Will the Bitcoin Halving Cause Another BTC Price Hype Cycle?

Now that spot bitcoin exchange-traded funds (ETFs) are live in the US, market watchers are looking for the next potentially bullish event to drive cryptocurrency gains. Following the US Security and Exchange Commission’s (SEC) long-awaited decision to approve these financial products, bitcoin ETFs simultaneously outperformed and beat expectations – representing the pluses and minuses of a market driven by hype.

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The top three bitcoin ETFs saw more than half a billion dollars in capital inflows (not including Grayscale’s $22 billion fund, which was converted from the existing GBTC trust and saw significant outflows), reflecting the significant customer demand for traditional on – ramps in bitcoin (BTC). In the weeks leading up to the approval date, Wednesday January 10, bitcoin rose to a recent high of ~$48,000.

Many analysts and traders are now hoping that the upcoming bitcoin halving — when the rate of new bitcoins issued to network validators (also known as miners) is reduced — could be a similar catalyst for crypto prices. There is a long-standing debate as to whether these once-every-four-years programmatically-triggered events are ‘priced in’.

The approval of bitcoin ETFs last week may be an indication of what’s to come for the next bitcoin hype cycle. The listing of 11 new bitcoin funds was a clear moment to sell, at least in hindsight, and bitcoin has since fallen ~12% to $42,250 today. It remains too early to say whether bitcoin ETFs will draw in billions of new dollars and investors, a prediction that depends on actual demand for bitcoin.

Meanwhile, the bitcoin halving (sometimes called halving) story is a supply-side story: bitcoin’s price may pop after the supply of new coins entering the market is limited, assuming the use of the Bitcoin network remains steady or increases .

To some extent, the bitcoin halving narrative is a post-hoc rationalization for the fact that bitcoin has in fact gone on a rift in the months following each halving thus far. For example, six months after the network’s second halving in 2016 (when the emission of new coins per block dropped from 25 to 12.5 BTC), bitcoin crossed the $1,000 threshold for the first time. A similar rally took place in 2020, when bitcoin set a new all-time high.

But there is little to suggest that these price increases are directly related to the halving, other than the heightened bullish sentiment and media coverage that typically precedes the event. CoinShares noted in its latest “Mining Report” that there is a “peak in hashrate growth that often occurs around four months before the halving, likely due to a ‘Bitcoin rush'”, which may represent positive sentiment.

Except that the economic logic surrounding a bitcoin supply shock is a bit wonky, considering that the supply of new bitcoins will actually continue to increase for the next century or so, at which point all 21 million bitcoins will have been mined. Satoshi Nakamoto designed the Bitcoin network to subsidize miners through these rewards to stimulate adoption, with the hope that transaction fees would grow large enough over time to maintain network security and validation.

CoinShares does not offer a price forecast in its report, instead making the case that bitcoin mining will grow more competitive after the halving, eliminating the least efficient miners. While Bitcoin has become 90% more efficient since the last halving, hashrate (which represents the amount of computing power used for network security) and cost structures have also increased.

In fact, current bitcoin mining difficulty is at historic highs, with computing power jumping more than 100% in 2023. CoinShares predicts that it will fall with a “miner exodus” after the halving. The company also said that the “average cost of production per coin” could normalize to just under $38,000 after halving, given the complex interrelationship between hardware and electricity costs, difficulty levels and the cost structures that determine whether certain miners make or lose money. which determines how many miners are on the network.

What exactly does this mean for bitcoin price predictions? Well, somewhat counterintuitively, if bitcoin prices stay above $40,000, it could actually lead to lower miner returns. CoinShares does not offer this forecast as such, but since miners are often the biggest sellers of bitcoin, reduced profitability could cause selling pressure from that group as well.

There are many others who disagree, seeing the halving as another potential positive catalyst for bitcoin prices. But it is important to note that everyone has their own incentives. The only near-guarantee when it comes to the halving is that it’s still a moment for hype.