Bitcoin Halving: A Technical Approach

Bitcoin halving is an event that occurs approximately every 4 years, where the reward for mining new Bitcoin blocks is cut in half. This is hard-coded into Bitcoin's protocol and is designed to control the supply of new bitcoins entering circulation. Specifically, the block reward received by miners for successfully mining a new block is reduced by 50% after every 210,000 blocks are mined.

The purpose of halving is to maintain Bitcoin's limited supply and ensure its long-term sustainability. Bitcoin has a maximum supply cap of 21 million coins, and the halving mechanism helps regulate the issuance of new bitcoins over time. As the block reward decreases, mining new bitcoins becomes more difficult and resource-intensive, which helps to maintain its value.  

There were 3 halving events in the past - 

1. The 1st halving in November 2012, the reward for each mined block fell from 50BTC to 25BTC.
2. The 2nd halving in July 2016, the reward was cut from 25BTC to 12.5BTC.
3. The 3rd halving in May 2020, the reward was again halved, from 12.5BTC to 6.25BTC.

The upcoming halving (4th) which is schedule to be around mid-April 2024, this time the reward will fall once more to 3.125BTC per block.

What happens to Bitcoin’s price on each halving event?

The first halving was on November 28th, 2012 when Bitcoin was at $12. Around 1 year later, on November 30th, 2013, its price skyrocketed over 9500% to $1163. But then over the next year, Bitcoin gradually declined 86% to $152 on January 14th, 2015. After that drop, Bitcoin's price moved sideways until the end of that halving cycle.  

For the second halving on July 9th, 2016, Bitcoin started at $663. Around 1.5 years later, it hit a new all-time high of $19,666 - up 2866%. However, it then took around a year for Bitcoin's price to fall 83% to $3,122 before rebounding sideways towards the cycle's end.  

The third halving occurred on May 11th, 2020 with Bitcoin at $8,721. Again, around 1.5 years after, Bitcoin made a fresh all-time high of $69,000. Based on this pattern, Bitcoin was due for a major pullback since it had been over 1.5 years since the third halving. Then over the next year, on November 21st, 2022, Bitcoin declined to $15,479 (77% down) - a massive crash that most of us must have heard about. But after that, prices started gradually moving upwards again sideways.  

Currently, we're just one week away from Bitcoin's fourth halving in April 2024. Interestingly, Bitcoin has already made its new all-time-high at $72900, and still looks bitcoin halving 2024 is bullish for a further up move.

Therefore, looking ahead to the fourth Bitcoin halving, there are key factors that could make this cycle play out differently compared to previous ones.  

• A major factor is the entry of large institutions and traditional investors into the Bitcoin market, driven by the approval of Spot Bitcoin ETFs. We've witnessed massive inflows from renowned firms like BlackRock, Fidelity, Ark 21 Shares, Bitwise, and others. Since these Spot ETFs became available on their platforms in January 2024, Bitcoin's price jumped massively and continuously made new all-time-high.  

   

• Another factor impacting Bitcoin is the geopolitical tensions, such as between Israel-Hamas, and the Houthi attacks on Red Sea shipping routes. This could boost Bitcoin's price as an alternative currency used.  

   

• The ongoing tension between the United States and China is also significantly impacting current market dynamics, including traditional markets and cryptocurrencies as well. 

   

Bitcoin Ownership Distribution

Current Supply vs. Historical Supply

With the Bitcoin reward for mining getting cut in half per block, along with the hash rate hitting its peak, this would affect the current supply of Bitcoin.

The reward for mining bitcoin after the fourth halving will be 3.125 BTC per block, and the hash rate was at its peak above 700 EH/s and is currently sitting above 550 EH/s.

The hash rate refers to the total amount of energy used to verify transactions and produce new coins, which reflects the overall condition and security level of the Bitcoin network. The fact that the hash rate has surged this high also causes the network to adjust the mining difficulty upwards, as it is expected that the difficulty level of mining Bitcoin will increase by more than 5% from the current difficulty level. 

The hash rate refers to the total amount of energy used to verify transactions and produce new coins, which reflects the overall condition and security level of the Bitcoin network. The fact that the hash rate has surged this high also causes the network to adjust the mining difficulty upwards, as it is expected that the difficulty level of mining Bitcoin will increase by more than 5% from the current difficulty level. 

The Balance of total Bitcoin in all cryptocurrency exchanges is now continuously decreasing, at about 2.2M BTC presently. The Net Transfer Volume is also showing an increase in outflows. These two figures indicate that investors are holding Bitcoin off the books (most likely in their cold wallets). 

Additionally, the total Bitcoin's OTC desk is at its lowest numbers in the last 5 years. Big institutions may need to buy Bitcoin publicly on exchanges due to the low OTC desk numbers.

With all this information together, the possibility of having a Bitcoin supply shock is high, which could lead to an increase in Bitcoin's value. 

