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4 Reasons Why Bitcoin’s Halving Could Be Different
Key points
- The fourth Bitcoin halving is expected to take place at the end of this month.
- SEC approval of spot bitcoin ETFs could alter the supply and demand dynamics of the upcoming halving event, according to reports from Coinbase and 21Shares.
- There are fewer bitcoins available to trade than in previous halving cycles.
- According to Grayscale, it is important to contextualize the upcoming halving with the uncertainty over a rate cut by the Federal Reserve.
Bitcoin (Bitcoin) is expected to halve later this month, but a confluence of factors is likely to distinguish the fourth such event for the cryptocurrency from previous events.
Halve— after which the rate at which bitcoins are generated by the network is halved to roughly every ten minutes: this typically occurs after 210,000 bitcoins have been mined, or roughly every four years. This year the halving is expected around April 20, but some suggest it could happen even earlier.
The price of Bitcoin trades differently before the halving
In the run-up to previous halving iterations, bitcoin reached new highs in the months following the cryptoasset’s issuance rate reduction.
It recently reached a new all-time high for the first time before the halving of the current cycle. Analysts at Coinbase warn that the market may be placing undue importance on price movements around the halving without taking into account the context of broader market conditions.
“Bitcoin’s performance at previous halvings was most likely context-dependent. This may explain why price trends during different cycles have varied so widely,” he wrote in a March report.
For example, they attribute some of the 45% growth before the second halving in July 2016 to Brexit uncertainties and the 73% gain before the third halving in May 2020 to the pandemic-era initial coin offering (ICO) boom .
Spot Bitcoin ETFs have turbulent demand
According to Coinbase, spot bitcoin exchange traded funds (ETFs) have “fundamentally changed” the market dynamics for bitcoin. And they didn’t exist at the time of the previous halvings.
Products that began trading in January saw massive inflows which increased demand and consequently the price of bitcoin.
“The approval of bitcoin ETFs in the US could significantly alter the supply and demand dynamics of bitcoin, as inflows are approximately 5-7 times the daily new units of BTC generated,” says a report by 21Shares.
So, how does this play out in the context of the halving? In a hypothetical scenario, if the supply consisted only of newly minted bitcoins (and existing bitcoins were not available to be traded), here’s what could happen according to Coinbase:
“If we assumed that the pace of new inflows into U.S.-based ETFs slowed from $6 billion in February to reach a steady state of $1 billion in net inflows per month, a simple mental model suggests that measured against around 13.5k BTC mined per month (in a post-halving environment) the equilibrium price for bitcoin should be closer to around $74k,” they wrote.
Fewer Bitcoins available for trading
“Bitcoin available for trade (i.e. the difference between circulating and illiquid supply) has been declining since the start of 2020, a major change from previous cycles,” Coinbase said.
Normally, the illiquid supply is attributed to lost wallets and forgotten keys, but Coinbase analysts also mention that “the level of available bitcoin supply has been trending downward over the past four years” and this is a departure from the previous halving cycles.
But this is not necessarily a bad thing for Bitcoin, as this could mean investors with long-term positions are less likely to sell on short-term price changes.
With more than $19 million worth of bitcoin in circulation and supply capped at $21 million, the halving is making mining more difficult and cutting incentives for miners in half.
Typically, miners sell bitcoin ahead of halvings in anticipation of covering operating expenses for things like energy and mining equipment. However, the bitcoin rally has led to fewer bitcoin sales by miners who have up to 1.8 million bitcoins in their reserves.
Uncertainty over the Fed’s move on rates
Another key factor to consider during the upcoming halving event is the contrast of bitcoin’s predictable declining issuance rate against the backdrop of uncertainties over the US Federal Reserve lowering its benchmark rates.
The general thesis is that if the Fed cuts rates, US Treasury yields will weaken, making riskier assets like cryptocurrencies more attractive to investors. However, unexpectedly robust economic data in recent weeks has done so fueled the debate on rate cuts. Cutting too soon could revive inflation, but keeping rates higher for too long could push the economy to the brink of recession.
Other central banks around the world have already started to change their monetary policy stance.
“The eagerness of major central banks to reduce interest rates despite strong economic growth has likely contributed to a rise in market inflation expectations,” digital asset manager Grayscale said in a report. “The risk of higher inflation could in turn spur demand for alternative stores of value, such as physical gold and Bitcoin.”