Bitcoin Halving: How Does Bitcoin Halving Affect the Bitcoin Price?

‘Total circulation will be 21,000,000 coins. This will be distributed to network nodes when they make blocks, with the amount halved every 4 years. first 4 years: 10,500,000 coins next 4 years: 5,250,000 coins next 4 years: 2,625,000 coins next 4 years: 1,312,500 coins etc…’—Satoshi Nakamoto

Every four years, the Bitcoin network undergoes a significant change known as “halving,” a process that cuts the rewards for mining new blocks in half. This mechanism is built into Bitcoin’s protocol to control inflation and cap the total supply at 21 million coins. Halving events are therefore pivotal, highly anticipated events within the cryptocurrency community, often causing speculation and market volatility.

The “stock-to-flow” ratio is a key concept used to measure the current supply of a commodity against the rate of new supply entering the market. For Bitcoin, each halving event significantly increases this ratio, underscoring its growing scarcity. This ratio is widely regarded as an important indicator of Bitcoin’s long-term valuation.

Often this benchmark is compared to that of precious metals, such as gold, enhancing Bitcoin’s image as the “digital gold” and reinforcing its role as a store of value for the digital age.

Halves and booms: historical price analysis

Bitcoin’s price trajectory often reacts dramatically to halving events. After the first halving on November 28, 2012, when the mining reward dropped from 50 BTC to 25 BTC, Bitcoin’s price soared from $12 to $1,075 within a year, an astonishing 8,858% increase. This boom was accompanied by a drop in Bitcoin’s inflation rate from 25.75% to 12% by January 2013. The second halving on July 9, 2016 showed a similar pattern. The reward dropped from 25 BTC to 12.5 BTC, and Bitcoin experienced a 294% price increase from $650 to $2,560 over the next year. At the same time, its inflation rate dropped from 8.7% to 4.1% by August 2016. Most recently, the third halving (May 11, 2020), Bitcoin’s mining reward dropped to 6.25 BTC and its price climbed from $8,727 to around $55 847 by May 11, 2021, a gain of 540%. Accordingly, the inflation rate decreased from 3.7% to 1.8% by June 2020.

These events indicate a pattern where Bitcoin halvings generally lead to diminishing returns, although the percentage gain after the third halving was greater than after the second. This anomaly was influenced by the Federal Reserve’s increase in the M2 money supply, which effectively repriced BTC. However, this trend reversed when the Fed began its new cycle of interest rate hikes in March 2022, suppressing asset prices. Sentiment Analysis: Current Developments and Future Projections

(Bitcoin balance available in exchange. Source: Glass Node)

Bitcoin’s price trajectory is a fascinating mix of historical trends, market events and evolving investor sentiment. Recent developments offer compelling insights into the cryptocurrency’s potential trajectory.

One of the most significant recent developments, the approval of US Bitcoin ETFs, has spurred significant capital inflows, driving Bitcoin to unprecedented highs and fueling a bullish market outlook. However, it is important to remember that this bull market may still be in its infancy. Experts expect volatility and price pullbacks along the way.

Despite the bullish sentiment, recent geopolitical tensions following Iran’s drone strikes on Israel on April 13, 2024 caused market turbulence. Bitcoin experienced a sharp decline, hitting its lowest level in a month. This event led to a sell-off, which lost about 8% of Bitcoin’s value in a short period of time. However, historically, such geopolitical conflicts have ended up fueling the cryptocurrency market.

Another key factor to consider is the upcoming halving event in 2024. This programmatic reduction in Bitcoin’s supply could strengthen demand. Yet the materialization of this demand depends on multiple variables, such as sales pressure, regulatory shifts and the broader macroeconomic landscape. Looking ahead, the anticipated first rate cut by the Federal Reserve in mid-2024 is expected to further positively impact Bitcoin’s price.

Interestingly, despite its inherent volatility, Bitcoin appears to be showing signs of market maturity. There are less extreme price swings compared to previous cycles, potentially making it a more attractive option for diversified investors. Further supporting this idea, a recent report by blockchain data analytics firm Glassnode highlights a significant decline in Bitcoin balances on exchanges. This trend is consistent with the idea of ​​investors adopting a long-term management strategy. A shift to such behavior could trigger a supply shock, further adding to upward price momentum.

Technical Analysis

Currently, Bitcoin is exhibiting a pre-halving retracement characterized by bearish signals and lateral market movements. A technical analysis of the weekly timeframe reveals the formation of a Cup and Handle pattern in Bitcoin’s price chart. Traditionally, this pattern can continue further downward movements. There is particularly robust support within the $60,000 to $61,000 price range. If this support level is breached, it is plausible to expect a pullback to the $51,000 mark. In a worst-case scenario, prices could potentially fall to around $45,000 and this could indicate an interim bear market.

In the daily timeframe, Bitcoin’s price action shows consolidation within a defined range, characterized by the formation of a triple top pattern. This pattern is typically recognized as a bearish reversal indicator, emerging after a sustained uptrend. The appearance of the triple top on Bitcoin’s daily chart could signal a potential shift in market sentiment from bullish to bearish.

Should Bitcoin break through the crucial support level at $60,000, we could see a marked downtrend, with the price possibly falling to the $50,000-$51,000 range. This pivotal move highlights the importance of closely monitoring these key technical levels, which serve as critical indicators of Bitcoin’s short-term market movements.

By integrating the exponential moving average (EMA) with a period of 200 in our analysis, we improve our insight into potentially uncertain scenarios. Should the price range breach and Bitcoin (BTC) drop into the specified $50,000-$51,000 zone – which coincides with the EMA (200) – we can expect significant turmoil within the Altcoin market cap. A failure by BTC to maintain support at the critical EMA (200) point could signal the onset of a temporary bear market, as indicated previously. In particular, BTC’s descent below the EMA (200) is widely recognized as a conventional strategy for exiting bull markets.

Considering various macroeconomic and microeconomic factors, there is a solid basis for optimism about Bitcoin’s potential to recover and set new all-time highs. Projecting a $120,000 target for Bitcoin in 2024 is well-founded in current market dynamics and historical performance trends. This outlook highlights the critical need to closely monitor key technical thresholds and market sentiment as Bitcoin approaches its next halving event.

The complex array of factors surrounding Bitcoin’s halving events show that these are not just technical updates, but crucial market catalysts. Historical trends of post-halving price increases, along with evolving market sentiment and technical patterns, provide deep insights into Bitcoin’s future potential. The recent approval of US ETFs and shifts in the global economic landscape add new dimensions to market predictions, but the fundamental economic principles of supply and demand remain the driving force behind Bitcoin’s long-term viability.

As we look forward to the 2024 halving, it is clear that it brings both challenges and opportunities. Investors and market analysts are advised to vigilantly monitor key technical levels and broader market indicators. Through careful analysis and a sophisticated understanding of Bitcoin’s market mechanics, stakeholders are well equipped to navigate the coming fluctuations and exploit the opportunities that emerge as Bitcoin continues to mature and become more integrated into the global financial system.

(The author is Research Analyst, Mudrex)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. They do not represent the views of The Economic Times)