4 reasons why this bitcoin halving could be different

Bitcoin (BTC) halving is expected later this month, but a confluence of factors will likely set the cryptocurrency’s fourth such event apart from previous events.

Halving — after which the rate at which bitcoins are generated by the network is cut in half roughly every ten minutes — typically occurs after 210,000 bitcoins have been mined or roughly every four years. Halving is expected around April 20 this year, but some suggest it could happen even earlier.

Bitcoin price trades differently before the halving

In the run-up to previous halving iterations, bitcoin has set new highs in the months following the cut in the crypto-asset’s issuance rate.

It recently hit a new high ahead of the current cycle’s halving event for the first time. Analysts at Coinbase warn the market may place undue importance on price movements around halving without considering the context of broader market conditions.

“Bitcoin’s performance around previous halving events has most likely been context dependent. This may explain why price trends have varied so widely during different cycles,” wrote a March report.

For example, they attribute some of the 45% growth before the second halving in July 2016 to Brexit uncertainties and the 73% increase before the third halving in May 2020 to the pandemic-era initial coin offering (ICO) boom .

Spot Bitcoin ETFs Have Turbocharged Demand

Spot bitcoin exchange-traded funds (ETFs) have “fundamentally changed” market dynamics for bitcoin, according to Coinbase. And they did not exist at the time of previous halvings.

The products that began trading in January saw massive inflows that drove demand and consequently the price of bitcoin.

“The approval of bitcoin ETFs in the US could significantly change the supply and demand dynamics of bitcoin, as inflows are approximately 5-7X the daily new units of generated BTC,” a 21Shares report said.

So how does this play out in the context of the halving? In a hypothetical scenario, if the supply consisted only of newly minted bitcoin (and existing bitcoin was not available to be traded), here is what Coinbase said could happen:

“Assuming that the pace of new inflows into US-based ETFs has slowed from $6 billion in February to a steady state of $1 billion of net inflows per month, a simple mental model suggests that measured at ~13.5 k BTC mined per month (in a post-halving environment) the equilibrium price for bitcoin should be closer to around $74,000,” they wrote.

Fewer Bitcoins available to trade

“Bitcoin available to trade (ie, the difference between circulating and illiquid supply) has declined since early 2020, a major shift from previous cycles,” Coinbase said.

Normally, illiquid supply is attributed to lost wallets and forgotten keys, but Coinbase analysts also mention “the level of available bitcoin supply has trended lower over the past four years” and this is a departure from previous halving cycles.

But that’s not necessarily a bad thing for bitcoin, as it could mean investors with long-term positions and less inclination to sell with short-term price variations.

With more than $19 million worth of bitcoin in circulation and the supply capped at $21 million, the halving makes mining more difficult and cuts incentives for miners in half.

Miners usually sell bitcoin before halvings in anticipation of covering operational expenses for things like energy and mining equipment. However, the bitcoin rally has led to fewer bitcoin sales by miners who have up to 1.8 million bitcoin in their reserves.

Uncertainty surrounding the Fed’s move on rates

Another key factor to consider during the upcoming halving event is the contrast of bitcoin’s predictable, falling issuance rate in context of the uncertainties surrounding the US Federal Reserve lowering its benchmark rates.

The general thesis is that if the Fed cuts rates, US Treasury yields will weaken, making riskier assets like cryptocurrencies more attractive to investors. However, unexpectedly strong economic data in recent weeks has fueled the debate about interest rate cuts. Cutting too soon can revive inflation, but keeping rates higher for too long can push the economy to the brink of recession.

Other central banks around the world have already started to change their monetary policy stance.

“The eagerness of major central banks to cut interest rates despite strong economic growth likely contributed to a rise in market inflation expectations,” digital asset manager Grayscale said in a report. “The risk of higher inflation could in turn stimulate demand for alternative stores of value, such as physical gold and Bitcoin.”