The upcoming Bitcoin halving is expected to make a significant impact on cryptocurrency trading markets while a maturing digital assets ecosystem sees Ethereum (ETH) facing considerable competition from other smart contract platforms.
A lot has changed since the BTC halving of 2020. In an environment of macro-economic uncertainty, with significant inflation and looming federal funds rate cuts, ripple effects of the planned US election cycle, overall geopolitical tensions, and rising debt levels, one event stands out as a “beacon of certainty” — Bitcoin’s 4th halving, the team at Coin Metrics notes.
With its first block (genesis block) mined back in 2009, Bitcoin came into existence as a digitally scarce, decentralized virtual currency with a fixed / pre-determined monetary policy, predictable inflation rate, and a fixed supply of 21M BTC, the Coin Metrics report states.
This week, the Bitcoin network is expected to undergo the fourth halving 15-years into the flagship cryptocurrency’s existence—an event fundamental to its economic policy as well as unique value proposition on the global stage, the Coin Metrics report adds.
The Coin Metrics State of the Network examines the significance of the halving, its overall impact on key stakeholders in the ecosystem as well as any potential effects on the BTC price as the 4th Bitcoin halving approaches.
As explained in the research report, each halving event is a key moment in Bitcoin’s lifecycle, as it directly affects its issuance and inflation rate, effectively cutting down on block rewards (newly issued BTC that incentivize crypto miners to generate blocks, keeping the network secure) and possibly sending shocks to the market value of BTC because of its increased scarcity.
As suggested by its name, a “halving” is a term used to refer to the reduction of BTC issuance by 50%, thus effectively halving Bitcoins inflation rate— which is the rate at which new bitcoins enter the market, the Coin Metrics report explains.
It adds that with this halving, Bitcoins issuance will decline from 900 BTC per day (1.8% issuance rate) to 450 BTC per day (0.9% issuance rate).
As a result, the rewards crypto miners get for validating new blocks and securing the network (excluding fees) are reduced in half, thus directly impacting their incentives and profitability.
The report further explains that halving is programmed to take place every 210,000 blocks, which is approximately every 4 years, and it is “immutable”—the rules governing this process are “etched into the very code” that underpins the Bitcoin network.
The report adds that since Bitcoin’s inception in 2009, the network has undergone three halving events, each reducing the block reward for cryptocurrency miners in half.
The research report from Coin Metrics points out that the first halving back in November 2012 lowered the reward from (50 BTC to 25 BTC), followed by the second in July 2016 (25 BTC to 12.5 BTC), and the most recent in May 2020 (12.5 BTC to 6.25 BTC).
The research report also notes that the upcoming halving is estimated to take place on April 20, 2024 at block 840,000 and will slash the block reward down to just 3.125 BTC.
But as Bitcoin progresses along this fixed / pre-determined schedule, with a decaying issuance rate and about 19.7M of the capped 21M supply currently mined, each incremental halving will have “a diminishing impact on overall supply,” the Coin Metrics report explains.
As a result, the significance of future halvings will “gradually wane” as Bitcoin approaches its finite supply, the report adds.
It’s worth noting that crypto miners serve an important role in the Bitcoin ecosystem, acting as “the backbone for the security and integrity of the blockchain,” the report explains.
The Coin Metrics team also mentions that miners use computational power from specialized hardware to hash transaction data, “seeking a nonce—the solution to a hash function—that when found, validates a new block and adds it to the Bitcoin blockchain.”
In exchange for the computational work, BTC miners are given with a block reward (block subsidy) consisting of “a predetermined amount of newly minted bitcoins and transaction fees from transactions included in a block.”
The report further notes that block subsidy forms the “primary economic incentive” for miners.
But with this reward being cut by 50% from 6.25 BTC to 3.125 BTC, miners will be “stress-tested” as a “substantial source of income diminishes.”
Consequently, transaction fees are “expected to play an increasingly important role for miner revenue, along with the appreciation of BTC’s value amid greater demand,” the report explains.
It adds that since the 3rd halving, Bitcoin revenue from block subsidy “climbed to $43B, 180% higher than the prior halving in 2016.”
Although transaction fees presently account for a relatively smaller portion of the overall miner revenue, they are growing in significance with each halving, with fees “bringing in a total of $2.5B—doubling from the prior halving,” the report reveals.
And total BTC mining revenue continues to reach new heights, with block rewards “bringing in more than $76M in a single day on March 11th, a new all-time high.”
While the block subsidy will decrease in BTC terms, appreciation of BTC’s market value “has offset this decline, leading to greater USD-denominated revenue for miners.”
The report points out that with BTC showing strength towards the start of this year, miners will “hope for this trend to sustain post-halving.”
In addition to this, Ordinals, which enable the inscription of data like images, video and text into non-fungible tokens, have also “boosted transaction fees for miners.”
The Coin Metrics team also notes that in Q1 2024, miners have reportedly “earned an average of $3M daily in transaction fees, well-above historical norms.”
Notably, in May and December 2023, revenue from fees surged to $17M and $24M respectively, “representing close to 40% of total miner revenue from fees on those days.”
