Now that spot exchange-traded funds (ETFs) are live in the US, market watchers are looking for the next potential bullish event to propel the cryptocurrency’s gains. In the wake of the long-awaited decision of the US Security and Exchange Commission (SEC) to approve these financial products, Bitcoin ETFs have simultaneously outperformed expectations – representing both the pros and cons of a hype-driven market.
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The three largest Bitcoin ETFs saw over half a billion dollars in capital inflows (not counting Grayscale’s $22 billion fund, which was converted from an existing GBTC fund and saw significant outflows), demonstrating significant client demand for… Traditional currencies. It descends to Bitcoin (BTC). In the weeks leading up to the approval date, Wednesday, January 10, Bitcoin rose to a recent high of $48,000.
Many analysts and traders are now hoping that the upcoming bitcoin halving — when the rate of new bitcoins issued to the network’s validators (also known as miners) declines — will be a similar catalyst for cryptocurrency prices. There is a long-standing debate about whether these once-every-four-years programmatically triggered events are “priced.”
The approval of a Bitcoin ETF last week may give some indication of what’s to come in the next Bitcoin hype cycle. The listing of 11 new bitcoin funds was an obvious sell-off moment, at least in hindsight, and bitcoin has since fallen roughly 12% to $42,250 today. It is still too early to say whether Bitcoin ETFs will attract billions of new dollars and investors, a prediction based on actual demand for Bitcoin.
Meanwhile, the narrative of Bitcoin halving (sometimes halving) is a supply-side story: the price of Bitcoin can rise after the supply of new coins entering the market becomes constrained, assuming that use of the Bitcoin network remains constant or It increases.
To some extent, the Bitcoin halving narrative is an afterthought justification for the fact that Bitcoin has actually seen a tear in the months following every halving so far. For example, six months after the second network halving in 2016 (when emissions of new coins per block dropped from 25 to 12.5 BTC), Bitcoin crossed the $1,000 threshold for the first time. A similar rally occurred in 2020, when Bitcoin hit a new all-time high.
But there is no indication that these price increases are directly related to the halving, other than the heightened bullish sentiment and media coverage that typically precedes the event. CoinShares, in its latest “Mining Report,” notes that there is a “peak in hash rate growth that often occurs approximately four months before the halving, likely due to a ‘Bitcoin rush,’ which may represent positive sentiment.”
Except that the economic logic around a Bitcoin supply shock is a bit shaky, considering that the supply of new Bitcoins will actually continue to increase over the next century or so, at which point all 21 million Bitcoins will have been mined. Satoshi Nakamoto designed the Bitcoin network to support miners with these rewards to stimulate adoption, with the hope that over time transaction fees would grow large enough to keep the network secure and validated.
CoinShares does not provide a price prediction in its report, suggesting instead that Bitcoin mining will become more competitive after the halving, weeding out less efficient miners. While Bitcoin has become 90% more efficient since the last halving, its hashrate (which represents the amount of computing power devoted to network security) and cost structures have also increased.
In fact, current Bitcoin mining difficulty has reached historic highs, with computing power jumping more than 100% in 2023. CoinShares expects this to decline after the halving with a “miner exodus.” The company also said that the “average cost of production per coin” could return to just under $38,000 after the halving, given the complex relationship between hardware and electricity costs, difficulty levels and cost structures that determine whether some miners make or lose money. . Which determines the number of miners on the network.
What exactly does this mean for Bitcoin price predictions? Well, somewhat paradoxically, if Bitcoin prices remain above $40,000, it could actually lead to lower returns for miners. CoinShares doesn’t make this prediction per se, but since miners are often the biggest sellers of Bitcoin, lower profitability could also create selling pressure from that group.
There are many others who disagree with this, and see the halving as another potential positive catalyst for Bitcoin prices. But it is important to note that each person has their own incentives. The only guarantee when it comes to the halving is that it’s another moment of hype.