DeFi

·

March 8, 2024

Bitcoin halving and crypto prices

Anthony Allen

Bitcoin’s price movements lead the crypto markets. As BTC pushes new highs, other cryptocurrencies are following. What can we expect when the production of new bitcoin is cut in half?

The price of bitcoin is back to an all-time-high (ATH), and the halving is still to come. With the next halving expected on April 17, 2024, you may be wondering what will happen to your increasingly healthy portfolio when the number of bitcoin issued each block gets cut in half. Looking at the economics of a Bitcoin halving, let’s see what we can expect based on previous cycles.

What is a Bitcoin halving?

A Bitcoin halving reduces the amount of bitcoin (BTC) created when a new block is mined. This happens every 210,000 blocks, which takes approximately 4 years. In the beginning, 50 bitcoin were issued with every block. Then, in 2012, this fell to 25, in 2016 it halved again to 12.5, and since 2020 there have been 6.25 BTC produced every block.

Bitcoin block rewards after each halving
Bitcoin block rewards after each halving.

Currently, around 900 new bitcoin are issued each day. After the halving, this will drop to just 450. For context, Blackrock recently bought 11,000 BTC in a single day to keep up with ETF demand. 

Halvings are a way for Bitcoin to lower the inflation of its supply at a predictable rate. They operate at a macro scale, targeting a maximum supply of 21 million bitcoin in circulation by the year 2140. The rate of individual block production is controlled through difficulty adjustments, which alter the likelihood of finding a block as network computing power changes.

Combined, difficulty adjustments and halvings regulate the Bitcoin network in a way that ensures a block is found every 10 minutes, on average, and that the network gradually transitions to a fee-based system rather than a rewards-based one. 

The Bitcoin price after halvings

Halving cycles are an economic phenomenon that has historically seen the price of bitcoin rally every four years. While often discussed as fact, these price rallies are not guaranteed and should not be the sole basis for investment decisions. Just a couple of months prior to the last halving in May 2020, bitcoin’s price crashed by 70%, and took over 6 months to start testing new highs.

Bitcoin price chart showing the impact of each previous bitcoin halving
How the halving cycles reflect on the price of bitcoin.

Bitcoin halvings are coded into the protocol itself, so it’s logical that they should be considered ‘priced in’. So what causes the seemingly inevitable price surge which has so far taken bitcoin to new highs every 4 years? It’s hard to say for sure, but it’s almost certainly a combination of several factors:

  • Supply squeeze: not only is the amount of bitcoin produced being cut in half, the number of bitcoin owned by long-term holders is at a record high and the amount of bitcoin available on exchanges has dropped to levels not seen since 2018. 
  • Media attention: speculation over the halving itself and the drop in supply brings new market participants.
  • Inflation hedging: Bitcoin’s inflation reduces while many fiat currencies’ inflation increases. This was especially true during the last cycle, where a global pandemic led to record levels of money printing.
  • FOMO: Bitcoin halvings represent a tangible change in an otherwise unchanging asset, so the feeling of getting in before the halving may drive investors who are otherwise on the fence into investing.  
  • Cultural shifts: mainstream society has warmed up to bitcoin as it has broken new ground, such as adoption by a nation state in 2021 and the recent Bitcoin ETF approval in the USA.

There is no certainty that the price of Bitcoin will rise following the halving. Given the recent price action, it may even drop as investors ‘sell the news’. But historically they have led to increased demand while reducing supply, which is the main reason why halvings are such a compelling narrative for bitcoin.

What bitcoin halvings mean for crypto as a whole

There is no explicit reason why the prices of other cryptocurrencies should rise or fall with bitcoin. Crypto prices nowadays are mostly denominated in US dollars (USD), rather than in BTC. That means that the value of one token may remain the same in USD, while reducing in BTC terms as the bitcoin price rises.

That said, a number of factors come into play that tend to lead to correlation between the bitcoin price and the price of other tokens, mainly speculation and trading activity. In the same way attention, FOMO and cultural shifts affect the bitcoin price, these can have a knock-on effect that drives interest and investment i other cryptocurrencies, as speculators seek out new technologies, or try to capitalize on trends.   

Since the last halving, Ethereum moved to an entirely new consensus model, Proof of Stake (PoS), which all but severed its similarities with Bitcoin. Yet development in the Ethereum ecosystem has been unmatched, with smart contracts enabling a wide range of applications that bitcoin does not support. Many new market participants coming to bitcoin for the halving are therefore likely to also invest in other cryptocurrencies like ether. 

