Bitcoin is fast approaching a key bullish milestone, here’s what to expect

Bitcoin’s fourth halving

Bitcoin, the world’s dominant cryptocurrency, is about a year away from the fourth halving event in its 14-year history. The event takes place every four years and historically acts as a bullish catalyst for Bitcoin’s price and adoption.

Bitcoin’s halving affects the public’s perception and awareness of Bitcoin as a digital asset and global store of value. It generates media attention and public interest in bitcoin, as well as speculation and debate about its future prospects. Perhaps most importantly, the halving serves as a reminder of bitcoin’s limited and predictable supply, which contracts with the unlimited and variable supply of fiat currencies.

The halving is a planned reduction in the amount of newly issued bitcoins that are created and distributed to the miners who secure and validate transactions on the network. It is coded into Bitcoin’s software and is designed to ensure that the network’s total supply will never exceed 21 million units.

The first halving occurred in November 2012, when the block reward – the amount of bitcoins awarded to miners for validating each block of transactions – dropped from 50 to 25 bitcoins. The second halving occurred in July 2016, when the block reward dropped from 25 to 12.5 bitcoins. The third and final halving took place in May 2020, when the block reward was reduced from 12.5 to 6.25 bitcoins.

The next halving is expected to occur in April 2024, when the block reward will be cut to 3.125 units, reducing Bitcoin’s annual inflation rate from 1.7% to 0.8%. The final halving is projected to occur in 2140, when the last fraction of a bitcoin will be mined and the total supply will reach 21 million.

Banking crisis restores faith in Bitcoin

In the wake of several bank collapses, including First Republic Bank, Silicon Valley Bank, Silvergate Bank and Signature Bank, bitcoin rebounded with a 76% increase so far this year. The US banking crisis of 2023 primarily affected regional banks and was largely caused by the Fed rapidly raising interest rates, devaluing the balance sheets of banks holding US Treasuries. Retail users quickly pulled funds from bank accounts that yielded less than 1% in favor of high-yield savings accounts and money market funds that offer more competitive rates closer to the Fed Funds rate of 4%-5%.

This dynamic caused a run on the banks, and the Federal Reserve responded by opening its Bank Term Funding Program, offering to buy written-off US Treasuries at face value. Although there are important differences, many analysts equated this financing program with a new form of quantitative easing. Historically, the Federal Reserve’s printing of money to buy impaired assets and increase the size of its balance sheet has been bullish for Bitcoin.

As the banking crisis persists, fiat currencies continue their inflationary spiral, with record high inflation hitting Western economies such as the US and Europe. Others such as Argentina, Venezuela and Lebanon are struggling with more severe bouts of hyperinflation.

Argentina’s annual inflation rate rose to 104% in March, marking the highest inflation rate in over 30 years. Interestingly, bitcoin’s price in Argentine pesos rose to its previous record high of 6.7 million ARS this week. Priced in US dollars, bitcoin is still down 60% from its all-time high. In Argentina, bitcoin has shown strong properties as a store of value and inflation hedge over the years.

The US Federal Reserve is expected to make its last rate hike today before taking a break, and if the banking crisis continues, it may actually need to start aggressively cutting interest rates even if inflation remains stubbornly high. This dynamic and the impending halving could create unique tailwinds for Bitcoin in the coming months.

It’s also worth pointing out that Bitcoin’s monetary policy is unique compared to most other cryptoassets, which tend to be inflationary. Dogecoin has an inflation rate of 2-3% in perpetuity and Solana’s long term inflation rate is 1.5%. With Ethereum’s recent move to proof-of-stake, the inflation rate has actually been slightly negative, due to burned transaction fees exceeding newly issued Ether.

Bullish for Bitcoin price

Measuring the price performance of the three Bitcoin halving cycles over the two-year period starting one year before each halving and ending one year after provides clues about bitcoin’s price trajectory as the fourth halving approaches.

During the two-year periods, Bitcoin’s 2012 halving saw a price increase of 39,200%, 2016 yielded 786% and the 2020s increased by 712%. If Bitcoin were to perform in line with the last two halvings, the price would reach $220,000 in 2025.

