.5 million, then it’s not ready for institutions.
Beware of ETF Flows; they will dictate the price more than a slight decrease in supply growth.
Q. How does the bitcoin halving affect the supply of bitcoin and what impact does it have on its price?
The supply of Bitcoin in the secondary market depends on holders looking to sell existing Bitcoin and miners looking to sell the newly created Bitcoin assigned to them. Typically, between halvings, the release of these new bitcoins creates a sort of equilibrium in the supply/demand dynamic of the secondary market where the reward can support demand. When halving occurs, it creates a supply shock because the balance is disrupted and no longer meets demand. Historically, this has been a catalyst for a dramatic increase in prices.
Q. Can you explain the concept of “halving cycles” in the context of Bitcoin’s price history?
Since the halving is timed to occur every 210,000 blocks, this creates a distinct time frame between these events that lasts approximately four years. Over these four years, there has historically been a price peak, a price trough, a bullish part of the cycle, and a bearish part of the cycle. The greatest price appreciation has historically occurred in the month before and after the halving. This is the result of the supply shock created by the halving. Once the new supply/demand balance is reached, the price peaks and then a drastic sell-off occurs until the BTC price hits its lowest or trough. This usually happens 12 to 18 months after the halving. Once we reach the bottom, the price decreases, then increases steadily until we get closer to half, and the cycle repeats.
Q. What are some potential strategies investors should consider before, during and after a Bitcoin halving event?
The main strategy we recommend for an investor with a long time horizon is to simply buy and hold. The volatility of cryptocurrencies can be difficult to navigate, and it’s easy to find yourself on the wrong side of a trade. This tends to lead to very emotional and suboptimal decision-making. Over a period of years, Bitcoin tends to provide a significant return to investors. It is therefore not necessary to try to improve an already significant performance to make a strategy successful.