‘Total circulation will amount to 21,000,000 coins, distributed to network nodes as they generate blocks, with the quantity halved every 4 years. In the initial 4-year period, 10,500,000 coins will be in circulation, followed by 5,250,000 coins in the subsequent 4 years, then 2,625,000 coins, and so forth.’—Satoshi Nakamoto
Every four years, the Bitcoin network experiences a significant event known as “halving,” reducing the rewards for mining new blocks by half. This adjustment is a fundamental aspect of Bitcoin’s protocol designed to manage inflation and cap the total coin supply at 21 million. Halving events are highly anticipated milestones in the cryptocurrency community, often sparking speculation and market volatility.
The concept of “stock-to-flow” ratio plays a crucial role in evaluating a commodity’s current supply against the rate of new supply entering the market. For Bitcoin, each halving event substantially increases this ratio, emphasizing its growing scarcity. This ratio serves as a vital indicator of Bitcoin’s long-term value.
Crypto Tracker
11,703 (8.17%)
46,142 (6.28%)
5,327,606 (5.5%)
256,965 (3.9%)
84 (-0.03%)
Comparisons are often drawn between this metric and that of traditional precious metals like gold, reinforcing Bitcoin’s reputation as “digital gold” and solidifying its position as a store of value in the digital age.
Halving Dips & Surges: Historical Price Analysis
Bitcoin’s price trajectory typically reacts significantly to halving events. Following the first halving on November 28th, 2012, where the mining reward decreased from 50 BTC to 25 BTC, Bitcoin’s price surged from \(12 to \)1,075 within a year, marking an impressive 8,858% increase. This surge coincided with a decline in Bitcoin’s inflation rate from 25.75% to 12% by January 2013. The second halving on July 9th, 2016, exhibited a similar pattern with the reward dropping from 25 BTC to 12.5 BTC, leading to a 294% price increase from \(650 to \)2,560 over the following year. Concurrently, the inflation rate decreased from 8.7% to 4.1% by August 2016. The most recent halving event on May 11, 2020, reduced Bitcoin’s mining reward to 6.25 BTC, propelling its price from \(8,727 to approximately \)55,847 by May 11, 2021, marking a 540% gain. Correspondingly, the inflation rate dropped from 3.7% to 1.8% by June 2020.
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These historical events suggest a trend where Bitcoin halvings generally result in diminishing returns, although the percentage gain following the third halving surpassed that of the second. This anomaly was influenced by the Federal Reserve’s expansion of the M2 money supply, which effectively revalued BTC. However, this trend reversed when the Fed initiated a new cycle of rate hikes in March 2022, suppressing asset prices.
Sentimental Analysis: Current Developments and Future Projections
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(Bitcoin balance available in exchanges. Source: Glass Node)
Bitcoin’s price movement reflects a blend of historical patterns, market dynamics, and evolving investor sentiment. Recent developments offer valuable insights into the potential trajectory of the cryptocurrency.
A significant recent development, the approval of US Bitcoin ETFs, has driven substantial capital inflows, pushing Bitcoin to record highs and fostering a bullish market outlook. However, it is essential to note that this bullish phase may still be in its early stages, with experts anticipating volatility and price corrections along the way.
Despite the optimistic sentiment, recent geopolitical tensions following Iran’s drone strikes on Israel on April 13, 2024, triggered market instability. Bitcoin witnessed a sharp decline, reaching its lowest point in a month, resulting in an 8% drop in value within a brief period. Historically, such geopolitical conflicts have eventually fueled the cryptocurrency market.
Another critical factor to consider is the upcoming 2024 halving event. This programmed reduction in Bitcoin’s supply could boost demand. However, the realization of this demand depends on various factors such as selling pressure, regulatory changes, and the broader macroeconomic environment. Looking ahead, the anticipated initial rate cut by the Federal Reserve in mid-2024 is expected to further positively impact Bitcoin’s price.
Interestingly, despite its inherent volatility, Bitcoin appears to be demonstrating signs of market maturity, with fewer extreme price fluctuations compared to previous cycles, potentially making it more attractive to a diverse range of investors. Supporting this trend, a recent report by blockchain data analysis firm Glassnode highlights a significant decrease in Bitcoin balances on exchanges, indicating a shift towards a long-term holding strategy among investors. This shift could trigger a supply shortage, further contributing to upward price momentum.
Technical Analysis
Currently, Bitcoin is showing a pre-halving retracement characterized by bearish signals and sideways market movements. A technical analysis of the weekly timeframe reveals the formation of a Cup and Handle pattern in Bitcoin’s price chart. Traditionally, this pattern may precede further downward movements. Notably, there is strong support in the \(60,000 to \)61,000 price range. If this support level is breached, a retracement towards the \(51,000 mark is conceivable. In a worst-case scenario, prices could potentially drop to around \)45,000, indicating a temporary bear market.
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On the daily timeframe, Bitcoin’s price action is consolidating within a defined range, characterized by a triple top pattern. This pattern is typically seen as a bearish reversal indicator, emerging after a prolonged uptrend. The appearance of the triple top on Bitcoin’s daily chart may signal a shift in market sentiment from bullish to bearish.
If Bitcoin breaks below the critical support level at \(60,000, a significant downtrend could ensue, with prices potentially falling to the \)50,000-$51,000 range. This pivotal movement underscores the importance of closely monitoring these key technical levels, which serve as essential indicators for Bitcoin’s short-term market direction.
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By incorporating the Exponential Moving Average (EMA) with a 200-period into our analysis, we gain further insights into potential scenarios. If the price range breaches and Bitcoin (BTC) descends into the specified \(50,000-\)51,000 zone—coinciding with the EMA (200)—we might anticipate significant turbulence in the Altcoin Market Capitalization. Failure by BTC to sustain support at the critical EMA (200) juncture could signal the start of a temporary bear market, as previously mentioned. Notably, BTC dropping below the EMA (200) is commonly seen as a conventional signal for exiting bull markets.
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Considering various macroeconomic and microeconomic factors, there is a strong basis for optimism regarding Bitcoin’s potential to rebound and achieve new all-time highs. Projecting a target of $120,000 for Bitcoin in 2024 is well-supported by current market dynamics and historical performance trends. This forecast underscores the importance of closely monitoring key technical levels and market sentiments as Bitcoin approaches its next halving event.
The intricate interplay of factors surrounding Bitcoin’s halving events demonstrates that these are not just technical adjustments but significant market drivers. Historical trends of price surges post-halving, along with evolving market sentiments and technical patterns, provide valuable insights into Bitcoin’s future prospects. The recent approval of U.S. ETFs and shifts in the global economic landscape introduce new dimensions to market forecasts, yet the fundamental economic principles of supply and demand remain the primary drivers of Bitcoin’s long-term sustainability.
As we anticipate the 2024 halving, it is evident that this event presents both challenges and opportunities. Investors and market analysts are advised to maintain a vigilant eye on critical technical levels and broader market indicators. Through thorough analysis and a nuanced understanding of Bitcoin’s market dynamics, stakeholders can navigate the upcoming fluctuations and capitalize on the opportunities that arise as Bitcoin continues to mature and integrate further into the global financial ecosystem.
(The author is Research Analyst, Mudrex)
(Disclaimer: Recommendations, suggestions, views, and opinions expressed by the experts are their own and do not necessarily reflect the views of The Economic Times)