Bitcoin Halving 2024 – Why This Time It’s Different

The fourth bitcoin halving event, scheduled for April 19, 2024, heralds a significant transformation in the cryptocurrency landscape. This halving, marked by the reduction of bitcoin supply subsidy, the emergence of a liquid investment ecosystem via CME futures and options, the advent of spot Bitcoin ETFs and the introduction of Ordinals, brings forth novel dynamics that could reshape prevailing narratives around bitcoin economics.

The Halving Mechanics
At its core, the quadrennial halving event entails a reduction in the reward granted to miners for each block mined on the bitcoin blockchain (the block subsidy) as determined by the bitcoin protocol. It is scheduled to occur roughly every four years, or every 210,000 blocks until the entire 21 million bitcoin supply is mined, approximately by 2140.

As part of bitcoin's deflationary approach to its capped supply, the upcoming halving will reduce the bitcoin supply subsidy from 6.25 bitcoin per block to 3.125 bitcoin, fostering a more stringent supply landscape. By gradually decreasing the number of bitcoin entering into circulation, and, so long as the adoption of bitcoin grows over time, the halving mechanism ensures that the laws of supply and demand will consistently impact the value of the asset.

1. Impact on Price Dynamics

Historically, each halving event has been accompanied by a significant surge in bitcoin price in the months preceding and following the event. Notably, in the 365 calendar days after the November 28, 2012, halving, bitcoin prices rose 8,447%, when the reward was cut from 50 bitcoin to 25 bitcoin. In the year following the July 9, 2016, halving, bitcoin prices rose a more modest, but still impressive, 283%, and the block reward was reduced to 12.5 bitcoin. In the 12 months after the May 11, 2020, halving, where the reward was cut to 6.25 bitcoin per block, bitcoin prices jumped 559%.

Source: CME CF Bitcoin Reference Rate

The pre-halving rally has shown a diminishing trend over time, likely due to miners selling off their bitcoin holdings to secure profits ahead of the impeding reward reduction. Nevertheless, the historical pattern suggests the potential for bitcoin to reach new all-time highs in the aftermath of the 2024 halving.

2. Impact of Bitcoin Spot ETFs

The landscape surrounding bitcoin has evolved significantly, particularly with the approval of spot Bitcoin ETFs and the influx of institutional capital into the market. These ETFs have generated substantial daily demand, surpassing the pace of new bitcoin supply even before the halving and have the potential to absorb a considerable portion of the limited new issuance.

To put the spot bitcoin ETF inflows into perspective, at the current rate of block rewards, the bitcoin network produces about 900 new coins per day, or around $54 million worth of bitcoin (assuming an average price per coin of $60k). In April 2024, issuance will fall to 450 coins, or about $27 million worth of bitcoin. During the month of February, net inflows into the US-listed spot bitcoin ETFs averaged $208 million per day, far outstripping the pace of new supply, even before the halving.

This imbalance between new demand and limited new issuance has likely contributed to the strong upward pressure on the price.

3. Evolution of a Large Liquid Derivatives Market

The emergence of a robust, regulated derivates market, facilitated by CME Bitcoin futures and options, marks a fundamental shift in the narrative surrounding the halving for three key reasons: it enables price risks to be hedged, facilitates the management of bitcoin demand risk, and provides market participants with actionable price discovery.

Miners typically sold their bitcoin for fiat currency as they mined them, to pay for operational costs. This constant selling meant that price appreciation was measured. After a halving event, miners would have fewer bitcoin to sell, meaning the price could go up.

Mining is now dominated by larger, often publicly traded, companies and with a liquid regulated derivatives market, it is possible for these firms to hedge and lock in future bitcoin prices to cover expenses without selling their coins. If this is the case, then selling pressure from miners is less likely to act as a drag on bitcoin prices going forward.

Through the emergence of a healthy options market, investors can take price signals and consensus estimates about market expectations. Options could allow for additional income to be earned by miners or enhance long bitcoin positions which would further cushion the impact of the upcoming halving.

A higher number of investors and traders means better liquidity and, enhanced price stability for bitcoin. It’s worth noting that bitcoin has become less volatile in recent years, with fewer extreme moves both to the upside and to the downside.

Growing institutional participation drove Bitcoin futures average daily open interest to over $11 billion so far, in March 2024 (+29,000 contracts). Year- to- date average daily volume in CME’s Bitcoin futures is ~$4 billion (+15,400 contracts). Large Open Interest Holders (a LOIH is any entity that holds at least 25 Bitcoin futures or Micro Bitcoin futures contracts) reached a record of 272 holders, indicating growing institutional interest for bitcoin exposure.

4. Impact on Miners

The impeding halving poses challenges and opportunities for miners, as evidenced by shifts in miner behaviour and industry dynamics. Decreased bitcoin reserved held by miners, coupled with heightened competition and record high hashrates, underscore the need for operational efficiency and strategic adaptation.

The number of bitcoin held in wallets associated with miners has dropped to the lowest level since July 2021, suggesting that miners are perhaps capitalizing on bitcoin's recent price surge, running down their inventory ahead of the halving or leveraging them to raise capital for upgrading machinery and mining facilities.

In previous cycles, there weren't many large-scale miners and even fewer publicly traded ones. The halving may catalyse merger and acquisition activities among mining firms, driving industry consolidation and fostering innovation in sustainable mining practices.

5. The rise of Ordinals

The recent surge in retail demand can be attributed in part to the rise of bitcoin Ordinals BRC 20 tokens, which are reshaping the crypto landscape. These tokens, often likened to “NFTs for Bitcoin,” have the potential to drive on-chain activity and increase transaction fees, thereby bolstering miners’ revenue streams amidst declining block rewards post-halving.

Long Term Outlook
Bitcoin’s designation as "digital gold" underscores its role as a store of value, particularly amidst the scarcity reinforced by halving events. Institutional investors who view bitcoin as a hedge against inflation may find the halving supportive of its perceived value.

Shifts in central bank policies, such as prolonged higher interest rates and potential quantitative easing measures, could further bolster bitcoin’s appeal as a hedge against currency devaluation.

Looking ahead, the implication of bitcoin’s programmed scarcity intersecting with evolving demand dynamics remain intriguing. While past having cycles, with the associated price rallies offer valuable insights, the 2024 halving presents a unique confluence of factors that could usher in a new era for bitcoin. With 28 more halving events expected over the next 112 years, the future trajectory of bitcoin adoption and network growth warrants close monitoring – especially when broader access to bitcoin was only made possible in the U.S. less than 90 days ago with the approval of spot bitcoin ETFs.

In conclusion, as institutional and retail interest converges with regulatory developments and macroeconomic shifts, maintaining a balanced perspective is imperative to navigating the evolving landscape of bitcoin.

About the Author

Authored by Payal Shah - Director of Equity and Cryptocurrency Product Development at CME Group

Disclaimer

The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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