Welcome Avatar!
We hope you are ready for the quadrennial Bitcoin event.. all your Bitcoins get cut in half!
Just kidding. The Bitcoin halving isn't actually about cutting a Bitcoin in half. Instead, it's about the rewards miners receive.
A refresher for those who are new to crypto:
Bitcoin operates on a decentralized network, and miners are the ones who validate and record transactions on the blockchain. For their efforts, they're rewarded with newly minted Bitcoins. This reward started at 50 Bitcoins per block back in 2009 ($1.3 million per block in today’s prices!).
Every 210,000 blocks, or roughly every four years, this reward is halved. Hence, the term "Bitcoin halving." So, after the first halving in 2012, the reward became 25 Bitcoins. In 2016, it was 12.5, and in 2020, it dropped to 6.25 Bitcoins.
The next Bitcoin halving, where the inflation rate of Bitcoin gets cut in half, is fast approaching. In April 2024, block rewards are scheduled to decrease from 6.25 BTC to 3.125 BTC. An estimated 203 days away.
The question on everyone’s mind: does this mean a bull market is around the corner?
Well, let’s walk through the dynamics, as this question is as much about the economics of BTC as the technical aspects of the halving.
Miners
Imagine you're a miner. Pre-halving, you're chugging along, validating transactions, and getting rewarded with a certain number of Bitcoins for every block you mine. Then, post-halving, for the same amount of work and energy, your reward is slashed in half. It's a direct hit to your profits. For some miners, especially those with higher operational costs or older equipment, this reduction can make mining unprofitable.
The halving can be thought of as a natural selection process in the mining world. Those with outdated equipment or higher electricity costs might find it hard to keep up. They might either need to upgrade their hardware, seek cheaper energy sources, or, in some cases, shut down their operations altogether.
On the flip side, miners with more efficient setups can weather the storm better. They can continue mining and potentially reap greater rewards in the future, especially if the price of Bitcoin rises post-halving.
Miners play a crucial role in keeping the Bitcoin network secure. They validate and record transactions, ensuring everything runs smoothly. If many miners were to exit post-halving, there could be concerns about the network's security. Fewer miners could mean the network is more susceptible to attacks. However, Bitcoin's protocol has built-in mechanisms to adjust the difficulty of mining, ensuring that it remains profitable for miners and that the network remains secure.
While the immediate aftermath of the halving can be challenging for miners, many take a long-term view. They're banking on the idea that the scarcity induced by the halving will drive up the price of Bitcoin in the future. If that happens, even though they're earning fewer Bitcoins, the value of those Bitcoins could be significantly higher.
Past Performance & Future Results
When we look back at the previous halvings in 2012, 2016, and 2020, there's a noticeable trend: a significant increase in Bitcoin's price in the months following each halving. For instance, after the 2016 halving, Bitcoin's price surged from around $650 to almost $20,000 by the end of 2017. After the halving in May 2020, Bitcoin tripled by the end of the year. While correlation doesn't imply causation, these patterns have led many to believe that halvings act as a catalyst for bullish market cycles (which, beyond purely the technical considerations, drives activity)
At its core, the halving reduces the rate at which new BTC is introduced into the market. If demand remains steady or increases, and the supply growth slows down, it's logical to assume that prices might rise. This is basic economic theory in action: when supply decreases relative to demand, prices tend to go up.
Post-halving, some miners might find it unprofitable to continue operations, leading them to sell their accumulated Bitcoins to cover costs. This could introduce selling pressure. However, if many miners decide to hold onto their Bitcoins, anticipating future price increases, this could reduce the available supply on exchanges, potentially exerting upward pressure on the price.
The Ripple Effect
As you’ve likely noticed by now, the crypto market is heavily influenced by sentiment and speculation. As the halving approaches, media coverage (such as this article!) intensifies, discussions become more prevalent, and there's a general buzz in the crypto community. This heightened attention can lead to increased buying activity, driving up the price. The anticipation of a post-halving price surge can become a self-fulfilling prophecy as traders and investors position themselves accordingly.
