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How Halving Will Impact the Bitcoin Market
There is a lot of forces moving Bitcoin, Yet few attract the same level of attention as halvings (when the overall reward is cut in half). Historically, halvings have proven to be important catalysts for bull markets, and even if the rate of impact declines, the upcoming halving will likely prove important for Bitcoin price formation.
This opinion article is part of CoinDesk “The Future of Bitcoin” Package released to coincide with the halving in April 2024. Torbjørn Bull Jenssen is the CEO of K33.
At K33, we expect speculators to once again lead the event, as they have in all previous halving events. On average, bitcoin appreciated 14% in the month leading up to the halving, and we wouldn’t be surprised if 2024 follows this trend. That said, there are many factors at play that neither we nor anyone else can predict with certainty. But there are some things we know for sure.
Demand is the key
First, the price of Bitcoin is still determined by the net demand for holding Bitcoin. With a given amount of Bitcoin available at any time, its value must adjust until investors make their desired allocations, denominated for example in USD.
To take a simplified example: if there was only one bitcoin and two investors each wanted to hold $1,000 worth of bitcoin, this would only be possible with one bitcoin valued at $2,000 per coin and each investor held half a coin each.
The current inflation rate is around 1.8%, about the same as gold, and will fall to 0.9% by the end of April. This means that without a change in demand, the halving should only trigger a 0.9% price increase in the first year after the halving, compared to what would be the case without the reduction A half.
Without a change in demand, market capitalization is expected to remain fixed. With 1.8% annual inflation in Bitcoin stock, the price needs to fall 1.8% for the market cap to stay the same. With inflation at 0.9%, the decline should only be 0.9%.
The demand for Bitcoin is of course simply fixed, but ironically the analysis above proves an important point: although the halving is a supply event, all of its impact on price must come from the supply side. demand, like the pure supply effect. is a virtual non-event.
The Hodlers are fully invested
In other words, it appears that the supply side effect is irrelevant. But this is not 100% true. The reason is that many bitcoin holders are fully invested. They will continue to hold if the price increases, but they do not have more USD to buy BTC. The price is therefore to some extent determined by the balance between the marginal buyer and the marginal seller, because the total portfolio demand is endogenous and, to some extent, determined by the price.
The story continues
To make a simplified illustration of this point: imagine that all existing coins are held by strong hands who do not sell. Miners must sell to cover their costs, but no one is forced to buy. A halving of the supply of new bitcoins would, for a given rate of inflow of new dollars into bitcoin, result in a doubling of the price. Once the price doubles, half the number of coins will be enough to absorb the incoming USD.
A doubling of price would be a significant move, but looking at past halvings and popular predictions like those long debunked but still used Stock-flow model, optimists expect a 10-fold increase in prices. This cannot be explained in isolation by a halving and will only happen if there is a massive increase in demand, which is actually not too unlikely.
Halving draws attention to bitcoin scarcity
The halving could tip the balance between marginal buyers and sellers, triggering a bull market with a feedback loop where more people would want to buy when the price rises.
Additionally, the current halving draws attention to the absolute scarcity of bitcoin at a time when it is more accessible to investors than ever, thanks to the approval of ETFs in the United States. There are also growing concerns about debt overhang in the United States. which leads some to assert that Bitcoin could serve as a hedge against a possible loss of confidence in the dollar.
In this context, more and more people are discovering the halving and scarcity of bitcoin and finding it attractive. In this way, the halving works like a Schelling Point, accelerating the already strong momentum of bitcoin. It is therefore not unlikely that we could see a halving, followed by a correction, before the underlying trend of growing adoption and awareness drives Bitcoin to new highs.
The daily reduction in bitcoin production from 900 to 450 on halving day (likely April 20) is unlikely to have an immediate impact, but combined with awareness of demand and positive returns from ‘an increase in prices, the annual effect of 164,250 is definitely significant. .
Half day should be a non-event
The upcoming halving is a known event and should, according to the efficient market hypothesis, be taken into account. Bitcoin is a volatile asset, with a correspondingly high expected future return, but events such as halving are not expected to have a predictable effect on the day of the event itself.
We can of course wonder whether the hypothesis of an efficient market is verified or not. But, judging by the options market, it appears that the halving itself will be a non-event. If anything, traders appear more interested in hedging downside risk with puts than in speculating on significant upside with OTM (out-of-the-money) calls. 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 you do as an investor?
Although speculators will likely position ahead of the halving, as they have done in the past, long-term investors should pay minimal attention to the halving itself and instead focus on demand for the halving. walk.
As such, perhaps the most important effect of the halving will be its marketing effect for Bitcoin and its long-term absolute scarcity in a world of inflationary fiat currencies.