Today's newsletter is about Bitcoin's fourth halving, which will take place tomorrow. There have been numerous reports and price predictions. Zodia Markets' Mick Roche explains in simple terms how the Bitcoin halving works, why it is important, and how it could potentially impact the Bitcoin price. DAIM's Bryan Courchesne then answers questions he receives on this topic in Ask an Expert.
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Bitcoin miners are rewarded for verifying and securing new blocks on the Bitcoin network. For this effort, they are paid in Bitcoin (BTC) at a current rate of 6.25 BTC per verified block, plus transaction fees. Verifying a new block takes about 10 minutes, and about 144 blocks are verified every day, which equates to a reward of 900 BTC per day. The supply of BTC increases by this amount every day.
For every 210,000 blocks mined, the available mining rewards are reduced or halved. This happens approximately every four years. After this upcoming halving, the fourth in the blockchain's 15-year history, a miner will receive 3.125 BTC for verifying a block instead of 6.25 BTC. This will reduce the new daily BTC supply to around 450 BTC.
What is the current market status?
Daily exchange-traded BTC volume varies depending on the source, but when we look at Messari volumes, we see a daily volume range of around $30 billion. At current prices (BTC = $64,000), the reduced new supply will be $29 million, or about 1% of the average daily exchange trading volume, up from 2%.
However, miners may not sell all of their new coins. Research from CoinShares suggests that the average cost of mining Bitcoin post-halving will be around $40,000, depending on many variables. Therefore, miners whose operating costs are lower than the current market price may choose to hold on to their coin and not release it to the market. However, this has always been the case. There are some miners who sell all rewarded BTC when they receive it (either to take profits, cover operating costs, or for capital investments), and others who hold excess Bitcoins in anticipation of a price increase.
Another consideration is the “free float” (actively traded coins) in BTC. Currently, about 93.5% or 19.635 million of all BTC have been mined. Of these, around 75% are considered to be held long-term (with BTC held in a wallet for longer than 155 days). This would result in a free float of approximately 5 million BTC and increase the supply by 0.01% daily.
Also to consider are the new spot Bitcoin ETFs. The average daily inflow volume into the new ETFs (including Grayscale outflows) is $202 million. This has a far greater impact on prices than the supply reduction.
What could this mean for the price of Bitcoin?
While it is obvious that a decrease in supply should have a positive impact on the price of a commodity, the same should apply to Bitcoin. The question is, how much should it increase and is the price increase already included in the current price? As we've seen with the ETF announcements, most predetermined headlines become “buy the rumor, sell the fact” events, and we see a risk of that being the case here too.
We don't think it makes sense to look back at previous halvings as there aren't enough data points to be statistically meaningful. Additionally, it is difficult to extrapolate correlations to halvings on an instrument that went from $0 to $70,000 in a short period of time.
A much larger impact on the Bitcoin price will be ETF flows, as these have the potential to change dramatically depending on sentiment. These flows can easily exceed the supply reduction caused by the halving.
We expect the halving to have a much larger impact on miners than the Bitcoin price. Miners will have to adapt their operations to accommodate the reduced profits they will receive, whether by investing in more efficient equipment, reducing operating costs, or even selling more of their mined Bitcoins.
One of the goals of participants in the digital asset space is to increase institutional adoption. Reducing daily new supply by $31.5 million in a market that already transacts about $30 billion is relatively trivial. If the market cannot handle a $31.5 million reduction in daily supply, it is not ready for institutions.
Pay attention to ETF flows; They will dictate price more than a small drop in supply growth.
Q. How does the Bitcoin halving affect the Bitcoin supply and what impact does it have on the price?
The supply of Bitcoins in the secondary market depends on holders who want to sell existing Bitcoins and miners who want to sell the newly minted Bitcoins they receive. In general, the release of these new Bitcoins between halvings creates some kind of equilibrium in the supply/demand dynamics of the secondary market, where reward can support demand. Halving involves a supply shock because the equilibrium is disrupted and demand is no longer met. In the past, this has been a trigger for dramatic price increases.
Q. Can you explain the concept of “halving cycles” in the context of Bitcoin price action?
Since the halving is programmed to occur every 210,000 blocks, there is a specific time frame between these events that lasts about four years. In these four years, there has historically been a high price, a low price, a bull part of the cycle and a bear part of the cycle. Historically, the strongest price increase occurred in the month before and after the halving. This is a consequence of the supply shock created by the halving. After the new balance between supply and demand is reached, the price peaks and then a drastic sell-off occurs until the BTC price reaches its bottom or bottom. This typically occurs 12-18 months after the halving. Once we hit the bottom, the price fluctuates and then rises steadily until we approach the halving and the cycle repeats.
Q. What potential strategies should investors consider before, during and after a Bitcoin halving?
The main strategy we recommend for investors with a long investment horizon is to simply buy and hold. The volatility of cryptocurrencies can be difficult to manage and it is easy to get on the wrong side of a trade. This tends to lead to very emotional and suboptimal decisions. Over a period of several years, Bitcoin has tended to provide investors with a high return, so it is not necessary to improve an already high return to make a strategy successful.
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