Bitcoin’s last three halvings have given investors dramatic price jumps.
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Bitcoin’s fourth halving
Bitcoin, the world’s dominant cryptocurrency, is about a year away from the fourth halving in its 14-year history. The event occurs every four years and has historically served as a bullish catalyst for Bitcoin’s price and acceptance.
Bitcoin halving is impacting public perception and awareness of Bitcoin as a digital asset and global store of value. It generates media attention and public interest in Bitcoin, as well as speculation and debate about its future prospects. Perhaps most importantly, the halving serves as a reminder of Bitcoin’s limited and predictable supply collapsing with the unlimited and variable supply of fiat currencies.
The halving is a planned reduction in the amount of newly issued bitcoins that are created and distributed to the miners who secure and validate transactions on the network. It is coded into Bitcoin’s software and is designed to ensure that the network’s total supply never exceeds 21 million units.
The first halving took place in November 2012, when the block reward — the amount of bitcoins awarded to miners for validating each block of transactions — dropped from 50 to 25 bitcoins. The second halving took place in July 2016 when the block reward fell from 25 to 12.5 bitcoins. The third and final halving took place in May 2020 when the block reward was reduced from 12.5 to 6.25 bitcoins.
The next halving is expected to occur in April 2024, when the block reward will be cut to 3,125 units, bringing Bitcoin’s annual inflation rate down to 0.8% from 1.7%. The final halving is expected to happen in 2140 when the last fraction of a bitcoin will be mined and the total supply will reach 21 million.
Banking crisis restores trust in Bitcoin
After several banks collapsed, including First Republic Bank, Silicon Valley Bank, Silvergate Bank and Signature Bank, Bitcoin rallied and is up 76% year-to-date. The 2023 US banking crisis primarily affected regional banks and was largely caused by the Fed’s rapidly rising interest rates, which devalued the balance sheets of banks holding US Treasuries. Retail customers were quick to withdraw funds from bank accounts that were yielding less than 1% in favor of high-yielding savings accounts and money market funds that offered more competitive interest rates closer to the Fed Funds rate of 4%-5%.
This momentum caused a bank run, and the Federal Reserve responded by opening its Bank Term Funding Program and offering to buy depreciated US Treasuries at face value. While there are important differences, many analysts have equated this funding program with a new form of quantitative easing. In the past, Bitcoin has been bullish on the Federal Reserve printing money to buy impaired assets and increase total assets.
As the banking crisis continues, fiat currencies continue their inflationary spiral, with record high inflation hitting Western economies like the United States and Europe. Others like Argentina, Venezuela and Lebanon are struggling with more serious bouts of hyperinflation.
Argentina’s annual inflation rate rose to 104% in March, marking the highest rate in over 30 years. Interestingly, the price of bitcoin in Argentine pesos hit its previous all-time high of ARS 6.7 million this week. Valued in US dollars, Bitcoin is still 60% below its all-time high. In Argentina, bitcoin has shown strong properties as a store of value and anti-inflation over the years.
Bitcoin has proven to be a solid hedge against inflation
CoinGecko
The US Federal Reserve is expected to make its last rate hike today before pausing, and if the banking crisis continues they may indeed have to start cutting rates aggressively, even if inflation remains stubbornly high. This momentum and the upcoming halving could give Bitcoin a unique tailwind in the coming months.
It’s also worth noting that Bitcoin’s monetary policy is unique compared to most other crypto assets, which tend to be inflationary. Dogecoin has a perpetual inflation rate of 2-3% and Solana’s long-term inflation rate is 1.5%. With Ethereum’s recent move to proof-of-stake, the inflation rate has actually been slightly negative as the transaction fees burned outweigh the newly issued ether.
Bullish for bitcoin price
Measuring the price action of the three bitcoin halving cycles over the biennium, beginning a year before each halving and ending a year after, provides clues to bitcoin’s price action as the fourth halving approaches.
Over the bienniums, the 2012 Bitcoin halving showed a price increase of 39,200%, 2016 added 786%, and 2020 added 712%. If Bitcoin moves in line with the last two halvings, its price would reach $220,000 in 2025.
