The upcoming Bitcoin halving is poised to trigger a supply squeeze, leaving only nine months of supply on exchanges, a recent Bybit report reveals. This reduction, anticipated to intensify post-halving, will slash Bitcoin’s supply by 50%. “Bitcoin reserves in all centralised exchanges have been depleting faster,” the report notes, highlighting the swift depletion. With only 2 million bitcoins left, a daily inflow of $500 million to Bitcoin Spot ETFs could see around 7,142 bitcoins leaving exchange reserves daily, depleting all remaining reserves within nine months.
The report highlights that the halving will render Bitcoin twice as rare as gold. “The Stock-to-Flow (S2F) ratio is calculated by dividing the circulating supply of a commodity by its annual production, yielding a gauge of scarcity,” it explains. “Bitcoin’s S2F ratio is around 56 before the upcoming halving, while gold is 60. After the halving in April 2024, Bitcoin’s S2F ratio is projected to double to 112.”
In anticipation of this, institutional investors have proactively positioned themselves for the event, particularly following the US approval of Bitcoin Spot ETFs. “Bitcoin is becoming the safest investment choice even for the most sophisticated investors in the crypto field,” the report asserts. “The price correlation between Bitcoin and the rest of cryptocurrency has been consistently high, and investment in Bitcoin has also been regarded as the cryptocurrency with the lowest beta.”
As the cryptocurrency market braces for the halving event, it sets off a chain of speculative activities and market dynamics that significantly impact investor sentiment and behaviour. In this lead-up to the impending event, several discernible trends emerge.
Fear of Missing Out (FOMO): The anticipation of potential post-halving gains frequently sparks a palpable sense of FOMO among investors. This prompts previously hesitant individuals to enter the market, fearing they might miss out on lucrative opportunities. Consequently, this influx of demand contributes to a notable surge in market activity.
Heightened demand and price surge: As the halving event draws nearer, demand for the cryptocurrency typically intensifies. Investors and traders become increasingly active, fearing they might miss the chance to capitalise on the anticipated price appreciation following the event. This heightened demand often leads to a price surge in the short term, creating a sense of urgency within the market.
Buy-and-hold strategy: Investors commonly adopt a buy-and-hold approach in anticipation of reducing the rate of new coin issuance. Believing that impending scarcity will drive future price appreciation, investors tend to hold onto their assets despite fluctuations in the market.
Increased volatility: Despite the halving event’s excitement, the market experiences heightened volatility. Price fluctuations occur as investors react to rumours and speculation surrounding the event, introducing an element of uncertainty into the market dynamics.
Speculative trading strategies: Traders often employ various speculative trading strategies to capitalise on the anticipation and uncertainty surrounding the halving event. These strategies range from rapid day trades to calculated swing trades, each aiming to seize short-term opportunities driven by speculation.
“As the halving approaches, news outlets and social media buzz will fuel the excitement and anticipation,” said Mohammed AlKaff AlHashmi, co-founder of HAQQ. “Some traders might engage in short-term, high-frequency trading strategies to capitalise on price fluctuations leading up to the halving.”
According to analysts, investors seeking to amplify potential gains may utilise leverage trading, borrowing funds to buy more BTC. Some experienced ones might buy Bitcoin anticipating the halving and then sell shortly after the event to lock in profits.
“This Bitcoin halving event is a unique one considering it is preceded by the launch of a spot Bitcoin ETF in the US,” explained Gracy Chen, Managing Director of Bitget. “These ETF sentiments and price accumulation have complemented the pre-halving surge, driving the price of the asset above its previous ATH.”
“The impact of the Bitcoin halving is now gaining more positive projections from investors across the board.”
What role do institutional investors play?
All halvings are the same, but they’re different when considering when they take place. “Right now, we’re seeing the biggest institutional interest in Bitcoin’s history with the new spot bitcoin exchange-traded funds (ETFs) launched in January 2024,” explained Josh Gilbert, Market Analyst at eToro. “These new ETFs saw huge interest with tens of billions of dollars of inflows in their first few months of trading, alongside massive institutions such as Blackrock buying bitcoin by the bucket load, propelling the asset to new all-time highs.”
“This undoubtedly changes the landscape ahead of the halving and increases the importance of supply being cut at a time when we are seeing so much buying from huge institutions. This might not have a direct impact overnight, but it will play a massive role in the future.”
Indeed! Institutional investors – like banks, hedge funds, and investment firms – play a significant role in the cryptocurrency market, influencing the narrative around Bitcoin halving events. Their presence provides legitimacy, brings more substantial capital inflows, and can significantly affect the price and volatility of Bitcoin. “With the formation of ETFs, we’re seeing greater access to the market for more conservative investors,” stated Alex Chehade, General Manager of Binance FZE.
With Bitcoin’s growing acceptance and adoption as a legitimate asset class, institutions have increasingly viewed it as a viable investment opportunity.
