Bitcoin halvings, occurring approximately every four years, are key events that significantly slow down the supply growth of BTC by reducing cryptocurrency miners’ rewards in half.
By activating bitcoin’s so-called “deflationary” as well as “scarcity” mechanisms, halvings enhance its appeal as a form of “digital gold” while spurring wide-ranging discussion in the crypto space and beyond, “putting digital assets into the spotlight as catalysts for change,” according to a report from Binance.
This year’s upcoming halving is especially unique, according to Binance, as we are seeing the collision of three major narratives such as the “surging spot ETFs, booming DeFi activity, and the halving itself. Indeed, 2024 will be a pivotal year for Bitcoin.”
Occurring approximately every four years, Bitcoin halvings are considered to be “one of the most anticipated events for the original blockchain network and the wider crypto ecosystem.”
As explained in a report by Binance, a halving effectively slashes the amount of bitcoin given to miners “as a reward by half.”
By doing so, the report notes that it “activates a deflationary mechanism that slows the supply growth of bitcoin over time, thus making it more scarce and contributing to the narrative of BTC as ‘digital gold.'”
As we approach the next Bitcoin halving, set for the latter half of April 2024, the market eagerly anticipates its impacts.
However, the inner workings of this important event and its potential effects often tend to “get overshadowed by the buzz.”
As noted in the update from Binance, at its core, a Bitcoin halving refers “to a 50% reduction in the reward that Bitcoin miners receive for verifying and adding new bundles of transactions, or blocks, to the blockchain.”
The event occurs after “every 210,000 blocks are mined, which happens approximately every four years. Through this mechanism, the finite supply of bitcoin (capped at 21 million) is released into circulation at a diminishing rate, thereby inducing a deflationary effect on the cryptocurrency.”
This feature sets BTC apart “from traditionally inflationary fiat currencies.”
This intentional slowing of supply growth, “paired with BTC’s fixed maximum supply of 21 million units, powers the scarcity driving bitcoin’s value and its appeal as a form of ‘digital gold.’”
Unlike traditional fiat currencies, whose supply is regulated by central banks, BTC’s total supply is “fixed and immutable.” The team at Binance further noted that the halving is “a crucial aspect of Bitcoin’s tokenomics, designed to control the supply of BTC and ensure that its maximum limit is approached at a predictable rate over time.”
The first halving occurred “in November 2012, when the block reward dropped from 50 to 25 BTC. Subsequently, in July 2016, it was further halved to 12.5 BTC. The most recent halving, in May 2020, saw the block reward diminish to its current amount of 6.25 BTC. In the fourth halving, set for April 2024, the reward will become 3.125 BTC.”
Bitcoin’s cyclical halvings have often “represented significant turning points in the cryptocurrency’s market dynamics, with each halving event historically having a strong impact on BTC prices. This is largely due to the fundamental economic principles of supply and demand. With each halving, the rate of new bitcoins being added to the circulating supply slows. With this decreased supply, in the face of steady or growing demand, bitcoin’s price would appreciate, all else equal.”
Historically, BTC experienced notable price surges in “the six months following each halving event.”
Additionally, the year following a Bitcoin halving has typically “been associated with bull market conditions.”
These dynamics underscore the market’s response “to the reduced supply of new BTC, with increased demand driving up the cryptocurrency’s value.”
Unfortunately for Bitcoin miners, halvings effectively “reduce their immediate rewards for processing transactions and securing the network, essentially doubling mining costs per token. With each halving, miners must reevaluate the balance of efficiency and profitability in their operations, potentially leading some to exit the market.”
This reduction in miners can “negatively affect the Bitcoin network’s processing capabilities, particularly in the short term.”
However, the Bitcoin network has historically “shown resilience in the face of such issues. With each halving, bigger miners generally seek out opportunities to acquire smaller competitors. We also often see more mergers in the space as miners attempt to consolidate their operations. As a result, while the number of miners may decrease, the overall size of mining operations generally maintains its balance.”
As Bitcoin’s fourth halving approaches, there’s a palpable sense of anticipation.
This year’s halving is unique as it “comes amid a series of other significant events in the Bitcoin and wider crypto ecosystem.”
Firstly, the emergence of US-based spot bitcoin exchange-traded funds (ETFs) has been extremely successful “in amplifying BTC’s demand and furthering its reach. These funds have attracted over $11.9 billion of net inflow since launching in January 2024 – a remarkable achievement, marking the most successful ETF launch in history.”
