The adrenaline is starting to be felt on bitcoin with the arrival of the halving in April 2024. Will the next halving be different from the others? Can we face a supply shock before the halving with the introduction of ETFs? We are going to see together the possible impacts of this halving cycle.
Halving: reduction in the supply of bitcoin
The halving process happens every 4 years. This is a technicality specific to the functioning of bitcoin. This involves reducing the supply by half every 4 years. We remind you that bitcoin has a limited supply of 21 million in total. Therefore, after every 4 years, the miners’ reward is reduced to half. Even if the halving mechanism reduces supply, the price of bitcoin rises after each halving as long as demand remains constant. Until now, we have faced several halvings, in 2012, 2016 and 2020. Here is the reduction in rewards over time:
Halving also reduces inflation by half every 4 years. This is in some way why bitcoin strongly outperforms in countries facing hyperinflation since the local currency no longer has any value or purchasing power. We can see this with the examples in the table below:
Supply and demand, the key element for halving
As bitcoin has a limited supply, this makes it a scarcity, just like gold. As long as demand remains constant for bitcoin, the price of bitcoin continues to rise as the supply decreases over time. This is the principle of supply and demand.
Until then, it was largely bitcoin investors with strong convictions, maximalists, influencers who promoted bitcoin. But now we also have big carriers like ETF issuers such as Blackrock, Vanguard, Invesco…This has a major impact on the adoption and democratization of bitcoin in the coming years.
The impacts of halving on investors, miners and the price
The halving process is something that we cannot change, it is written in the bitcoin code. We are going to see the consequences both on investors, the price and also on miners:
- Investors are the first affected by the halving process since the issuance of new bitcoins will be slower. Therefore, they may rush before the halving in order to benefit from the next move thanks to the diminished supply.
- The price of bitcoin will be impacted by the reduction in supply as long as demand remains constant. On the other hand, the approach of the halving event will make noise, which will lead to euphoric enthusiasm since everyone will be talking about it.
- Miners are influenced by the fact that they will earn less bitcoin once a block is added. However, as the price of bitcoin is often higher after each halving, this offsets the reduction in reward. There will come a time when all bitcoins will be mined. In this type of case, either miners will be able to sell their bitcoin for reward, or they will benefit from transaction fees.
A cyclical regularity of investor behavior
Bitcoin is very cyclical, we can identify the different important phases of the price evolution. We could describe this cyclicality in 4 phases:
- The accumulation of first arrivals
- The follower push
- The euphoria of latecomers
- The crash
We can see the different phases represented on the graph below and add the halving dates:
In green : The accumulation phase corresponds to the first arrivals, which accumulate when everyone is afraid of bitcoin.
In yellow : The follower push phase is those who return after the first arrivals. They still have a good start in general since they can benefit from the euphoria of those who follow.
In purple : The euphoria of the latecomers is those who are afraid of missing the movement, those who hear about bitcoin because it has just outperformed. Entering bitcoin in the midst of euphoria can hurt during bear markets since the risk/reward is less advantageous. And most of the time, you have to wait longer to come out positive at the next bullrun.
In turquoise : we have the crash which results in a bear market which can last more than a year.
In the past, an ATH on bitcoin took place after the halving date in the euphoria phase. But this cycle may be different this time because the introduction of ETFs has an impact on supply. On the other hand, there is significant anticipation among participants to buy bitcoin before the halving. The process of euphoria can take place before halving.
Halving and the different markets (bullish and bearish)
As explained previously, halving takes place every 4 years. This is also why during these 4 years that have passed, we often face both a bullrun (bullish market) with several ATHs and a bear market (bearish market). This means that each market cycle can last on average from 18 months to 2 years. This can be seen in the illustration below:
On the other hand, there is also another correlation to highlight for these cycles. It’s the one with the economy. These cycle periods (bear and bull market) also correspond to cycles of economic acceleration and slowdown.
The shock of the offer: a possible ATH before the halving ?
The big event of the year remains the progress in institutionalization of bitcoin with the release of spot ETFs. Since January 2024, spot ETFs have been accepted on traditional markets offering investors greater opportunities to invest in bitcoin. For example, investors who were reluctant to invest in bitcoin because it was not a centralized product or because they had to open another account on an external platform no longer face this type of problem. Investors can purchase ETFs on the same platform where they purchase stocks and other regular products. This was a great advancement in the democratization of bitcoin. Therefore, this can impact the variation of bitcoin because when demand for the ETF increases, its issuers must buy bitcoin (underlying product). Demand for ETFs remains quite significant (example with the top 10 ETFs):
On the other hand, the number of bitcoin is limited to 21 million, and the halving process will slow down bitcoin production by half. Therefore, bitcoin has a high probability of making an ATH before the halving itself. Here is an example of the number of bitcoins mined vs buying for ETFs for February 27.
With these big differences, we could have a big temporary distortion. Obviously, this will calm down with time because for the moment, there is a rush so as not to miss the train. Investors want to buy bitcoin before production halves. Therefore, this cycle is different from the previous ones.
CONCLUSION
The halving process remains a technically bullish mechanism as long as demand is constant. There is a chance that bitcoin will hit an ATH before the next halving date as we face ongoing distortions and imbalances. This is particularly the case between purchases of bitcoins for ETFs and mined bitcoins. Therefore, this may result in a supply shock as other participants will want to hold bitcoin before production slows down.
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