Newcomers, hearing about the halving, might start exploring other crypto investments, leading to capital inflow into various altcoins. Altcoins (non-BTC/ETH) often experience volatility around the time of a Bitcoin halving. Historically, when Bitcoin's price surges post-halving, altcoins might initially dip as investors flock to Bitcoin. However, once Bitcoin's price stabilizes or consolidates, altcoins often play catch-up, experiencing their own rallies.
Zooming out a bit - the anticipation and aftermath of a halving can lead to a surge in the development and adoption of crypto-related services and products. Popular ones include crypto exchanges, wallet services, and crypto lending (hopefully not this time around!).
Now that you’re all caught up on what halvings are and how they work, it’s time for the fun part.
What’s Different This Time?
Crypto is influenced by both cyclical (BTC halving) and secular (technological, economic, political, social, etc) trends. A lot has changed in the last few years.
Specifically:
Trust in Crypto Exchanges: With FTX being exposed as a fraud and Binance under fire from regulators all over the world, trust in major crypto exchanges has been severely shaken. This could lead to a more cautious approach from investors, both retail and institutional, when it comes to trading or holding assets on centralized platforms. There are also legitimate operational considerations for those who manage larger portfolios regarding how they will manage their accounts given counterparty risk.
Severely Wounded Investors: There is no question about it, the 2020-2022 crypto bull run was crypto’s mainstream moment. Massive amounts of capital, investor interest, and media attention funneled into the industry. After most projects turned out to be worthless, retail investors lost huge sums. Institutions (such as pension funds) lost billions of dollars. Many funds have quietly suffered or shut down in this bear market.
Rates: Historically, Bitcoin has been viewed by some as a hedge against economic instability. However, with the US Treasury Rates at over 5%, traditional financial instruments become more attractive as a safe haven.
Regulatory environment: US regulators have taken aim at the crypto industry and cracked down on numerous projects, both centralized and decentralized. With the regulatory landscape remaining ambiguous, a lot of the action could take place overseas this go around. Founders have become far more cautious about launching tokens in the US and serving US investors.
Global Economic Landscape: Rising costs, high rates, and a falling consumer savings rate creates risk-averse behavior, which could potentially reduce exposure to crypto assets.
There are a few catalysts and narratives that are in favor of a Bitcoin, and dare we say, crypto boom.
US Elections: Anything could happen of course, but a changing of the guard to a crypto friendly administration next year would be a massive tailwind for the crypto industry. Gensler? He’ll be around until 2026. However, the commission’s focus and temperament is likely to be guided by the administration.
Institutional interest: Financial powerhouses like Blackrock and Citadel have not only changed their tone towards crypto over the years, they have invested in building crypto services and products. This awards crypto a badge of trust among the financial community, which ultimately holds the keys to trillions of dollars in investor capital.
Spot ETFs: A Bitcoin spot ETF would mean there are potentially huge pools of capital buying and custody-ing spot BTC. Given everything we’ve discussed about the halving, you can see how spot ETFs would be a boon for crypto. Enough said!
Long desperation: The global asset bubble led everyone to believe they were “geniuses” and prices would go up forever. These highs can only be balanced out by lower lows. As more people come to a realization that there are very few ways left to “make it” in the modern world, they will continue to turn to crypto as one of the last remaining open spaces for speculation and opportunity.
Wounds are healing: In the midst of a prolonged bear market, there's a dip in liquidity. To manage costs, teams offload tokens, and VCs cash out their investments. As a result, most tokens, with the exception of BTC/ETH, face steeper declines. As this progresses, people clean house and consolidate their holdings to the best quality assets. This consolidation has occurred, and we believe investor psychology can only improve from here.
And that’s all for today!
Make sure to become a paid subscriber so you’re prepared for the next crypto cycle.
Until next time, anon..
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.