Extrapolate this to the hundreds of specialized cryptocurrencies, and you can start to see how a major event like the halving leads to record valuations across Web3. Combined with low market caps, as is common for niche tokens, the sudden injection of capital can lead to outsized performance and headline-grabbing profits for traders who got in early to memecoins and other low-profile crypto projects.

Getting exposure to bitcoin 

Making the most of the halving without holding bitcoin has been quite difficult, historically. While there may be significant opportunities in other networks and tokens, it is notoriously difficult to predict which will outperform, and choosing the wrong token can leave you with significant losses. 

Wrapped bitcoin (WBTC) is an easy way to get exposure to bitcoin price movements without having to deal with converting your ETH or other investments to fiat, or using a centralized exchange. WBTC is an ERC-20 token collateralized by bitcoin that has been locked in a smart contract. That means you can use Matcha to swap directly to WBTC from ETH or other ERC-20 tokens to benefit from any price increases which may result from the halving. 

WBTC is tokenized on multiple chains, either as a collateralized native token or as a bridged token, so you can even swap directly across chains using a cross chain swap on Matcha. 

Keep your expectations in check 

The efficient market hypothesis should mean that the halving is priced in. Following previous halvings, the bitcoin price peaked around 500x in the first bull market, 88x in the second, 25x in the third and just 7x in the last. As awareness has increased, the price has stabilized. So to expect a sudden spike to a 10 trillion dollar market cap for bitcoin is probably wishful thinking, and huge gains have repeatedly been followed by devastating crashes. 

That said, bitcoin adoption still has a long way to go, and the proliferation of DeFi is even further behind. Markets may be efficient, but the impact of a revolutionary technology like cryptocurrency is not easy to gauge. The SEC may consider crypto a “rounding error”, but there is no doubt that it is gathering pace on the global stage, with even the most steadfast critics changing their minds about bitcoin’s potential. 

While there is no way to predict the outcome of this bitcoin halving, there are two words which are as likely to come from economists in the boardroom to degens in the basement: supply and demand. We will see a reduction in supply, and demand has been opened to as much as $100 billion in ETF investments. Whatever comes next, bitcoin’s place in mainstream society has never been stronger. 

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DeFi

·

March 8, 2024

Bitcoin halving and crypto prices

Bitcoin halving April 2024

Bitcoin’s price movements lead the crypto markets. As BTC pushes new highs, other cryptocurrencies are following. What can we expect when the production of new bitcoin is cut in half?

The price of bitcoin is back to an all-time-high (ATH), and the halving is still to come. With the next halving expected on April 17, 2024, you may be wondering what will happen to your increasingly healthy portfolio when the number of bitcoin issued each block gets cut in half. Looking at the economics of a Bitcoin halving, let’s see what we can expect based on previous cycles.

What is a Bitcoin halving?

A Bitcoin halving reduces the amount of bitcoin (BTC) created when a new block is mined. This happens every 210,000 blocks, which takes approximately 4 years. In the beginning, 50 bitcoin were issued with every block. Then, in 2012, this fell to 25, in 2016 it halved again to 12.5, and since 2020 there have been 6.25 BTC produced every block.

Bitcoin block rewards after each halving
Bitcoin block rewards after each halving.

Currently, around 900 new bitcoin are issued each day. After the halving, this will drop to just 450. For context, Blackrock recently bought 11,000 BTC in a single day to keep up with ETF demand. 

Halvings are a way for Bitcoin to lower the inflation of its supply at a predictable rate. They operate at a macro scale, targeting a maximum supply of 21 million bitcoin in circulation by the year 2140. The rate of individual block production is controlled through difficulty adjustments, which alter the likelihood of finding a block as network computing power changes.

Combined, difficulty adjustments and halvings regulate the Bitcoin network in a way that ensures a block is found every 10 minutes, on average, and that the network gradually transitions to a fee-based system rather than a rewards-based one. 

The Bitcoin price after halvings

Halving cycles are an economic phenomenon that has historically seen the price of bitcoin rally every four years. While often discussed as fact, these price rallies are not guaranteed and should not be the sole basis for investment decisions. Just a couple of months prior to the last halving in May 2020, bitcoin’s price crashed by 70%, and took over 6 months to start testing new highs.

Bitcoin price chart showing the impact of each previous bitcoin halving
How the halving cycles reflect on the price of bitcoin.

