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The Bitcoin halving promises new market dynamics as miners adjust to reduced rewards
Today’s newsletter focuses on the fourth Bitcoin halving, scheduled for tomorrow. There has been a lot of coverage and price predictions. Mick Roche from Zodia Markets provides a simple explanation of how the Bitcoin halving works, why it matters, and how it could impact the price of bitcoin. Then, Bryan Courtesne from DAIM answers questions you receive 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 it. For this effort, they are paid in bitcoin (BTC) at the current rate of 6.25 BTC per verified block, along with transaction fees. It takes around 10 minutes to verify a new block, and around 144 blocks are verified every day, which equates to rewards of 900 BTC every day. Therefore, the supply of BTC increases daily by this amount.
For every 210,000 blocks mined, available mining rewards are reduced or halved. This occurs approximately every four years. After this upcoming 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 supply of BTC to around 450 BTC.
What is the current state of the market?
The daily volume of BTC traded on exchanges 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 be equal to $29 million, or about 1% of the average daily volume traded on the exchange, down from 2%.
Miners, however, may not sell all of their new coins. Search from CoinShares suggests that the average cost of mining one bitcoin after the halving will be around $40,000, depending on many variables. Therefore, miners whose operating costs are lower than the current market rate can choose to hold onto their coin and not release it to the market. However, it has always been this way. There are some miners who sell all the rewarded BTC when they get it (to profit, cover operating costs, or for capital investment) and others who hold excess Bitcoin in the expectation of price appreciation.
Another consideration is the “float” (actively traded coins) in BTC. Currently approximately 93.5% or 19.635 million of all BTC has been mined. Of that, about 75% they are considered long-term held (where BTC has been in a wallet for more than 155 days). This would leave a free float of around 5 million BTC, increasing supply by 0.01% per day.
Also worth considering are the new spot ETFs on Bitcoin. THE average daily volume of inflows in new ETFs (including grayscale outflows) is $202 million. This affects prices much more than reducing supply.
What could this mean for the price of bitcoin?
While it is obvious that a decrease in supply should be a net positive for 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 integrated into the current price? As we saw with the ETF announcements, most predetermined stocks become “Buy the rumor, sell the fact” events, and we see the risk of that here too.
We do not find it useful to look back at previous halvings, as there is not enough data for them to be statistically significant. Furthermore, it is difficult to try to extrapolate correlations to the halvings of an instrument that has gone from $0 to $70,000 in a short period of time.
A much bigger influence on the price of bitcoin will be ETF flows, as these have the potential to change dramatically depending on sentiment. These flows can easily exceed the reduction in supply due to the halving.
We see that the halving will have a much bigger impact on miners than the price of bitcoin. Miners will have to adjust their operations to accommodate the smaller rewards they will get, whether it be capital expenditure on more efficient equipment, reducing operational costs or, even, selling more of the mined bitcoin.
One goal for participants in the digital asset space is to increase institutional adoption. Reducing new daily supply by $29 million per day in a market that already trades around $30 billion is relatively trivial. If the market cannot handle a daily supply reduction of $29 million, then it is not ready for institutions.
Pay attention to ETF flows; they will dictate the price more than a small decrease in supply growth.
Q. How does the bitcoin halving affect the supply of bitcoin and what impact does this have on its price?
The supply of bitcoins in the secondary market depends on holders trying to sell existing bitcoins and miners trying to sell the newly minted bitcoins they receive. Typically, between halvings, the release of these new bitcoins creates some sort of equilibrium in the secondary market’s supply/demand dynamic where the reward can support demand. When the halving occurs, a supply shock is created as the equilibrium is disturbed and no longer meets demand. Historically this has been a catalyst for dramatic price increases.
Q. Can you explain the concept of “halving cycles” in the context of Bitcoin’s price history?
Since the halving is scheduled to occur every 210,000 blocks, it creates a distinct time gap between these events that lasts approximately four years. In these four years, historically there has been a price peak, a price trough, a part of the bull cycle and a part of the bear cycle. Historically, the greatest price appreciation occurred in the month before and after the halving. This is a result of the supply shock created by the halving. Once the new balance between supply and demand is reached, the price peaks and then a drastic sell-off occurs until the price of BTC reaches the bottom or bottom. This usually occurs 12-18 months after the halving. Once we hit bottom, the price moves, then rises steadily until we get close to the halving 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-term time horizon is simply to buy and hold. Cryptocurrency volatility can be difficult to manage, and it’s easy to find yourself on the wrong end of a trade. This tends to lead to very emotional and suboptimal decision making. Over a multi-year time frame, Bitcoin has tended to provide a great return to investors, so trying to improve on an already great return is not necessary to make a strategy successful.