The Bitcoin halving is seven months away, but is it bullish?

As we close the page on summer and roll into Q4, there is something growing ever close on the horizon: the Bitcoin halving. The fourth iteration of Bitcoin’s much-discussed supply cut is slated to take place in April 2024. 

What is the halving?

The halving will see the block subsidy cut in half, from 6.25 to 3.125 Bitcoin. The block subsidy is integral to the incentive structure around Bitcoin, and miners rely on it to get paid for their “volunteering” in maintaining the blockchain. It is pre-programmed to split in half every 210,000 blocks, which roughly coincides with four-year intervals. 

In such a way, the inflation rate of Bitcoin will be halved – just as it has been in the past, with the first, second and third halvings taking place in 2012, 2014 and 2020 respectively. 

Another way of looking at this is that the supply of new Bitcoins on the market steps down in intervals every four years. With a capped supply of 21 million Bitcoins, the final halving will take place in 2140, when the subsidy will drop to zero and transaction fees alone will sustain the network.

This means that, despite Bitcoin launching only 15 years ago, and there still being 117 years until that final supply cap is hit, the vast majority of Bitcoins that will ever be in existence are already in circulation. 93%, to be exact. 

Is it bullish for Bitcoin?

Arguably one of the most discussed topics in crypto is the affect of Bitcoin halvings on the price. This is not surprising for two reasons. The first is that, as economics 101 tells us, price equates to supply and demand; if supply is falling, price should go up. 

The second reason is the below chart. For previous halvings, Bitcoin’s price has raced upward soon after each time (note the log scale). 

However, there are reasons to be prudent here. We mentioned economics 101 earlier, but now it is time to jumpo over to statistics 101. Bitcoin has only experienced three halvings, which is far too small a sample size to draw any concrete conclusions from. 

Reinforcing this notion is that, in truth, the sample size may be even smaller. The first halving took place in 2012, when Bitcoin was still an unknown quantity outside of niche corners of the Internet. Even the second halving, which took place in 2016, saw Bitcoin trading with very low liquidity. 

In recent years, the crypto market has transformed entirely, with the asset class emerging from the shadows into the mainstream. This needs to be kept in mind when drawing upon trends from years gone by. Past performance never guarantees future results, but this is especially true when talking about Bitcoin, which has burst onto the scene faster than any asset before it. 

Even 2020’s halving, perhaps the first where Bitcoin could be considered a bona-fide asset class, took place during the black swan of all black swans, a global pandemic of unprecedented scale in the modern age. It took place amid a bonanza of money printing and aggressive rises in the price of risk assets across the board.

This takes us nicely into our next point. Perhaps the biggest reason why care should be taken when assessing the effect of Bitcoin halvings is that these supply cuts have coincided remarkably well with global liquidity cycles. 

The next chart from Fidelity demonstrates this well. How can we be certain that it is the halvings affecting Bitcoin’s price when they line up so well with liquidity cycles? Is it merely a happy coincidence?

We stressed a similar point when there was talk of a “supercycle” during the pandemic. We must not forget that Bitcoin was only launched in 2009, with the genesis block mined two months before the stock market bottomed in March of that same year. 

After that came a bull market of historic scale and longevity, with interest rates near zero and a perfect environment for risk assets. Bitcoin had never before experienced a bear market in the wider economy, meaning we had no idea how it would trade when that day came. In 2022, we found out.

All this is not to say that Bitcoin halvings have no effect on the price of Bitcoin. The supply cap and pre-determined schedule of the release of new Bitcoin is vital to the fundamentals of Bitcoin. It is what allows it to be analysed through a macroeconomic framework, compared to gold, and what makes it so intriguing to study. 

It could well be a coincidence that halvings have lined up with global liquidity cycles. The point is that, like we had no information about how Bitcoin would perform in a tight monetary environment before the last eighteen months, we simply do not for sure. 

The release of new supply is still getting cut, and while some may argue it has been priced in, this really is a novel asset the likes of which we have not seen before, and hence we cannot argue this point for sure either.

This is merely a word of caution that, as of the year 2023, we don’t have enough information to conclude one way or another whether halvings will spark price rises. After all, people, and therefore markets, can be emotional. 

But time will tell. 

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