Secondly, the Bitcoin network has recently seen “a boom in layer-2 (L2) and decentralized finance (DeFi) activity, largely fueled by the popularity of the Ordinals protocol and Bitcoin inscriptions. Given Bitcoin’s limited functionality beyond a store of value, one of its most persistent challenges has been scalability.”
In addition to these positive developments, what many casual observers of the crypto space do not realize or fully grasp is that Bitcoin, the flagship cryptocurrency, is no longer merely just a simple “pet rock.”
In a separate update, CertiK examines Bitcoin’s innovation “awakening.”
A Pet Rock No Longer: Bitcoin’s Innovation Awakening provides “a comprehensive overview of the Bitcoin ecosystem’s evolution over the last year, focusing on several key developments.”
CertiK has looked into the rise of Ordinals and Inscriptions “following the SegWit and Taproot upgrades, highlighting their impact on the Bitcoin network and the creation of non-fungible tokens (NFTs).”
CertiK cover the introduction and “implications of the BRC-20 token standard, which was inspired by Ethereum’s ERC-20 and aims to provide a framework for fungible tokens within the Bitcoin ecosystem.”
The emergence of BRC-20 has led “to rapid market growth but also issues like network congestion and security vulnerabilities.”
CertiK further explore the development of Bitcoin’s DeFi sector, “including trading platforms, lending protocols, and other financial instruments emerging within the Bitcoin ecosystem.”
New tools and protocols like Multibit and DeepLake that aim “to improve Bitcoin’s utility and efficiency” could have profound positive impacts on the industry as well.
The report from CertiK outlines expectations “for Bitcoin’s short-term, mid-term, and long-term future, particularly focusing on the development of Layer 2 solutions, sidechains, a Bitcoin Virtual Machine (BVM), and Bitcoin smart contracts.”
CertiK comments on the importance of new protocols “such as Atomicals ARC-20 and Runes, including their technological underpinnings and differences from BRC-20.”
The report also addresses the challenges facing the Bitcoin ecosystem, “such as security risks, network congestion, and scalability issues.”
Along with this Bitcoin market developments, the broader crypto market maintained its bullish momentum (although it has pulled back from a BTC price of over $73,000 to around $68,000 at the time of writing), with the total market capitalization of cryptocurrencies surging by an impressive 10.8% over the week.
The bitcoin dominance continued to hover around 52%. This is notable considering that this level of BTC domination has been maintained since the historic bull run of 2017.
Among blue chips in the crypto space, the team at Talos notes in their report that Bitcoin printed fresh highs posting an impressive 10.6% weekly gain, while Ethereum (ETH)’s performance was “more subdued, recording a modest 4.9% weekly gain.”
As stated in the update from Talos, US-listed Bitcoin spot ETFs continue “to attract substantial investor interest,” with this past Tuesday witnessing “a record-breaking daily inflow exceeding $1 billion. Since their inception on January 11th, 2024, total net inflows have surpassed $11.8 billion, with BlackRock leading the pack by a significant margin.”
Recent reports indicate that “the total assets under management (AUM) of the BTC ETF universe are nearing $60 billion, while their Gold counterparts hover around $98 billion.”
The Talos report also mentioned that this “places the former just approximately 58% shy of Gold’s AUM, a remarkable achievement in just a couple of months since these investment products entered the market.”
Eric Balchunas, an ETF specialist at Bloomberg Intelligence, is optimistic on the question of survival on any of the 10 BTC ETFs.
According to his post, even the lowest-ranked Bitcoin ETF “in terms of AUM, WisdomTree’s BTCW, manages a healthy $74 million, positioning it among the top 15% of the 108 ETFs launched in 2024.”
GBTC remains the largest among the ETFs “in terms of AUM.”
However, it has also experienced “significant daily outflows, largely attributed to bankruptcy liquidations and concerns about its relatively high cost compared to peers. As of the end of 13th March since January 2024, GBTC has experienced capital outflows exceeding $11.4 billion, while the other 9 ETFs have seen total net inflows surpassing $23 billion.”
In response to these challenges, Grayscale plans to “introduce a low-fee version of the ETF, seeking approval from the U.S. Securities and Exchange Commission (SEC) to spin out a percentage of GBTC shares to seed the new product, according to a recent filing.”
If approved, the new product, the Grayscale Bitcoin Mini Trust, would am to “offer existing GBTC investors lower total blended fees without requiring them to pay capital gains tax to transition into the new fund.”
Capital gains realization has been “a concern for GBTC shareholders due to the existing product’s high fees compared to competitors.”
While the specific fees for the Grayscale Bitcoin Mini Trust are “not yet disclosed,” a report said that Grayscale indicated that they will “be competitive with some of the low-cost bitcoin ETFs in the market.”