Now that spot Bitcoin exchange-traded funds (ETFs) are available in the US, market watchers are looking for the next potentially bullish event that will drive cryptocurrency gains. Following the US Securities and Exchange Commission's long-awaited decision to approve these financial products, Bitcoin ETFs have simultaneously exceeded and underperformed expectations – illustrating the pros and cons of a hype-driven market.
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The three largest Bitcoin ETFs saw capital inflows worth well over half a billion dollars (not counting Grayscale's $22 billion fund, which was acquired by the existing GBTC trust and saw significant outflows), reflecting significant customer demand after traditional on-demand investments. enters Bitcoin (BTC). In the weeks leading up to the approval date, on Wednesday, January 10, Bitcoin rose to a current high of around $48,000.
Many analysts and traders are now hoping that the upcoming Bitcoin halving – when the rate of new Bitcoins issued to network validators (also called miners) will be drastically reduced – could be a similar catalyst for crypto prices. There has long been a debate about whether these programmatically triggered events, which occur every four years, are “priced in.”
The approval of Bitcoin ETFs last week could provide a hint of what's to come in the next Bitcoin hype cycle. The listing of 11 new Bitcoin funds was, at least in hindsight, a clear time to sell, and Bitcoin has since fallen about 12% to $42,250 today. It is still too early to say whether Bitcoin ETFs will attract billions of new dollars and investors, a forecast that depends on the actual demand for Bitcoin.
Meanwhile, the Bitcoin halving (sometimes halving) narrative is a supply-side story: Bitcoin's price could explode after limiting the supply of new coins entering the market, assuming usage of the Bitcoin network remains stable or increases.
In some ways, the Bitcoin halving narrative is an after-the-fact rationalization of the fact that Bitcoin has actually crashed in the months following each halving to date. For example, six months after the network's second halving in 2016 (when new coin emissions per block fell from 25 to 12.5 BTC), Bitcoin crossed the $1,000 threshold for the first time. A similar rally took place in 2020 when Bitcoin hit a new all-time high.
However, aside from the increased bullish sentiment and media coverage that typically precedes the event, there is little evidence that these price increases are directly related to the halving. CoinShares noted in its latest “Mining Report” that there is “often a peak in hash rate growth around four months before the halving, likely due to a 'Bitcoin rush,'” which could indicate positive sentiment.
However, the economic logic surrounding a Bitcoin supply shock is somewhat uncertain, considering that the supply of new Bitcoins will actually continue to increase over the next century or so, by which time all 21 million Bitcoins will have been mined. Satoshi Nakamoto designed the Bitcoin network to subsidize miners through these rewards to encourage adoption in the hopes that transaction fees would become high enough over time to maintain the security and validation of the network.
CoinShares does not offer a price prediction in its report, but instead assumes that post-halving Bitcoin mining will become more competitive and eliminate the least efficient miners. While Bitcoin has become 90% more efficient since the last halving, its hashrate (which represents the amount of computing power devoted to network security) and cost structures have also increased.
In fact, current Bitcoin mining difficulty is at all-time highs, with computing power increasing to over 100% in 2023. CoinShares predicts that this value will decline after the halving with a “miner exodus.” The company also said that the “average production cost per coin” could normalize to just under $38,000 after the halving, given the complicated interplay between hardware and electricity costs, difficulty levels, and the cost structures that determine whether certain miners make money or lose. This determines how many miners are on the network.
What exactly does this mean for Bitcoin price predictions? Well, somewhat contradictory: if Bitcoin prices stay above $40,000, it could actually cause miners' returns to decline. CoinShares does not offer this prediction as such, but given that miners are often the largest sellers of Bitcoin, lower profitability may also lead to selling pressure among this group.
There are many others who disagree and see the halving as another potential positive catalyst for Bitcoin prices. However, it is important to note that everyone has their own incentives. The only near guarantee for the halving is that it is another moment for hype.
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