Bitcoin Is Fast Approaching A Key Bullish Milestone, Here’s What To Expect

Bitcoin’s Fourth Halving

Bitcoin, the world’s dominant cryptocurrency, is approximately one year away from the fourth halving event in its 14-year history. The event takes place every four years and historically serves 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 crucially, 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 scheduled 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 fell from 25 to 12.5 bitcoins. The third and most recent 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 happen 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 multiple bank collapses including First Republic Bank, Silicon Valley Bank, Silvergate Bank, and Signature Bank, bitcoin rebounded by appreciating 76% year-to-date. The 2023 US banking crisis primarily affected regional banks and was largely caused by the Fed rapidly increasing interest rates, devaluing the balance sheets of banks holding US treasuries. Retail consumers rapidly pulled funds from bank accounts yielding sub-1% in favor of high yield savings accounts and money market funds offering more competitive rates closer to the Fed Funds Rate of 4% – 5%.

This dynamic caused a run on the bank, and the Federal Reserve responded by opening its Bank Term Funding Program, offering to purchase depreciated US treasuries at face value. Although there are important distinctions, many analysts equated this funding program to a new form of quantitative easing. Historically, the Federal Reserve printing money to purchase impaired assets and increase the size of its balance sheet has been bullish for Bitcoin.

While the banking crisis persists, fiat currencies continue their inflationary spiral, with record high inflation hitting western economies such as the United States and Europe. Others such as Argentina, Venezuela, and Lebanon are struggling with more serious bouts of hyperinflation.

Argentina’s annual inflation rate soared to 104% in March, marking the highest inflation rate in over 30 years. Interestingly, bitcoin’s price in Argentinian pesos brushed up against its previous all-time 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 exhibited strong properties of a store of value and inflation hedge over the years.

The US Federal Reserve is expected to make its final rate hike today before pausing, and if the banking crisis continues, they may actually need to start aggressively cutting rates even if inflation remains stubbornly high. These dynamics and the impending halving may create unique tailwinds for Bitcoin over the coming months.

It is also worth pointing out that Bitcoin’s monetary policy is unique compared to most other crypto assets, 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 transition to proof-of-stake, its inflation rate has actually been slightly negative, due to burned transaction fees outpacing newly issued Ether.

Bullish For Bitcoin Price

Measuring 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 as to bitcoin’s price trajectory as the fourth halving nears.

Over the two-year periods, Bitcoin’s 2012 halving exhibited price appreciation of 39,200%, 2016’s yielded 786%, and 2020’s added 712%. If Bitcoin were to perform in line with the last two halvings, its price would reach $220,000 in 2025.

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

Bitcoin Miners Will Have Less To Sell

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

Currently, the majority of miner revenue comes from the Bitcoin block subsidy (newly minted Bitcoin), in which 6.25 BTC (currently $187,000) is rewarded to miners approximately every 10 minutes. Annualized, new Bitcoin issuance comprises $9.8 billion of additional sell pressure that must be absorbed by the market every year.

Although the number of new bitcoin minted every block is halved, aggregate miner revenue has increased after every halving, driven by Bitcoin’s rise in price. 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 revenue in the form of transaction fees. In order to ensure the security and longevity of the network, transaction fees will need to increase and replace the dwindling block subsidy. As a percentage of the total block reward, transaction fees make up only 2.6% of miner revenue.

Although transaction fees make up a small minority of the block reward, transaction fees have been trending up over the past year rising from about 1.3%. This uptrend was largely driven by the emergence of Ordinals, increasing the demand for Bitcoin block space. New experiments around layer-two technologies such as the Lightning payment network, the Stacks layer-two smart contract platform, the Bitcoin-native DeFi protocols Sovryn and Interlay, and Bitcoin sovereign rollups may further drive demand for block space.

These two trends will need to continue moving forward as public bitcoin mining stocks have historically been a high beta play on Bitcoin’s performance, outperforming bitcoin to the upside in a bull market and suffering greater losses in a bear. A few of the leading public mining companies: Marathon, Riot, Hut 8, and Hive exhibited strong price appreciation alongside bitcoin after the 2020 halving, before seeing major price corrections. These companies possess substantial operational risk, requiring them to run and maintain hardware and effectively manage their cashflow.

Key Quote

“Transaction fees may go up over time, but there are other ways for miners to generate revenue. Miners can be compensated for using natural gas that otherwise would have been flared, receiving carbon credits, or even getting into energy production themselves. I believe Bitcoin mining should be seen as a critical piece of grid infrastructure that can balance the energy grid.

The forced halving and difficulty adjustment guarantee miners will be more and more efficient with their energy usage, lowering their energy costs and increasing chip efficiency. Existing energy producers may even buy Bitcoin miners and mine with their excess energy.”

• Dennis Porter, CEO & Co-Founder of Satoshi Action Fund

Decision Points

Based on historical performance, investors have done well to invest in the months leading up to Bitcoin Halving events. However, as the reduction in issuance has a lessening effect on relative sell pressure compared to daily trading volumes, halving events may prove to be less impactful moving forward. In fact, total miner revenue as a percentage of daily trading volume has declined greatly, 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 measurably pick up, or miners cannot find alternative sources of revenue, 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 may prove to be detrimental to Bitcoin’s adoption, as investors sell their most liquid assets first to fund daily expenditures.

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