First of all, let me talk about how this halving of Bitcoin is different from previous ones!
Bitcoins are generated through a process called "mining," where computers solve computationally intensive problems to earn block rewards of new bitcoins. The issuance of bitcoins is limited by design — approximately every four years, the mining reward is "halved," effectively halving the number of new coins issued.
This deflationary property is a fundamental attraction for many Bitcoin holders. While fiat currency supply is dependent on central banks and precious metal supply is subject to natural forces, Bitcoin’s issuance rate and total supply have been dictated by its underlying protocol since its inception. The combination of a fixed total supply and a gradually decreasing inflation rate not only creates scarcity, but also builds deflationary properties into Bitcoin.
Aside from the obvious supply implications, the compelling excitement and anticipation surrounding the Bitcoin halving stems from its historical correlation with Bitcoin price increases:
However, it is important to understand that a Bitcoin price surge following a halving is not a given. Given that these events are highly anticipated, if a price surge was certain, rational investors would likely buy in advance, leading to a price surge prior to the halving. This brings us to frameworks like the Stock-to-Flow model. While it creates visually appealing charts by correlating scarcity with price increases, the model ignores the fact that this scarcity is not only predictable, but widely known in advance. We can conclude this by observing other cryptocurrencies that employ similar halving mechanisms, such as Litecoin, which has not consistently seen price increases following the halving. This suggests that while scarcity can sometimes influence price, other factors also play an important role.
Rather than attributing post-halving price increases to the halving itself, it appears that these periods coincide with significant macroeconomic events. For example, in 2012, the European debt crisis highlighted Bitcoin’s potential as an alternative store of value amid economic turmoil, causing its price to rise from $12 to $1,100 in November 2013. Similarly, the 2016 initial coin offering boom—which pumped more than $5.6 billion into altcoins—indirectly benefited Bitcoin, boosting its price from $650 to $20,000 in December 2017. Of particular note, during the 2020 COVID-19 pandemic, massive stimulus measures have heightened inflation concerns, potentially pushing investors toward Bitcoin as a safe haven, causing its price to rise from $8,600 to $68,000 in November 2021. These macroeconomic uncertainties and explorations of alternative investment options appear to coincide with periods of increased interest in Bitcoin, which coincidentally occur around the time of the halving. This pattern suggests that while the halving helps reinforce Bitcoin’s scarcity narrative, the broader economic context and its impact on investor behavior can also have a significant impact on Bitcoin’s price.
While the future macroeconomic environment remains uncertain, the impact of the halving on Bitcoin’s supply structure is certain. Let’s take a deeper look.
Miner threats
The halving poses challenges for Bitcoin miners. With Bitcoin issuance decreasing from 6.25 BTC per block to 3.125 BTC, the revenue miners receive from block rewards has effectively been cut in half. In addition, expenses are increasing. Hash rate, a measure of the total computing power used to mine and process transactions on the Bitcoin network, is a key input for calculating miner expenses. In 2023, the 7-day average hash rate surged from 255 EH/s to 516 EH/s, an increase of 102%, significantly outpacing the 41% growth rate in 2022. This surge, driven in part by Bitcoin's price increase throughout 2023 and companies acquiring more efficient mining equipment in response to favorable market conditions, highlights the growing challenges facing miners. The combination of falling revenue and increasing costs could put many miners on edge in the short term.
While the situation may seem grim, there is evidence that miners have long been prepared for the financial consequences of the halving. In the fourth quarter of 2023, miners clearly sold their Bitcoin on-chain holdings, possibly to build liquidity ahead of the block reward reduction. In addition, major fundraising activities such as Core Scientific’s $55 million equity offering, Stronghold’s $15 million equity financing, and Marathon Digital’s ambitious $750 million hybrid equity financing highlight the industry’s proactive attitude in strengthening reserves. Together, these moves suggest that Bitcoin miners are well-positioned to cope with the upcoming challenges, at least in the short term. Even if some miners exit the market completely, causing the hash rate to drop, it may lead to a mining difficulty adjustment, potentially reducing the cost per coin for the remaining miners and keeping the network balanced.
Despite the challenges posed by the reduction in block rewards, the growing role of inscriptions and L2 within the Bitcoin ecosystem have recently emerged as promising use cases. These innovations may provide a glimmer of hope for miners, potentially increasing transaction throughput and increasing transaction fees on the network.
1. Bitcoin halving cycle
The halving of the reward reduces the number of newly mined Bitcoins accordingly. This happens after every 210,000 blocks, forming a four-year price cycle. Previous halvings occurred in 2012, 2016, and 2020.
This event will reduce the profitability of miners, who use customized hardware (application-specific integrated circuits, ASICs) to process transactions. According to CoinDesk, in 2023, it will take at least $10,000 to $15,000 to mine a block profitably. After the halving, the cost could soar to $40,000 per coin.
2. When will Bitcoin halve in 2024?
The reward will be reduced from 50 bitcoins per block to 6.25 bitcoins, and will be further reduced to 3.125 bitcoins on April 19, 2024.
3. Impact on prices: in the context of Bitcoin halving
While the scarcity narrative is important, there are other factors at play besides a contraction in supply. In theory, falling inflation should boost demand, but the actual price impact is likely to be limited.
The slower rate of coin creation reduces inflation while ensuring that the supply of Bitcoin remains limited (21 million). This non-inflationary nature appeals to cryptocurrency enthusiasts: unlike fiat currencies and gold, Bitcoin is not subject to central institutions and natural reserves.
Lower rewards promote the health and sustainability of the network, and Bitcoin is also affected by factors beyond the rate of supply expansion. These factors include drivers within and outside the blockchain industry: regulation, the Federal Reserve’s monetary policy, geopolitics, and more.
That said, Bitcoin’s scarcity is also programmable and therefore known in advance. Models that tie it directly to price increases are likely flawed. Otherwise, Litecoin (another cryptocurrency that undergoes halvings) would continue to rise after each halving, which is not the case.
in conclusion
Bitcoin has not only weathered the storm of the bear market, but has also challenged outdated perceptions with its developments over the past year. While it has long been hailed as digital gold, recent developments show that Bitcoin is evolving into something more. Fueled by a surge in on-chain activity, supported by the momentum of significant market structure, and backed by its inherent scarcity, Bitcoin has shown its resilience. Keep an eye on its developments around the April 2024 halving, as we believe Bitcoin’s future is bright.
Personal thoughts: From the experience of traditional finance, the deflation caused by Bitcoin halving is known, so Bitcoin will not rise immediately after halving. The benefits of market deflation caused by halving will not be apparent until at least 3-5 months after halving! In other words, Bitcoin is very likely to be in the consolidation stage during the period from April to September, and will not start to surge until October this year. Bitcoin will reach between 100,000 and 130,000. As long as we enter the market in batches during the consolidation stage and enter the market before October this year, we will withdraw 90% of the total assets after reaching the target. At least in terms of cottages, the Bitcoin ecosystem mentioned above, as long as you follow this idea, you can reap very good returns in just one and a half years!