Potential scenarios

Scenario 1: Bitcoin Remains Bullish

Bitcoin today is ranking as number 8 of top assets by market cap with over $1.408Trillion, taking over the precious metal; Silver as number 9, ($1.385Trillion). Due to the approval of Spot Bitcoin ETFs in January 2024, the price of Bitcoin soared over 75% up to date.

Statistically speaking, Bitcoin has historically had a confirmed bull run after each halving event.     

Additionally, the current situation for Bitcoin’s price still looks very positive - here's why:

• The bullish momentum from Spot Bitcoin ETF inflows remains robust, with inflows increasing daily. Trading volumes are even exceeding that of Microsoft ($MSFT) stock.  

• Big institutions entered Bitcoin at higher levels around $40,000 in January 2024 when the ETFs launched. 
  At the current all-time high, it is relatively small profit so far, making it less likely for them to exit yet. Traditional investors and institutions are less likely to believe in cryptocurrency. 
  They see it as a venue to make a profit, and Bitcoin currently has a clear narrative and clear cycle as mentioned above. So, with the current all-time high, it is still considered a high-risk and low-reward for them.  

• The fact that those currently joining crypto are informed traders/investors with knowledge of traditional and crypto assets is positive, as the uninformed investors has not embraced crypto yet due to lack of full regulation. This means there is still significant potential for new investors to enter the market.  

Scenario 2: Bitcoin Sees a Correction

As mentioned, based on the past historical data, we can see the pattern of Bitcoin’s price after the halving. Statistically, Bitcoin’s price tends to have a massive correction around 1-1.5 years after the halving event. However, past data does not confirm the future, we only use it as a guideline to be aware of what could happen. For today’s event, there are many more factors that are different than the past 4 years on the third halving in 2020.  

One big point to be aware of currently is the potential rebalancing by institutions.  

Unlike retail traders/investors, big institutions are obligated to book profits once hitting certain percentage gains due to the regulations and rules they must follow. Their expected returns also differ from retail. This is something to keep an eye on. Closely monitoring fund flows, both inflows and outflows, is crucial as the correction may occur faster than previous history.  

All Time High

Bitcoin is continuously making new highest prices, with the price hitting as high as $72,000. 

It is difficult to predict how high the price could go. However, from the previous percentage growth (see appendix), and using it as historical data to predict, the growth before the fourth halving should be around 50%-100% (but now it has already increased by 300%), and then the growth after the halving event until the peak could between 150%-200% after comparing past cycles. So, to use these figures as a benchmark, at the maximum, the peak price for this cycle could be over $165,000, calculating from current price levels.

Together with the technical perspective, a Bitcoin price of approximately $102000 is ideal, expected to be reached in Q2 2024, with a possibility for a correction starting in Q3 2024 (as the bullish trend gets weaker), but not an immediate massive dump.  

Funding Rate today vs. Historical Funding rate

Just a short brief, funding rates refer to the interest rates set by cryptocurrency exchanges to balance the prices of perpetual or futures contracts with the actual market price of the underlying cryptocurrency (spot). If the funding rate is positive, it indicates that highly leveraged long positions exceed spot positions and vice versa.  

When the funding rate is positive, long position holders are charged the rate, while short position holders receive it. Conversely, with a negative funding rate, long holders receive the rate, and short holders are charged. These rates are typically charged or paid out every few hours, with most exchanges settling funding rates every 8 hours.

Why does it matter?

This matter is important because based on past data, when the funding rate is relatively high, exchanges usually clear out those with high leverage positions by making a stop hunt (See the chart below). 

The price usually drops around 25% minimum. And currently, we can start to observe that the funding rate is relatively high now. So, we should also be prepared for a crash in price, just for an exchange to make a profit from the liquidation. 

To recap, the upcoming Bitcoin halving event in April 2024 is important as it could significantly impact Bitcoin's price and supply dynamics. Past halving events have historically been followed by massive price surges, with Bitcoin reaching new all-time highs around 1-1.5 years after each halving. However, the upcoming cycle has already seen Bitcoin breach previous records, hitting over $72,000 ahead of the halving.

With the mining reward set to drop from 6.25 BTC to 3.125 BTC per block after the fourth halving, coupled with the hash rate hitting new peaks, the circulating supply of new Bitcoin is expected to constrict sharply. 

Signs of investors withdrawing Bitcoin from exchanges and holding it off-books further suggest a potential supply shock. The reduced supply, combined with increased demand from institutional investors after the Spot ETF approvals, could propel Bitcoin to new heights, with some projections targeting higher than $100,000 or more in this cycle's peak price. 

However, there is also the possibility of a major correction, as Bitcoin has historically experienced massive pullbacks around 1-1.5 years after halving events, but caution for a sooner correction than previous times as the situation today is different. 

Recommended Read: Decoding the Bitcoin Halving