Bitcoin halving events are pivotal moments that significantly influence both the short-term and long-term fundamentals of Bitcoin, reducing the rate at which new bitcoins are generated, altering supply and demand dynamics.  In this blog, we explore how Bitcoin halving's have historically shaped the asset's trajectory, what future events might mean for investors and if this time is different.

‍What is the Bitcoin Halving?

The Bitcoin halving is a fundamental event which is programmatically coded into the Bitcoin protocol where, every 210,000 blocks or roughly every four years, the number of new bitcoins issued per block is halved. This process, a deliberate part of Bitcoin's design, serves to enforce a disinflationary trend over time.

Introduced as a countermeasure against the indefinite inflation of fiat currencies by central banks, the halving aims to preserve purchasing power and instil scarcity within the Bitcoin ecosystem. Unlike fiat currencies, whose supply can be manipulated, Bitcoin's supply is capped at 21 million coins.

This hard cap and predictable issuance schedule underpin what many see as Bitcoin's sound monetary principles. So far, It has stood the test of time, and with each halving, although the supply emissions are halved, the price of BTC continues to rise; demonstrating the purity of its supply/demand dynamics.

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The Halving as a Cyclical Market Catalyst

Historically, halvings have marked bullish phases for Bitcoin, characterised by increased media attention, heightened market participation, and new supply dynamics, with fewer new bitcoins mined.

As a result of the factors mentioned, BTC’s price has predominantly risen following a halving event, with positive returns being generated post-halving at all 180 day intervals, and most 30, and 90 day intervals. Additionally, in most cycles, we have also seen volatility and volumes drop off following the halving, which suggests a significant part of the speculative positioning and volatility may occur prior to the event.

Examining the longer-term trend following a BTC halving, each halving has historically provided a period of rapid price expansion and has traditionally been a successful buying opportunity for those with a long-time horizon. This period of expansion has tended to last around 350 to 500 days post-halving, depending on the cycle. Each subsequent expansion has been followed by a period of downtrending distribution, typically felt via a bear market, before a period of consolidation and accumulation ensues.

With each cycle, Bitcoin solidifies its position as the top digital asset, and although its narrative is fluctuates based on how it is utlised, there is no doubt its position as an institutional asset is gaining traction.

Is this time different?

This halving stands out already for two distinct reasons

1. It is the first time that Bitcoin has surpassed its previous all-time high before the halving occurred
2. It is the first time that investors have access to U.S. Spot BTC ETFs, increasing Bitcoin's accessibility for both retail and institutional investors and creating distinct supply/demand dynamics.

Since the introduction of these Spot ETFs on January 11th, BTC’s price has dramatically increased, with returns since the ETF launch currently sitting at around 28.5%, hitting 58.5% at BTC’s all-time high.

This surge in price is driven by significant Bitcoin accumulation by ETF providers, as shown in successive net inflows since launch, reaching $12.43bn cumulatively, and the total BTC held by these providers reaching nearly 900,000 BTC, or ~$53bn, representing more than 4.25% of the current circulating supply.

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‍Impact On Block Rewards and Miner Revenues

While the economic impact of the halving influences the whole Bitcoin network, it mainly impacts Bitcoin miners. These entities or individuals play a crucial role in the Bitcoin network; solving complex mathematical puzzles to secure the network and process transactions, known as Proof-of-Work (PoW).

Miners are incentivised to participate in securing the network by earning block rewards, and transaction fees. Therefore, when the block rewards are cut in half, the amount of revenue generated by miners effectively halves overnight (holding transaction fees and BTC price constant).

This means that miners earn less BTC over time and must rely on the price appreciation of the underlying asset, or higher transaction fees due to increased demand for block space. Numerous miners have also looked at lowering mining costs through economies of scale or by utilising lower-cost/sustainable energy sources.

As block rewards diminish, transaction fees become a more crucial revenue stream for miners. The future health of the Bitcoin network—and miners' profitability—hinges on the growing demand for transaction processing and the ensuing increase in fee income. Recently, we have seen a higher demand for Bitcoin blockspace due to the emergence of ordinals and inscriptions, which enable the embedding of 'digital artefacts' on the Bitcoin blockchain.

This innovation not only enhances the blockchain's utility but also opens up new avenues for its application - increasing on-chain activity. These developments could incentivise miners to maintain their operations despite the diminishing block rewards. For example, there have been instances where transaction fees have exceeded the rewards from mining blocks, suggesting that transaction fees could become a viable and sustainable source of revenue for miners.

The hash rate, or total computational power expended on mining and transaction processing, is an essential security metric for the network. A high hash rate means more miners are participating in securing the network. Typically, the BTC hash rate drops temporarily after a halving as less efficient miners shut down. However, a generally upward trend in hash rate reflects ongoing confidence in the network’s viability and that miners are still keen to participate in the network.

Mining Stock Performance and Market Trends

Mining stocks often fluctuate around halving events, reflecting the sector's sensitivity to changes in profitability expectations. For instance, despite previous gains, mining stocks have underperformed compared to Bitcoin itself in anticipation of reduced future earnings. However, notable exceptions like CleanSpark demonstrate that strategic positioning can defy broader market trends.

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Looking Ahead

As the next halving approaches, we anticipate shifts in miner economics, potentially leading to more mergers and acquisitions in the sector and a geographical realignment towards more energy-efficient mining locations. Despite a reduction in block rewards, the expected continued growth in hash rate suggests enduring faith in Bitcoin's stability and relevance, particularly as an alternative in times of geopolitical and economic uncertainty.

Additionally, The introduction of the Spot ETFs, in combination with improving regulatory clarity, is likely creating a new and accessible avenue for retail and institutional investors to allocate parts of their portfolio to BTC. This is vital to further establish wide adoption and confidence in the asset, and the wider market. This event will also bolster overall liquidity in the space, and attract larger players looking to allocate large notional size, given its wider institutional acceptance.