Bitcoin network is protected by miners whose computational power ensures its security. These miners are, of course, rewarded. Globally, Bitcoin mining has become an activity for institutional companies, with computational power reaching new peaks day by day. Naturally, miners are rewarded in BTC for each block they find.
What is Bitcoin Halving?
Every day, miners issue new BTC into the market through mining. This will continue until the total circulating supply reaches 21 million BTC. However, the new supply issued will keep decreasing because block rewards are halved every four years. This can also be referred to as Bitcoin inflation. The halving of block rewards every four years reduces its inflation, and the following graph shows the inflation trend from 2009 to 2040.
The inflation rate, which was initially at 1177%, will drop to around 0.85% after the halving in April. Since the halving, or the block reward halving, is what ensures the decrease in inflation, markets have historically seen this event as the start of a bull season.
Block rewards are halved every 210,000 blocks. At the beginning of Bitcoin in 2009, each block reward was worth 50 BTC. Therefore, inflation was quite low, but today in 2020, the block reward has been halved for the third time, bringing the number down to 6.25.
On approximately April 20, 2024, which is about 50 days from now, the block reward of 6.25 will also be halved. As of August 2023, with 94% of the maximum supply of 21 million already in circulation and inflation now below 1%, we have entered a period of scarcity.
Historical Performance of Halving
Most graphs referencing historical data shared by experts revolve around the halving event. For example, the rainbow chart or PlanB’s S2F model are among the most popular. These models, which focus on 4-year cycles, naturally assume market excitement and a subsequent increase in price at certain intervals.
For instance, let’s look at the rainbow chart above.
- In 2012, a halving occurred, and a parabolic rally began for BTC. The price rose above $1200 from double-digit levels about a year later.
- In the 2016 and 2020 periods, we also see significant price increases occurring on average 10 months after the halving.
- The red section of the rainbow chart represents the cycle peak, and the orange area is the range where the price lingers near the peak.
- The rainbow chart suggests we could see a peak above $200,000 in the current cycle.
The graph above is PlanB’s, and it also feeds on price cycles formed around the halving. Although PlanB was confident that the BTC price would climb to the six-figure range by the end of 2021, he was mistaken.
Are Halving and Cycles Misleading?
If something truly gave a clear indication of the future, everyone would be rich. For example, if everything in this cycle happens as predicted, why aren’t people quadrupling their billions by buying Bitcoin?
Setting aside the abnormal price movements that such demand would cause, even many cryptocurrency investors are not sure these predictions will come true. For instance, the S2F or Rainbow chart failed in the over-sold environment of bear markets. The rule that the previous ATH cannot be violated as the next bear market bottom was demolished in 2022.
So there’s no rule that 4-year cycles and block reward halving will definitely make you money. Perhaps after the block reward halving, we will see a global crackdown on cryptocurrencies, significantly cutting off their interaction with fiat currencies. Or a major global issue that cuts off the internet/electricity will render it useless. Consider all doomsday scenarios and keep in mind the possibility that these cycles may not work.
Predictions for the 2024 Halving
In previous block reward halvings, cryptocurrencies were in a very different investment environment. One period was the ICO hype, another was the DeFi or cryptocurrency lending craze, etc. However, the period we are in now is when the term “supply scarcity” begins to materialize. Moreover, there is a continuous demand from the spot Bitcoin ETF channel. Below, you can see the growing BTC reserves of issuers in response to demand from the ETF channel since the launch day in January.
Since the launch day, despite GBTC sales, the BTC held by ETF issuers has increased by about 156,000. Now, you can also see how the BTC reserves at cryptocurrency exchanges have dropped to as low as $142 billion.
In addition to these two charts, we need to etch two important pieces of information into our minds.
- Experts say that the amount of BTC that can be added to the ETF reserve and traded is only worth $200 billion.
- The amount of BTC drawn daily from the ETF channel varies between 20-40 times the miner’s issuance.
- Bonus: As an extra detail, the demand from companies like MicroStrategy is a separate appetite.
As all the details we’ve discussed so far pass before your eyes like a film strip, analyze the following points and understand why this cycle is different.
- Historically, after the halving, the BTC price experiences a parabolic increase. Investors have embraced this trend in the current cycle, and it seems likely to happen again.
- While an annual net inflow of $10 billion was targeted from the ETF channel, reaching this figure in 2 months showed its immense potential. FOMO supported by the ETF channel should drive the price higher this cycle.
- A significant portion of new investors will come from the ETF channel, reaching up to half a million individual transactions daily.
- In April, with the block reward halving, there will be a demand 40-80 times the miner supply, and as people expect further price increases, they won’t sell BTC, pushing the price even higher.
- All exchanges have a BTC reserve of $142 billion, and in just 2 months, ETFs’ cumulative reserve is at $48.2 billion. If this reserve triples, all BTCs in crypto exchanges would need to be transferred to ETF issuer wallets. What price could the market recover at as supply decreases?
- The Fed, which has made the fastest interest rate hikes in history, will start cutting rates a few months after the halving, adding another multiplier effect.
- Spot Bitcoin ETFs are still in the early stages of adoption in other countries and among investment firms in the US. Merrill only recently started offering this to its clients. After a 6-month ETF performance is established, more investors are expected to be directed to this area by different companies and independent investment advisors. This coincides with the June-July 2024 period.
In conclusion, when we reach the same days in 2025, if most of what we’ve written here has happened, we should see a Bitcoin price approaching $200,000. And of course, we will live and see what happens; no one can predict the future.