Past performance is not indicative of future performance, and there are many other factors that affect bitcoin’s price. Also, as bitcoin matures and becomes more widespread, its price may become less volatile and more stable over time.

Bitcoin miners will have less to sell

One expectation for the halving is a reduction in natural selling pressure, especially from miners. Miners are the most predictable sellers of bitcoin, as they incur real costs to cover in turning their new bitcoin into cash. Each halving, structural selling pressure is halved, and assuming demand remains constant or rises, price must also rise as a result.

Currently, the majority of miner income comes from the Bitcoin block grant (recently Bitcoin), where 6.25 BTC (currently $187,000) is rewarded to miners approximately every 10 minutes. Annualized, new Bitcoin issuance comprises $9.8 billion of additional selling pressure that must be absorbed by the market each year.

Although the number of new bitcoins minted each block is halved, overall miner earnings have increased after each halving, fueled by Bitcoin’s price rise. As the number of new Bitcoin minted per block approaches zero, miners will not be able to rely on price appreciation to cover their costs.

In addition to newly issued bitcoin, miners also receive income in the form of transaction fees. To ensure the network’s security and longevity, transaction fees must increase and replace the diminishing block grant. As a percentage of the total block reward, transaction fees account for only 2.6% of the miner’s earnings.

Although transaction fees make up a small minority of the block reward, transaction fees have risen over the past year, rising from approx. 1.3%. This uptrend was largely fueled by the rise of Ordinals, which increased the demand for Bitcoin block space. New experiments around layer-two technologies such as the Lightning payment network, Stack’s layer-two smart contract platform, the Bitcoin-native DeFi protocols Sovryn and Interlay, and Bitcoin sovereign rollups may further increase the demand for block space.

These two trends must continue to move forward as public bitcoin mining stocks have historically been a high-beta bet on Bitcoin’s performance, outperforming bitcoin to the upside in a bull market and suffering bigger losses in a bear. Some of the leading public miners: Marathon, Riot, Hut 8 and Hive showed strong price appreciation alongside bitcoin after the halving in 2020, before seeing major price corrections. These companies have significant operational risk, which requires them to run and maintain hardware and effectively manage cash flow.

Key quote

“The transaction fees may increase over time, but there are other ways for miners to generate revenue. Miners can be compensated for using natural gas that would otherwise have been flared, receive carbon credits, or even get into energy production themselves. I think Bitcoin- mining should be seen as a critical part of the grid infrastructure that can balance the energy grid.

The forced halving and difficulty adjustment guarantee that miners will become more and more efficient with their energy use, reducing energy costs and increasing chip efficiency. Existing energy producers can even buy Bitcoin miners and mine with their surplus energy.”

• Dennis Porter, CEO and co-founder of Satoshi Action Fund

Decision points

Based on historical performance, investors have done well investing in the months leading up to Bitcoin Halving events. However, as the reduction in issuance has a diminishing effect on relative selling pressure compared to daily trading volumes, halving events may prove less impactful going forward. In fact, total miner earnings as a percentage of daily trading volume has fallen sharply, from as high as 16% in 2014 to just 0.1% now.

Proponents of Ethereum and other proof-of-stake-based networks point to Bitcoin’s dwindling security budget and question its sustainability. If transaction fees do not rise measurably, or miners cannot find alternative sources of income, Bitcoin’s long-term viability may be challenged, and the halving will put additional pressure on miners.

Bitcoin was created as a direct response to the reckless actions of financial institutions and politicians during the Great Recession of 2008, but it has yet to experience a prolonged global recession. Deflationary recessions can prove detrimental to Bitcoin’s adoption, as investors sell their most liquid assets first to fund day-to-day expenses.

The halving is one of the most important events in Bitcoin’s history and evolution. It showcases Bitcoin’s unique qualities as a decentralized, disinflationary and transparent form of money that is governed by code rather than by humans. Depending on how the network reacts to the event, the next Halving will either continue Bitcoin as the leading digital global store of value, or pave the way for other crypto networks to usurp Bitcoin’s throne.