Strategic Implications of Bitcoin Halving in 2024

Bitcoin | April 15, 2024

Image: Freepik

Understanding the Ripple Effects of Bitcoin’s 2024 Halving

The upcoming Bitcoin halving in 2024 is poised to significantly impact the cryptocurrency market. Historically, these events have precipitated major price fluctuations and heightened investor interest due to the reduced rate at which new bitcoins are created, effectively diminishing the block reward from 6.25 to 3.125 bitcoins.

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Bitcoin halvings are scheduled to occur approximately every four years, or every 210,000 blocks, until the maximum supply of 21 million Bitcoins has been mined. This is expected to continue until around the year 2140. After the 2024 halving, there will be several more halvings until the maximum supply limit is reached. Each halving reduces the rate at which new Bitcoins are created and released into circulation, thus prolonging the period of mining reward distributions.  Here’s what you need to know.

Historical Price Trends

Below is a chart and table displaying the Bitcoin prices approximately one year before and one year after each of the halving events:

Image: Bloomberg, Bitcoin Halvings as of Dec 31, 2023

• Past halvings have consistently led to increased bitcoin prices. For example, following the 2016 halving, bitcoin’s price surged from $650 to approximately $2,528 within a year, ultimately reaching a peak of $19,700 in December 2017.
• The most recent halving in 2020 saw bitcoin climbing from around $6,291 a year prior the halving to over $56,911 a year post-halving on May 11, 2021, depicting a robust post-halving appreciation trend.

Institutional Adoption and Bitcoin ETFs

• The 2024 halving differs notably due to the increased involvement of institutional investors and the integration of bitcoin into traditional financial products such as ETFs. These factors are expected to compound the typical supply shock, potentially magnifying the halving’s market impact.  Institutions are increasingly interested in Bitcoin, seeing the halving as an important factor in understanding Bitcoin’s monetary policy. Dante Cook from Swan Bitcoin indicates that the clarity on Bitcoin’s monetary dynamics will drive more institutional interest.

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• The new spot market Bitcoin ETFs launched in January have already had a substantial impact on Bitcoin’s price, driving it to all-time highs. The halving might amplify this effect by reducing the new supply of Bitcoin, thereby creating a demand shock that could elevate prices further. This is particularly relevant for institutions that view the capped supply of Bitcoin as a positive attribute, reinforcing its appeal as an alternative asset.
• Joe Nardini from B. Riley Securities discusses how the halving and the introduction of ETFs might interact. While the halving traditionally leads to a price increase, the recent surge in Bitcoin’s price due to ETFs might play a more significant role this cycle. The synergy between reduced supply from the halving and increased demand from ETF investors could lead to higher volatility and price dynamics than previous cycles.
• Despite the immediate impacts, Ruben Sahakyan from Stifel Financial points out that the halving alone might not be a decisive factor for institutions considering Bitcoin investments. Instead, the broader regulatory and market environment will be more influential.

Supply Dynamics and Miners’ Role

• The reduction in block rewards directly influences the supply side of bitcoin by limiting new coin production, thereby exerting upward pressure on prices, assuming steady or growing demand.
• Miners face a decrease in reward outputs, which historically has led to a short-term drop in profitability. However, price increases subsequent to halvings have allowed miners to maintain, if not increase, revenue over time.

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• Jenssen emphasizes that the true impact of the halving will come from the demand side rather than the supply cut itself. The halving serves as a reminder of Bitcoin’s scarcity, potentially influencing investor behavior more significantly than the actual reduction in new bitcoin production. For example, the inflation rate of bitcoin will drop from 1.8% to 0.9%, suggesting only a modest direct influence on price unless demand increases markedly.

Anticipated Market Reactions

• Given the historical context and current market conditions, the 2024 halving could trigger significant market volatility. Analysts suggest a possible continuation of the trend where bitcoin experiences substantial price increases in the year following a halving.
• Speculators often attempt to front-run the halving event, leading to a pre-halving price increase. Historically, Bitcoin has appreciated by about 14% in the month leading up to past halvings. The anticipation of these events can create short-term trading opportunities, but Jenssen advises long-term investors to focus on broader market demand factors.

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• The halving also plays a significant role psychologically and as a marketing tool, highlighting the built-in deflationary nature of Bitcoin to new and existing investors. This can enhance its appeal as a hedge against inflation, particularly in contexts like the current global financial environment with concerns about debt and fiat currency stability.

Closing

While the halving day itself is expected to be a non-event in terms of immediate market impact—likely priced in due to the efficient market hypothesis—the broader implications for Bitcoin’s scarcity and investor perception could drive much anticipated post-halving market activity for the next up cycle.

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