Unlocking the Future of Bitcoin: The Halving Cycle

Bitcoin: A Global Financial Revolution

 

Bitcoin, created in 2009, has historically gone through definable and identifiable 4-year cycles. These cycles revolve around what is known as the ‘Halving’. Every four years on a specific date, the amount of Bitcoin paid to miners (crypto terminology for those that validate transactions) per block of transactions they validate is cut in half. This is a programmed date and has been the catalyst for significant price appreciation in Bitcoin and the rest of the crypto ecosystem. The next halving will happen on block number 840,000 and is projected to occur on 10th April 2024.

This cycle has now occurred three times and we expect to see a similar pattern emerge over the coming eighteen months. Clearly the size and duration of the appreciation is dependent on the macroeconomic and geopolitical environment, but we believe that crypto has a unique tailwind that other risk assets do not have over the coming period. In this paper we explain what exactly the Bitcoin Halving is and why it has historically led to dramatic price appreciation in the asset class.

 

Understanding BTC Halving and its Impact

 

At the core of Bitcoin’s monetary policy lies the concept of halving, a programmed event that occurs approximately every four years. During each halving, the rate at which new Bitcoins are generated through the mining process and thus paid to the miners is cut in half. Essentially, miners are people who verify the integrity of the Bitcoin chain. This takes massive amounts of computational work using very large computers which consume large amounts of energy. The cost of doing this is significant, so when miners receive Bitcoin for their work they sell a portion of it into the market for cash to pay their costs and take profit from their endeavours.

This behaviour is a major contributor to the supply and demand dynamics of the market, and thus the price of Bitcoin. Once the amount paid to the miners is cut in half, the amount they receive and is available to sell is also cut in half. If the price of Bitcoin remains constant and the revenue miners receive is cut in half, less efficient miners become uneconomic and shut down while those remaining have only half the number of coins to sell into the
market, reducing the sell pressure. Either way, the issuance of Bitcoin diminishes significantly and if the demand remains constant, we should see prices appreciate.

In summary, post each halving, the amount of Bitcoin entering the market due to miners selling diminishes. Historically, this has triggered significant surges in Bitcoin’s value, presenting attractive investment opportunities.

 

 

Historical Success: Halving as a Catalyst for Growth

The price action surrounding previous Bitcoin halving’s has been nothing short of remarkable. Let’s delve into the historical performance of Bitcoin after each halving event:

2012 Halving: The first Bitcoin halving took place in November 2012 when the block reward reduced from 50 to 25 Bitcoins. Following this event, Bitcoin’s price experienced a gradual but significant ascent. Over the course of the next year, Bitcoin surged from around $12 to reach an all-time high of approximately $1,150 in December 2013. This staggering price increase marked a remarkable growth of over 9,500% in the 13 months following the event.

2016 Halving: The second halving occurred in July 2016, reducing the block reward from 25 to 12.5 Bitcoins. Bitcoin’s price did not immediately react, but it embarked on a remarkable bull run in the months and years that followed. From around $650 before the halving, Bitcoin soared to an all-time high of approximately $20,000 in December 2017. This phenomenal surge represented a staggering growth of over 3,000% over the period.

2020 Halving: The most recent halving event took place in May 2020, reducing the block reward from 12.5 to 6.25 Bitcoins. This halving was particularly significant as it occurred amidst increasing institutional interest in Bitcoin. On this occasion, as investors tried to front run the predicted price action and the price of Bitcoin saw a gradual rise in the months leading up to the halving, and afterward, it experienced a remarkable rally. From around $8,000 prior to the halving, Bitcoin reached an all-time high of approximately $64,000 in April 2021. This incredible surge marked an astounding growth of over 800% in less than a year.

A Glimpse into the Future: Halving in 2024

Based on the price action of previous halving’s, it is evident that they have acted as significant catalysts for Bitcoin’s bull markets. While the immediate price reaction may vary, the subsequent months and years have seen substantial growth and new all-time highs.

We note that the percentage appreciation in price has diminished with each halving, but the impact is still significant. We also note that the price movement happens earlier in the cycle as investors pre-position their portfolios with more history to look at.

In conclusion we believe that the halving creates a significant and objective catalyst for market strength relative to other risk assets. As such, we will be positioning our portfolio accordingly. We believe that the event occurring in March 2024 will provide a strong tailwind for the market as a whole from the fourth quarter of 2023 as market participants pre-position for the event.

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