What Bitcoin halving is, and how it changes the key proposition of Bitcoin
Bitcoin halving is an important event that occurs every 210,00 blocks, or approximately every four years. It’s a programmed mechanism that cuts the reward for Bitcoin mining in half, theoretically to control the issuance of new bitcoins and manage inflation.
Bitcoin’s network operates on a fixed supply schedule, with a total cap of 21 million bitcoins. The previous halving took place in May 2020, reducing the reward for each mined block of BTC transactions from 12.5 bitcoins to 6.25 bitcoins per block. The upcoming halving will further reduce it to 3.125 BTC.
Halving events have had significant implications for Bitcoin’s ecosystem, reducing the rate at which new Bitcoins are created and effectively slowing the supply of new coins entering the market. Coupled with increasing demand for Bitcoin, this reduction in supply has historically led to upward pressure on BTC’s price.
Bitcoin Halving Enhances Scarcity, Bitcoin’s Key Proposition
Bitcoin halving leads to a slow supply to the market due to block rewards. Unlike gold and other commodities, Bitcoin becomes more scarce after each halving in terms of less new “production” of Bitcoin. A stock-to-flow (S2F) model shows that after halvings, Bitcoin becomes scarcer than gold.
Bitcoin S2F model. Source: Bitbo
The S2F ratio is calculated by dividing the circulating supply of a commodity by its annual production, yielding a gauge of scarcity. Bitcoin's S2F ratio is around 56 before the upcoming halving, while that of gold is 60. After the halving in April 2024, Bitcoin’s S2F ratio is projected to double to 112.
For detailed mechanisms of Bitcoin halving, please check out our expert report.
Now that we’ve examined the basics, let’s examine the potential before and after impact of the upcoming April 2024 Bitcoin halving.
Pre-Halving Impact
Bitcoin halving impact. Source: Bitbo
Supply and Demand
Before the halving takes place, there’s no impact on the supply side. On the demand side, however, investors tend to forerun the halving. With this fourth halving, we’ve noticed an early surge in Bitcoin’s price. Some analysts believe that the early pre-halving increase in Bitcoin’s price indicates that the post-halving price rally will be less remarkable than we’ve come to expect historically.
Nonetheless, this cycle has become more complex than ever, with the recent approval of Bitcoin Spot ETFs in the U.S. playing a role. Historically, it’s wise to buy Bitcoin within six months before the halving and hold it for at least 12 months afterward.
Bitcoin began to recover in early October last year (2023), approximately six months before the coming April 2024 halving. However, it was also in October that large traditional finance giants began applying to run Bitcoin Spot ETFs. Overall, there is no consensus regarding whether the pre-halving effect has been more evident than in the previous three cycles.
Investor Behavior
According to an asset allocation report, investors have allocated more positions to Bitcoin since last September, with an average of 40% and 24% of total assets in this largest cryptocurrency by institutions and retail investors, respectively, as of January 31, 2024.
As Bitcoin becomes not only the first cryptocurrency but also the first currency with Spot ETFs approved by the SEC, it is seemingly becoming the safest investment choice even for the most sophisticated investors in the crypto field. The price correlation between Bitcoin and the rest of cryptocurrency has been consistently high, and investment in Bitcoin has also been regarded as the cryptocurrency with the lowest beta.
Bitcoin reserves in all centralized exchanges have been depleting faster. With only 2 million bitcoins left, if we assume a daily inflow of $500 million to Bitcoin Spot ETFs, the equivalent of around 7,142 bitcoins will leave exchange reserves daily, suggesting that it will only take nine months to consume all of the remaining reserves. With this in mind, it’s unsurprising that Bitcoin’s price may continue to climb before the halving, or even afterward, as the supply squeeze propels the price to another new record.
Institutional Interest
As mentioned above, institutions have been allocating more positions to Bitcoin in the past six months. Apart from crypto-native institutions, traditional Web 2.0 institutions have gained exposure with the help of Bitcoin Spot ETFs or Bitcoin proxy stocks such as MicroStrategy or miner stocks. In our view, traditional Web 2.0 institutions would prefer accumulating Bitcoin position before halving, sticking to the “sell the news” strategy.
Nonetheless, we believe that not all institutions have been able to gain exposure since the approval of Bitcoin Spot ETFs in January 2024, as their investment mandates restrict them from investing in new products that have been in the market for only a few months.
Post-Halving Impact
Worsening Supply Squeeze
As highlighted above, Bitcoin is seeing early signs of a short squeeze. Post-halving, the supply squeeze will ostensibly be worse. Investors tend to HODL their Bitcoin positions if they’re being held in cold or decentralized wallets. The supply for Bitcoin Spot ETFs is usually from centralized exchanges (CEXs), in which profitable investors realize their profitable positions or successful miners sell their recent rewards. Since mining rewards will be cut in half after the halving, the sell-side supply flowing into the CEXs will be reduced.
Miner Dilemma
Bitcoin hash rate projections pre- and post-halving. Source: CoinShares
After the halving, Bitcoin’s hash rate is expected to surge, increasing miners' production costs. CoinShares estimates that the direct costs of producing one Bitcoin will rise between $28K and $38K following the halving, while JPMorgan Chase & Co. recently predicted a $42K cost per production of one Bitcoin after April 2024. Only those miners with more advanced rigs and lower indirect costs will be able to survive once Bitcoin’s price drops below $40K.
It’s expected that following the halving, unprofitable miners might start selling their Bitcoin reserves in order to support their operations. However, once their reserves run out, the overall sell-side supply to CEXs will shrink.
Miners have begun unloading their Bitcoin previous to the 2020 halving, Source: Cryptoquant
The chart on the left shows miners’ reserves leading up to the 2024 halving, while the chart on the right shows those of the 2020 halving. It’s clear that miners started to unload their reserves earlier in this cycle, suggesting they might believe the Bitcoin price rally had begun to wear thin before the 2024 halving.
Investor Behavior
If Bitcoin continues to test a new ATH post-halving, some investors will try to profit from the opportunities presented. As mentioned above, Bitcoin tends to rally twelve months after each halving, and there’s a high probability that we might see a new ATH this time. Meanwhile, the Web 2.0 publicity will center around the Bitcoin halving, leading to FOMO-driven behavior on the part of new investors.
If you’re familiar with trading, an imminent mild adjustment of Bitcoin’s price might solidify its future rally as it forms a floor in the case of any black swan events. Thus, it can be okay to see adjustments during halving.
Bitcoin Cash’s halving indicates a positive price action right after halving, Source: binance
Bitcoin Cash jumped around 10% on April 4, 2024, right after the network’s halving. However, the rally wasn’t sustained, and BCH’s price has since retraced to its pre-halving level.
Navigating Pre- and Post-Halving With Binance
A key question after the halving will be: How far will Bitcoin’s price climb, and at what price will the cycle peak? No one has a crystal ball. However, our observations of this cycle do lead to a few pieces of advice.
First of all, it’s wise to take profits half a year after the halving, toward the end of 2024. The past cycle indicated a twelve-month window after the halving. And yet, we observed more forerunning before the halving, which limits the room for gains post-halving.
As the halving date approaches, volatility could spike. Investors might consider diverse investment strategies to protect their positions. If you’re in view of large price movements, either long or short, consider the straddle to catch the gain from large upside or downside volatility. Check out Binance ’s USDT options here.$BTC
In the face of volatility, it is of equal importance to choose the Unified Trading Account (UTA) with Binance , which helps reduce the chance of liquidation of your derivatives options when your assets are spread across different types of wallets.