Crypto for Advisors: Bitcoin’s Supply Reduction

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What is the Bitcoin Halving?

What is the current market status?

Based on different data sources, the daily trading volume for Bitcoin in the form of exchange-traded cryptocurrency can fluctuate significantly. According to Messari’s figures, this volume hovers around $30 billion per day. At its current price point ($64,000), new supply entering the market amounts to approximately $29 million or roughly 1% of the daily trading volume. This represents a decrease from the previous 2%.

Also to consider are the new spot bitcoin ETFs. The average daily inflow volume into the new ETFs (including grayscale outflows) is $202 million. This is far more influential on prices than the reduction in supply.

What could this mean for the price of bitcoin?

The reduction in bitcoin supply is generally expected to boost its price, just like any other commodity. However, the extent of this increase and whether it has already been reflected in the current price remains to be seen. We’ve observed similar patterns with previous ETF announcements, where market reactions are often driven by anticipation rather than actual implementation of the news. Thus, there’s a risk that we might experience a “buy the rumor, sell the fact” scenario in this instance as well.

It’s not profitable for us to analyze past bitcoin halvings due to insufficient data points for significant statistical analysis. Furthermore, attempting to draw correlations between halvings and price movements in an asset that has experienced such dramatic growth within a brief timespan can be challenging.

The impact of ETFs (Exchange-Traded Funds) on bitcoin’s price could be significantly greater than the effect of the halving. Since the volume of these flows can shift rapidly based on investor sentiment, they might overshadow the decrease in supply resulting from the halving event.

In Summary:

The reduction in rewards from mining new bitcoins, or “halving,” has a more significant effect on miners than changes in the bitcoin price. Miners may need to adapt by investing in more efficient equipment, reducing expenses, or even selling additional mined bitcoins to maintain their operations with the lower income.

In the digital asset sector, one objective for contributors is to boost institutional involvement. Cutting down daily new issuance by $31.5 million in a market dealing with around $30 billion is insignificant. If the market can’t manage a reduction of that size in daily supply, it isn’t prepared for institutions yet.

Keep an eye on the trends in Exchange-Traded Fund (ETF) investments. Their impact on price may be more significant than a minor reduction in supply growth.

– Mick Roche, senior trader, Zodia Markets

Ask an Expert

A. What is the influence of Bitcoin’s halving on its production, and how does this event affect its market value?

In simpler terms, the amount of bitcoin circulating in the market outside of new mining rewards is determined by those who currently hold the cryptocurrency choosing to sell it, and by miners selling their newly minted bitcoins. Normally, the addition of these new bitcoins maintains a balance between supply and demand in the secondary market. However, during periods without halvings, this influx keeps up with the market’s appetite.

Q. Can you explain the concept of “halving cycles” in the context of Bitcoin’s price history?

every 210,000 blocks, or approximately every four years, the Bitcoin supply is reduced by half through a process called halving. Historically, this event has led to distinct market patterns, including price peaks and troughs, bull and bear cycles, and significant appreciation in the months leading up to and following the halving. The reason for this price volatility is the sudden decrease in Bitcoin’s supply, which creates a shock to the market. After the new equilibrium is reached between demand and supply, there is typically a sell-off, resulting in a price bottom or trough. This period of low prices lasts around 12-18 months before the price begins to rise again, leading up to the next halving and the start of another market cycle.

“Could you provide some investment approaches that investors might find useful prior to, during, and following a Bitcoin halving?”

For an investor with a lengthy investment timeline, our suggested approach is simply to purchase and keep their Bitcoin holdings. The unpredictability of crypto markets can be challenging, increasing the risk of making unfavorable trades at inopportune moments. This often results in impulsive and less-than-ideal decision-making. Over a span of several years, Bitcoin has consistently delivered substantial returns to investors. Therefore, striving for enhancements to an already lucrative investment strategy might not be essential to ensure its success.

– Bryan Courchesne, CEO, DAIM

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