MicroStrategy and Grayscale Investments are notable institutions that adopted innovative approaches before Bitcoin halving events. MicroStrategy strategically shifted towards Bitcoin as a primary treasury reserve asset, making significant purchases before the halving. Meanwhile, Grayscale actively promoted its Bitcoin Investment Trust (GBTC) to institutional investors.
As for the upcoming Bitcoin halving event, analysts from Equiti believe it will be unprecedented, primarily due to the increasing involvement of institutional investors in the crypto space already. “Recent trends indicate a significant shift in sentiment, marked by substantial inflows from institutions into Bitcoin ETFs, while hedge funds have minimised their exposure,” they said. “This changing landscape reflects a broader trend wherein private wealth, family offices, and traditional financial institutions are embracing digital assets in their investment portfolios and product offerings.”
Technological advancements
Between Bitcoin halving events, the network often sees significant technological advancements and improvements in scalability and efficiency. Key developments include upgrades like Segregated Witness (SegWit), which increased block capacity and paved the way for second-layer solutions such as the Lightning Network, enhancing transaction speed and reducing costs. Additionally, advancements in mining technology, such as more energy-efficient ASIC miners, contribute to network resilience by maintaining mining profitability and security as rewards decrease post-halving. These technological improvements help Bitcoin handle increased transaction volumes and maintain robust security, ensuring the network’s ongoing viability and responsiveness to growing user demands.
A recent upgrade was the Taproot Upgrade. It improves the network’s privacy, efficiency and functionality by allowing complex, intelligent contracts to appear as regular transactions on the blockchain.
“The ecosystem built around Bitcoin moves remarkably from one halving event to the other,” explained Can Picak, Co-founder and CEO of Eldarune. “One key area that gets significant upgrades is Web3 gaming.”
“The Bitcoin halving sentiment is already complementing the bull run that is now in effect. This bull run, I believe, will also trigger massive hype in Web3 Gaming, a niche that has recorded promising growth in the past year.”
As a new way to onboard the following billion users into the blockchain, Web3 gaming adoption has increased by about 54.67% from the 2023 average per data from Footprint Analytics. This jump is fuelled by the consistent innovation showcased by developers in the industry and the embrace of Web3 gaming by top Web3 game development studios.
According to Chen, one crucial way the Bitcoin ecosystem evolves between halving events is through its payment utility. “Due to the strong entry of traditional finance, Lightning Network developers are building new solutions that can further fast-track the utilisation of BTC as a payment method,” he explained. The Lightning Network upgrades, the investment in Bitcoin development by Block Inc., and MicroStrategy notably contribute to the network’s efficiency.”
Long-term implications
When asked about the long-term implications of Bitcoin halving events in the cryptocurrency ecosystem and how future halvings might shape the adoption trajectory, innovation, and market dynamics, analysts from Equiti highlighted the following.
Adoption trajectory: Halving events highlight Bitcoin’s limited supply, enhancing its attractiveness and perceived value. This perceived scarcity draws in more investors and boosts mainstream adoption, solidifying Bitcoin’s status as “digital gold” and spurring increased institutional investment.
Technology innovation: Reducing mining rewards compels miners to seek more efficient technologies, potentially speeding up the adoption of sustainable energy sources in the industry. This necessity drives the development of advanced mining infrastructures and promotes the exploration of renewable energy solutions.
Market dynamics: Although halvings can cause price volatility in the short term, they tend to lead to a higher price baseline over the long term. The reduced supply usually triggers price appreciation, which, combined with heightened institutional interest, can reduce price volatility and contribute to market maturity.
In 2012, for instance, Bitcoin gained about 8,000% in the 12 months following the reward cut and rose almost 1,000% again in the wake of the 2016 cut. The last halving, in May of 2020, was followed by a bull run that ended in a record Bitcoin price of almost $69,000 in November 2021.
Time to go green?
Many investors are open to crypto mining, but it takes a lot of work to scale up profitably soon. While the move to net zero is the ultimate goal, crypto miners are currently offsetting their Carbon emissions sustainably. With less than 3,000 Blocks remaining before Bitcoin halving, switching to sustainable mining in days might offset regular productive operations without achieving the ultimate goals.
Environmentally conscious investors and institutions may be drawn to crypto with a positive impact. Greener protocols with lower energy consumption might be less susceptible to volatile energy prices. Similarly, mining farms running on solar energy will be more in demand, especially since the excess heat can also be directed to plants and other utilities. Embracing sustainability can improve the image of the crypto industry, attracting wider adoption and regulatory acceptance.
Currently, estimates suggest mining profitability could drop by 30-50% after the halving, incentivising miners to adopt more energy-efficient practices to stay afloat. Studies show a rise in miners utilising renewable energy sources like solar and hydropower in the years following previous halving events.
Statistics from the Bitcoin Electricity Consumption Index suggest that annual Bitcoin mining electricity use could be around 150 TWh in 2024. Shifting towards sustainable mining practices, like joining ‘green’ mining pools that prioritise renewable energy sources, can help reduce the network’s environmental impact.
Sustainable mining should be on the roadmap for every Bitcoin miner, and implementation should follow a phased rollout pattern to guarantee its effectiveness.