Bitcoin’s 2024 supply shock: What impact will the Halving have on the crypto market?

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Jason Welz, Head of Digital Assets at Jaltech

As Bitcoin continues to mature and establish itself as a significant player in the global financial landscape – with January’s approval of 10 US-based Bitcoin ETFs the latest endorsement from the traditional financial industry – the investment community has now turned its attention to the next catalyst on Bitcoin’s calendar: a fifty percent reduction in Bitcoin’s inflation rate, known as a Halving, due in April. 

Scheduled to occur roughly every four years, the Halving represents a pivotal moment in Bitcoin’s journey. In this article, we delve into the concept of the Bitcoin Halving, its historical significance, and the potential impact it could have on the crypto market in 2024.

What is a Bitcoin Halving?

The Bitcoin Halving is a predetermined event embedded in the cryptocurrency’s code, designed to occur approximately every 210,000 blocks, which works out to roughly every four years. This event results in a 50% reduction in the reward that Bitcoin miners receive for validating transactions and securing the network. In essence, the Halving diminishes the rate at which new bitcoins are created, ultimately capping the total supply at 21 million coins by 2140. This programmable scarcity is core to Bitcoin’s design and results in parallels being drawn to precious metals like gold.

Expected to arrive mid-April 2024, Bitcoin’s fourth Halving will see the block reward, paid to miners for their contribution towards maintaining the network, fall from 6.25 BTC to 3.125 BTC.

Historical Precedent

The previous three Bitcoin Halvings in 2012, 2016, and 2020 provide valuable insights into what we may see in 2024. Historically, a very similar price pattern played out around each Halving. First, in the months leading up to the Halving, a relatively gentle uptrend is established. Post-Halving we see this uptrend accelerate, with Bitcoin prices surging to new all-time highs before two years have passed.

Subsequently, we have always seen a steep downtrend emerge – this downtrend has always ended when prices approach the prior cycle’s all-time highs.

The upcoming Halving seems thus far to be no different to prior cycles. We’ve had a steep downtrend over 2022 in the wake of 2021’s all-time highs. 2023 saw a firm uptrend established. Now, if the cycle repeats, we could expect a parabolic surge to begin in April.

While we have seen rallies play out in the wake of each Halving to date, we have also seen the returns generated by these rallies decline each cycle. In dollar terms, Bitcoin rose 10,300% after the 2012 Halving. 2020 saw a more modest 730% increase, with many expecting 2024 to show an even smaller rise. This makes some sense, as each subsequent Halving takes place against the backdrop of a larger overall supply of Bitcoin – meaning the Halving’s impact on the inflation rate is smaller each time.

Halvings have seen strong, albeit declining price multiples historically

Source: TradingView

While historical precedent suggests a positive correlation between Halvings and price surges, predicting the exact trajectory remains a complex task. Some experts argue that the market has already priced in the anticipation of the 2024 Halving, potentially mitigating the immediate impact on prices. This argument was also heard in crypto circles around previous Halvings.

Proponents of the Halving’s significance point to the long-term effects on Bitcoin’s scarcity, arguing that the reduced supply will inevitably see prices driven upwards.

ETF Impact

The US-based ETFs launched in January have handily beaten expectations for flows. Inflows over the first 6 weeks completely dwarfed inflows into the first gold ETFs during 2003.

Source: Jaltech (construction), ETF.com (Bitcoin ETF data), World Gold Council (gold ETF data)

This suggests that these financial products have been able to unlock a significant amount of pent-up demand for Bitcoin from investors – both retail and institutional – who have previously not wanted to manage the intricacies of custody for their own cryptocurrency investments.

This provides optimists with a rationale for why a potential post-Halving rally may not see a declining growth multiple this time.

Mining Dynamics

For investments into listed Bitcoin mining companies, a post-Halving rally may not be as positive of a development as it would first appear.

With reduced block rewards, miners must contend with lower profit margins if prices cannot double to compensate for the fifty percent fall in rewards. This could potentially lead to increased competition and consolidation within the mining sector. Miners operating on outdated hardware may find it economically unfeasible to continue, further centralizing mining power among larger, more efficient operations. This shift could, in turn, lead to doubts about the network’s reliability and ability to remain censorship-resistant – two key pillars of Bitcoin’s value.

The Broader Cryptocurrency Market

While Bitcoin commands much of the public’s attention, Bitcoin itself has underperformed the broader crypto market in the wake of the prior two Halvings. This suggests that those with strong conviction about the Halving’s positive impact on price may be better off diversifying their investment across the cryptocurrency ecosystem, rather than simply investing in Bitcoin.

Conclusion

While historical trends suggest a positive correlation between Halvings and price rallies, the intricacies of market dynamics make precise predictions challenging. Investors and enthusiasts alike will be closely monitoring the months following the Halving, eager to witness the unfolding impact on Bitcoin’s price, mining ecosystem, and broader market sentiment.

As the crypto community prepares for this supply shock, one thing remains certain: the 2024 Bitcoin Halving will undoubtedly be a defining moment in the ongoing evolution of the world’s premier cryptocurrency. 

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Jaltech manages over R2 billion of customer assets and investments and offers a full suite of cryptocurrency products including regulated Crypto-backed Securities, Custody, and Trade Execution. 

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