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The forces driving Bitcoin development are numerous, but few are as attention-grabbing as the halving (when block rewards are halved). Historically, the halving has proven to be a significant catalyst for bull markets, although its impact rate is decreasing. However, the upcoming halving may still be crucial for Bitcoin's price formation.
At K33, we anticipate speculators to once again react prior to the halving event, as they have in all past halving events. On average, Bitcoin has appreciated by 14% in the month leading up to the halving. If this trend continues in 2024, it would not be surprising. However, there are many factors at play, and we, like anyone else, cannot predict them with certainty. But there are some things we do know.
Demand is key
Firstly, the price of Bitcoin is always determined by the net demand of Bitcoin holders. At any given time when there is a certain amount of Bitcoin available, its value must adjust until investors achieve their desired allocation, such as valued in dollars.
For instance: If there's only one Bitcoin and two investors want to hold Bitcoin worth $1000 each, then only a Bitcoin worth $2000 can allow each investor to hold half a Bitcoin.
Currently, the inflation rate is about 1.8%, roughly the same as gold, and will drop to 0.9% by late April. This means that if demand remains unchanged, the halving will only trigger a 0.9% increase in price in the first year after the halving.
If demand remains unchanged, the market value should stay the same. Since Bitcoin's stock-to-flow ratio has an annual inflation rate of 1.8%, the price must fall by 1.8% to keep the market value unchanged. If the inflation rate is 0.9%, then the decrease only needs to be 0.9%.
The demand for Bitcoin is certainly fixed, but ironically, the above analysis proves an important point: although the halving is a supply-side event, all its impacts on price must come from the demand side because there are almost no events caused purely by supply effects.
Holders are fully invested
In other words, supply-side effects seem irrelevant. But this is not 100% correct. The reason is that many Bitcoin holders have made full investments. If prices rise, they will continue to hold, but they don't have more dollars to buy Bitcoin. Therefore, the price is somewhat determined by the balance between marginal buyers and sellers because the total portfolio demand is endogenous and somewhat determined by price.
To illustrate this simply: Imagine all existing tokens are held by strong hands and not for sale. Miners must sell to cover costs, but no one needs to buy. For a given rate of new dollar inflows into Bitcoin, the halving of new Bitcoin supply would double the price. Once the price doubles, half the token supply is enough to absorb the inflowing dollars.
Doubling the price would be significant, but looking at past halvings and popular predictions, such as the already debunked but still used stock-to-flow model, optimists expect prices to increase tenfold. This cannot be explained by halving alone and only occurs when there is a significant increase in demand, which is actually unlikely.
Halving draws attention to Bitcoin's scarcity
The halving may disrupt the balance between marginal buyers and sellers, triggering a bull market and forming a feedback loop where more people want to buy as prices rise.
Furthermore, the current halving has drawn attention to Bitcoin's absolute scarcity, and with the approval of U.S. ETFs, investors find it easier to access Bitcoin than ever before. Concerns about excess U.S. debt are also increasing, leading some to view Bitcoin as a hedge against declining trust in the U.S. dollar.
In this context, more and more people are beginning to understand Bitcoin's halving and scarcity, and finding its attractiveness. In this way, the halving acts as a tipping point, accelerating Bitcoin's already strong momentum. Therefore, before we see a rise in adoption rates and awareness pushing Bitcoin to new highs, it is unlikely that we will see an increase before the halving followed by an adjustment.
The halving day (likely April 20th) will see Bitcoin production decrease from 900 coins per day to 450, unlikely to have any immediate impact, but combined with demand awareness and positive feedback from rising prices, the effect of 164,250 coins for the entire year will be significant.
The halving day is not expected to bring any changes
The upcoming halving is a known event and according to the efficient market hypothesis, it should be factored into prices. Bitcoin is an unstable asset with correspondingly high expected future returns, but events like the halving should not have predictable effects on the day of the event itself.
Of course, we can discuss whether the efficient market hypothesis holds true. However, looking at the options market, the halving itself seems to have no effect. If anything is different, it's that traders seem more interested in hedging downside risk with put options than speculating on large upside moves with out-of-the-money (OTM) call options. In the medium term, there is a bullish bias, but we have recently seen a slow decline in optimism in the options market.
What should investors do?
While speculators may prepare for the halving event as they have in the past, long-term investors should try to minimize their focus on the halving itself and instead focus on the demand side of the market.
Thus, the most important impact of the halving may be its marketing effect on Bitcoin and its long-term absolute scarcity in the fiat currency world of inflation. |
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Post time 18-4-2024 13:47:29