Bitcoin is influenced by various factors, yet few are as closely watched as the halvenings, where the block reward is halved. Historically, halvenings have been significant triggers for bullish trends, and although their impact is diminishing, the upcoming halvening is expected to play a crucial role in shaping the price of bitcoin.
This opinion piece is a part of CoinDesk’s “Future of Bitcoin” collection released in conjunction with the Halvening in April 2024. Torbjørn Bull Jenssen serves as the CEO of K33.
At K33, we anticipate speculators once again leading the charge ahead of the halvening, as seen in previous instances. On average, bitcoin has observed a 14% increase in value in the month preceding the halvening, and we wouldn’t be surprised if 2024 follows a similar trend. However, the market dynamics are complex, and predicting outcomes with certainty is challenging. Nonetheless, there are certain aspects that we can predict accurately.
Significance of Demand
Primarily, the price of bitcoin is a reflection of the net demand for holding bitcoin. With a fixed supply of bitcoin available at any given time, its valuation must adjust until investors achieve their desired asset allocations, typically denominated in currencies like USD.
For instance, in a hypothetical scenario where there is only one bitcoin and two investors each wish to hold $1000 worth of bitcoin, the valuation of bitcoin would need to reach $2000 per coin, with each investor holding half a coin.
The current inflation rate stands at around 1.8%, similar to that of gold, and is expected to drop to 0.9% by late April. This implies that without a change in demand, the halvening would likely result in only a 0.9% price increase within the first year post-halvening, relative to a scenario without a halvening.
In the absence of changes in demand, the market capitalization would remain constant. With a yearly inflation rate of 1.8% in the bitcoin stock, the price needs to drop by 1.8% to maintain the market cap. With a 0.9% inflation rate, the price drop required would reduce to 0.9%.
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The demand for bitcoin is essentially fixed, but interestingly, the analysis aforementioned highlights a crucial point: while the halvening pertains to the supply side, its impact on price is predominantly driven by the demand side, as the direct impact of the supply alteration is minimal.
Hodlers’ Full Investment
In simpler terms, it appears that the influence of the supply side is negligible. However, this isn’t entirely accurate. This is because many bitcoin hodlers are fully invested and unable to buy more BTC even as the price rises. Essentially, the price is partly influenced by the equilibrium between the marginal buyers and sellers, as the overall portfolio demand is endogenous and somewhat influenced by the price.
To illustrate this point in a straightforward manner: envision a scenario where all existing coins are held by long-term holders unwilling to sell. Miners must sell to cover expenses, but there’s no compulsion for buyers to engage. In this scenario, a halvening in the new bitcoin supply would, based on a fixed inflow rate of new USD into bitcoin, lead to a two-fold increase in price. Once the price has doubled, halving the number of coins would suffice to absorb incoming USD.
A twofold rise in price would be a substantial movement, but considering past halvenings and popular forecasts like the debunked yet commonly used Stock-to-Flow model, optimists anticipate a price surge by a factor of 10. This surge cannot be solely attributed to the halvening and will only materialize in the event of a substantial surge in demand – a scenario that is not implausible.
The Halvening Spotlights Bitcoin’s Scarcity
The halvening could alter the equilibrium between the marginal buyers and sellers, sparking a bullish trend with a positive feedback loop where increasing prices attract more buyers.
Moreover, the current halvening underscores the absolute scarcity of bitcoin at a time when it’s more accessible to investors than ever before, thanks to ETF approvals in the U.S. Moreover, there are mounting concerns regarding the debt burden in the U.S., prompting suggestions that bitcoin could act as a hedge against a potential erosion of trust in the dollar.
Given this context, an increasing number of individuals are learning about the halvening and bitcoin’s scarcity, finding it to be an intriguing proposition. Consequently, the halvening operates as a focal point, bolstering the already robust momentum for bitcoin. Hence, a pre-halvening surge followed by a correction, before the underlying growth trends in adoption and acknowledgment drive bitcoin towards new peaks, isn’t an unlikely scenario.
The daily reduction in bitcoin production from 900 to 450 on the halvening day (expected around April 20) might not yield an immediate impact. However, when coupled with demand-driven awareness and positive price momentum, the cumulative impact of 164,250 annually is indeed noteworthy.
Anticipating a Non-Event on Halvening Day
The forthcoming halvening is a known event that should ideally be factored into existing prices as per the efficient market hypothesis. Bitcoin, being a volatile asset, with a correspondingly high expected future…
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