The last two weeks have been an exciting time in the Bitcoin markets.
The price of Bitcoin has rallied from just over $5,000 to the current level of $8,800. Many bulls have their eyes now set on that magical $10,000 level.
However, could this all be related to a larger fundamental force at play?
Could the Bitcoin halving event be precipitating an institutional bull run that will further come to a head next year?
In this post, I will take an in-depth look at this theory and what it could mean.
But first, lets start with a bit of basics…
What is the Halving?
The Bitcoin halving is the protocol defined event where the Bitcoin block rewards halve. Essentially, miners will get half the Bitcoin that they were getting for propagating new blocks.
The halving was a genius solution to the problem of coin inflation. Hard-coded into the Bitcoin protocol, with every halving event, the coin inflation will also halve.
Bitcoin Price & Halving Relationship. Image Source
This has happened 3 times in the past and it will continue to happen until the Bitcoin until the supply is capped out at the max 21 million coins.
The next halving is expected to take place on the 22nd of May next year and the BTC block reward will go from the current amount of 12.5 BTC to 6.25 BTC .
This will decrease inflation from the current rate of 3.78% to 1.80%.
The Case for a Rally
One of the most fundamental reasons that people are predicting a rally in the price is because of the age-old economic discipline of supply and demand.
As less Bitcoin are mined, supply will start to taper off. This will continue to happen for the foreseeable future until we hit that 21 Million supply cap.
The demand for Bitcoin is only increasing as both retail and institutional investors see the benefits of a decentralised and immutable digital store of value.
It is also worth noting that after the halving, Bitcoin inflation will be below that of the most recent 2.1% of Core US inflation.
Moreover, the latter can change wildly and is impacted by policies implemented by the policymakers. The policy maker behind Bitcoin inflation is simply the code – which is immutable .
There are also many crypto analysts who have looked at the previous movements in the price of Bitcoin around these halving events. This is the case both months before the halving and immediately after it.
Below is a chart by @100trillionUSD which tracks the price of Bitcoin and graphs it in relation to the months till the next halving.
Bitcoin Stock-to-Flow Model in October 2018. Image Source
This was his “stock-to-flow” theory and as you can see, the price of Bitcoin rallies up to and within a few months after the halving.
Indeed, it does look like the price of Bitcoin currently is conforming to the previous trends. You also have an upward sloping futures curve. For example, the June and September Futures prices on the Deribit Exchange are above those of spot.
If this Bitcoin stock-to-flow model is anything to go by, it means that Bitcoin is up for one all mighty bull run a few months after the halving has occurred.
This is a view that is shared by many a crypto bull including the co-founder of Morgan Creek Digital and the “Pomp” himself.
Imagine if daily printing of US dollars was suddenly cut in half forever. Bankers would be FOMOing even though USD isn’t a scarce asset.
Now imagine what they’re going to do when the daily Bitcoin supply is cut in half for one of the scarcest assets in the world.
I can’t wait.
However, could all these prognostications be a bit much and is the market tired of lofty aspirations and missed price targets?
The Case Against it
There are quite a few analysts who think that the case for a crypto rally is slightly over blown.
Firstly, they take aim at the potential correlation with past events. There have only ever been two halvings where this type of a rally occurs.
Using such a small sample size to extrapolate out the price movements is dubious at best. When drawing statistical relationships with past data, the further back our back-testing goes, the more accurate our predictions.
In statistics, the theory is called the “Law of large numbers” and it applies just as well for time series data like this as it does for more fundamental sample based statistical studies.
We also have to take a look at the relative impact of those previous halvings and the most current one. According to Kyle Samani of hedge fund Multicoin Capital:
The first halvening brought inflation from 40% to 20%. The second from 20% to 10%. The next halvening is going to reduce it from about 3.8% to 1.9%. On an absolute basis, each halvening is becoming increasingly less relevant
So, the impact on the coin supply growth in the next halving is likely to be that much less important. It could be misguided to assume similar price movements when the supply impact is marginal.
Another much more fundamental point to consider is that the Bitcoin halving is a totally foreseeable event. Everyone knows that it is coming and the exact day that it will hit.
We can assume that most investors are reasonably forward thinking. They knew that the halving was coming 6 months ago when Bitcoin was below $4k. Once the halving has happened, they will already have accumulated the desired position.
Of course, there are other factors at play that could have much more of an impact on the price than the halving itself.
Of course, there are still those lingering questions about a potential Bitcoin ETF and the impact an ETF could have on the Bitcoin price.
The latest company trying to get an SEC stamp of approval on a Bitcoin ETF is that of Bitwise Asset Management. Their application was recently delayed which prompted a forceful response.
We also have to consider the impact that a fully regulated custody solution could have on the Bitcoin markets. As I discussed in a previous post, this could be a super highway to potential mass institutional adoption of Bitcoin.
The Bitcoin halving is no doubt a monumental event in the history of the cryptocurrency.
There is the marvel of it all: An immutable protocol defined rule that happens purely based on code and not on a single entity.
Of course, there are many predictions on what could happen to price. These could indeed be true either as a direct result of the limited supply or the hype created around the halving.
Either way, there are likely to be many other factors that will drive the price of Bitcoin in the near to medium term.
With 359 days and 16 hours to go, I will be watching that BTC ticker closely…