Bitcoin halvings are coded into the protocol itself, so it’s logical that they should be considered ‘priced in’. So what causes the seemingly inevitable price surge which has so far taken bitcoin to new highs every 4 years? It’s hard to say for sure, but it’s almost certainly a combination of several factors:

  • Supply squeeze: not only is the amount of bitcoin produced being cut in half, the number of bitcoin owned by long-term holders is at a record high and the amount of bitcoin available on exchanges has dropped to levels not seen since 2018. 
  • Media attention: speculation over the halving itself and the drop in supply brings new market participants.
  • Inflation hedging: Bitcoin’s inflation reduces while many fiat currencies’ inflation increases. This was especially true during the last cycle, where a global pandemic led to record levels of money printing.
  • FOMO: Bitcoin halvings represent a tangible change in an otherwise unchanging asset, so the feeling of getting in before the halving may drive investors who are otherwise on the fence into investing.  
  • Cultural shifts: mainstream society has warmed up to bitcoin as it has broken new ground, such as adoption by a nation state in 2021 and the recent Bitcoin ETF approval in the USA.

There is no certainty that the price of Bitcoin will rise following the halving. Given the recent price action, it may even drop as investors ‘sell the news’. But historically they have led to increased demand while reducing supply, which is the main reason why halvings are such a compelling narrative for bitcoin.

What bitcoin halvings mean for crypto as a whole

There is no explicit reason why the prices of other cryptocurrencies should rise or fall with bitcoin. Crypto prices nowadays are mostly denominated in US dollars (USD), rather than in BTC. That means that the value of one token may remain the same in USD, while reducing in BTC terms as the bitcoin price rises.

That said, a number of factors come into play that tend to lead to correlation between the bitcoin price and the price of other tokens, mainly speculation and trading activity. In the same way attention, FOMO and cultural shifts affect the bitcoin price, these can have a knock-on effect that drives interest and investment i other cryptocurrencies, as speculators seek out new technologies, or try to capitalize on trends.   

Since the last halving, Ethereum moved to an entirely new consensus model, Proof of Stake (PoS), which all but severed its similarities with Bitcoin. Yet development in the Ethereum ecosystem has been unmatched, with smart contracts enabling a wide range of applications that bitcoin does not support. Many new market participants coming to bitcoin for the halving are therefore likely to also invest in other cryptocurrencies like ether. 

Extrapolate this to the hundreds of specialized cryptocurrencies, and you can start to see how a major event like the halving leads to record valuations across Web3. Combined with low market caps, as is common for niche tokens, the sudden injection of capital can lead to outsized performance and headline-grabbing profits for traders who got in early to memecoins and other low-profile crypto projects.

Getting exposure to bitcoin 

Making the most of the halving without holding bitcoin has been quite difficult, historically. While there may be significant opportunities in other networks and tokens, it is notoriously difficult to predict which will outperform, and choosing the wrong token can leave you with significant losses. 

Wrapped bitcoin (WBTC) is an easy way to get exposure to bitcoin price movements without having to deal with converting your ETH or other investments to fiat, or using a centralized exchange. WBTC is an ERC-20 token collateralized by bitcoin that has been locked in a smart contract. That means you can use Matcha to swap directly to WBTC from ETH or other ERC-20 tokens to benefit from any price increases which may result from the halving. 

WBTC is tokenized on multiple chains, either as a collateralized native token or as a bridged token, so you can even swap directly across chains using a cross chain swap on Matcha. 

Keep your expectations in check 

The efficient market hypothesis should mean that the halving is priced in. Following previous halvings, the bitcoin price peaked around 500x in the first bull market, 88x in the second, 25x in the third and just 7x in the last. As awareness has increased, the price has stabilized. So to expect a sudden spike to a 10 trillion dollar market cap for bitcoin is probably wishful thinking, and huge gains have repeatedly been followed by devastating crashes. 

That said, bitcoin adoption still has a long way to go, and the proliferation of DeFi is even further behind. Markets may be efficient, but the impact of a revolutionary technology like cryptocurrency is not easy to gauge. The SEC may consider crypto a “rounding error”, but there is no doubt that it is gathering pace on the global stage, with even the most steadfast critics changing their minds about bitcoin’s potential. 

While there is no way to predict the outcome of this bitcoin halving, there are two words which are as likely to come from economists in the boardroom to degens in the basement: supply and demand. We will see a reduction in supply, and demand has been opened to as much as $100 billion in ETF investments. Whatever comes next, bitcoin’s place in mainstream society has never been stronger. 

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