Past performance is not a guide to future results, and there are many other factors that affect Bitcoin’s price. Additionally, as Bitcoin matures and increases in adoption, its price may become less volatile and more stable over time.
Bitcoin performance before and after the halving
Invest.com
Bitcoin miners will have less to sell
One anticipation of the halving is a reduction in natural selling pressure, particularly from miners. Miners are the most predictable sellers of bitcoin as they have real costs that they must cover by converting their new bitcoins into cash. At each halving, the structural selling pressure halves, and consequently, if demand stays the same or increases, the price must also increase.
Currently, the bulk of miner revenue comes from the bitcoin block subsidy (newly minted bitcoin), which awards 6.25 BTC (currently $187,000) to miners approximately every 10 minutes. Annualized Bitcoin reissuance includes an additional $9.8 billion in selling pressure for the market to absorb each year.
Although the number of new bitcoins minted in each block is halved, total miner revenue has increased after each halving, due to the rise in bitcoin’s price. As the number of bitcoins minted per block approaches zero, miners cannot rely on price increases to cover their costs.
Bitcoin miners will have less to sell after the halving
Nasdaq
In addition to newly issued bitcoins, miners also receive income in the form of transaction fees. To ensure the security and longevity of the network, transaction fees must increase and replace the dwindling block subsidy. As a percentage of the total block reward, transaction fees account for just 2.6% of miner revenue.
Bitcoin transaction fees as a percentage of block reward
Hashrate Index
Though transaction fees make up a small minority of the block reward, transaction fees have increased by about 1.3% over the past year. This uptrend was largely driven by the emergence of ordinal numbers, which increased demand for space for bitcoin blocks. New experiments around layer-two technologies like the Lightning payments network, layer-two smart contract platform Stacks, bitcoin-native DeFi protocols Sovryn and Interlay, and bitcoin Sovereign Rollups could further fuel demand for block space.
Both of these trends need to continue as public bitcoin mining stocks have historically been a high beta play on bitcoin’s performance, outperforming bitcoin in a bull market to the upside and suffering larger losses in a bear market. Some of the top public miners: Marathon, Riot, Hut 8, and Hive, alongside Bitcoin, all showed sharp price increases after the 2020 halving before major price corrections. These businesses come with significant operational risk that forces them to operate and maintain hardware and effectively manage their cash flow.
Bitcoin mining stocks are up around the halvings
trading view
key quote
“Transaction fees can increase over time, but there are other ways for miners to generate revenue. Miners can be compensated for using natural gas that would otherwise have been flared, receive carbon credits, or even get into power generation themselves. I believe bitcoin mining should be viewed as a critical piece of grid infrastructure that can balance the energy grid.
The forced halving and difficulty adjustment guarantee miners ever more efficient energy use, reducing their energy costs and increasing chip efficiency. Existing energy producers can even buy bitcoin miners and mine them with their excess energy.”
- Dennis Porter, CEO and co-founder of the Satoshi Action Fund
decision points
Based on historical performance, investors did well to invest in the months leading up to the Bitcoin halving events. However, as the reduction in issuance eases into relative selling pressure compared to daily trading volume, halving events may prove less impactful going forward. In fact, total miner revenue as a percentage of daily trading volume has fallen sharply, from 16% in 2014 to just 0.1% now.
Bitcoin miners revenue as a percentage of daily trading volume
Nasdaq, Yahoo Finance
Proponents of Ethereum and other Proof-of-Stake-based networks point to Bitcoin’s dwindling security budget and question its sustainability. If transaction fees don’t increase measurably or miners can’t find alternative revenue streams, Bitcoin’s long-term viability may be in question and the halving will put additional pressure on miners.
Bitcoin was created in direct response to the reckless actions of financial institutions and politicians during the Great Recession of 2008, but has yet to experience a prolonged global recession. Deflationary recessions can prove detrimental to Bitcoin adoption as investors sell their most liquid assets first to fund day-to-day expenses.
The halving is one of the most important events in Bitcoin history and development. It demonstrates Bitcoin’s unique characteristics as a decentralized, disinflationary, and transparent form of money governed by code rather than people. Depending on how the network reacts to the event, the next halving will either further cement Bitcoin as the leading digital global store of value or pave the way for other crypto networks to usurp Bitcoin’s throne.
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