With the upcoming launch of “Runes” — fungible tokens on the Bitcoin network— alongside the halving, miners may see further increases in transaction-fee based income, “potentially counteracting the impacts of a declining block subsidy.”
The report adds that bitcoin mining profitability is said to be “intricately linked to the efficiency of the mining hardware used, as well as the cost of electricity needed to power it.”
Newer ASIC models, such as the Antminer S19 and S19 XP are profitable “at any electricity cost below $0.13/kWh and $0.20/kWh compared to older models like the S9 and S17.”
The Coin Metrics report explains that this is because technological advancements in ASIC design “have led to more energy-efficient miners, allowing for profitable mining operations at higher electricity rates.”
But this metric is set “to get cut in half, making these models unprofitable even at $0.08/kWh, the average industrial rate in the United States.”
As the 4th Bitcoin halving nears, miners with access to the most efficient hardware and cheapest electricity “will be better positioned to withstand the reduction in block rewards.”
As a result, crypto mining firms have been employing strategies such as partnering “with renewable energy providers, locating operations near cheaper and sustainable energy sources, implementing advanced cooling techniques and harnessing stranded energy to enhance sustainability and profitability.”
The report further reveals that those “burdened with older, less efficient hardware will find it increasingly challenging to maintain profitable operations, potentially leading to a consolidation of mining power among the most efficient operators and a gradual phasing-out of less efficient ASICs from the network.”
The update from Coin Metrics adds that this, in turn, could impact hash rate— which is “a measure of computational resources being allocated to mining.”
Bitcoin’s hash rate has reportedly “grown to 605 EH/s in the run up to this halving. However, post halving, there is typically a temporary decline in hash-rate as less efficient hardware goes offline.”
In order to maintain the target block time of 10 minutes, a drop in hash rate “may be met with a downward adjustment in Bitcoins difficulty, easing the hashing process under changed conditions.”
Although the halving is a supply-side event, the diminishing impact of issuance would “suggest that demand plays a crucial role in driving the market value of an asset with an inelastic supply like bitcoin.”
The launch of spot BTC ETFs in January has “catalyzed a substantial source of new demand, altering Bitcoins market dynamics when compared to prior halving cycles.”
Sustained inflows into US based and recently approved Hong Kong BTC exchange-traded products, “alongside other sources of demand from funds to public company balance sheet holdings and smart-contracts, will help absorb pressure from forced selling and newly issued supply more effectively.”
As with every halving, a central question on everyone’s mind is: how will the halving “impact bitcoin’s price?”
Although we can extrapolate insights from performance during past halving cycles, they may “not directly indicate future outcomes.”
Given then we’ve had only three prior halvings under varying market conditions and different investor profiles, “predicting whether the halving is priced in can be misleading despite it being an event known well in advance,” the report adds.
Bitcoin’s price tends to “move in four-year cycles.”
If we look back to each halving epoch, Bitcoin price has appreciated substantially in the year “following each halving event.”
Before the 1st halving in 2012, bitcoin returned over 14,000%.
After the 1st and 2nd halving, BTC’s price increased by over 5100% and 1200%, respectively, “eventually reaching an all-time high approximately 500 days into the halving.”
In the current epoch leading up to the 4th halving, we’ve seen an appreciation “of 664% as of April 15th, with BTC reaching an all-time high of $73K before a halving for the first time.”
The role of ETF-induced demand and subsequent attention has resulted in “a slightly different dynamic and promises to play an outsized role going forward.”
Several other factors could also “provide a boost to the demand side of the equation, such as broader macroeconomic and liquidity shifts, regulatory changes, growth in global digital asset adoption, and speculation, which could all influence BTC’s price trajectory.”
The historical drawdowns illustrate “the resilience in Bitcoin’s price trajectory.”
Despite consistently retracing over 70% away from all-time highs during halving cycles, the price has “rebounded and established new highs toward the beginning of every cycle.”
The report continues to note that as the 4th halving approaches—even though BTC was able “to reach ATHs even before the halving is triggered—it is important to factor in price volatility, which could arise as a result of external conditions or increased attention and speculation around the halving itself.”
The Bitcoin halving exemplifies “a predictable monetary rhythm amid uncertain financial conditions.”
Bitcoin’s inherent scarcity and deflationary nature make it a unique asset “across various economic cycles. While the reduction in block rewards will strain miners, it will drive them towards more efficient and sustainable operations.”
The convergence of this supply side event and strong drivers of demand suggest that Bitcoin is “poised for its next phase of growth.”
With no shortage of innovation on Bitcoin—such as the upcoming Runes and Bitcoin L2s, boosting transaction fees and scalability, Bitcoin is “well-positioned for its next epoch,” the Coin Metrics report notes.
In another update covering the upcoming BTC halving, it is noted that this event is important for investors.
Historically, halvings have been crucial moments for bitcoin appreciation, the Bitso report adds while noting that after all the previous events, cryptocurrency prices “have increased significantly 365 days after each halving: after the 2012 event it rose more than 8,000%, after 2016 more than 250% and in 2020 more than 500%.”
Although it is important to emphasize that past performance does not guarantee future performance, many investors see the event as an opportunity “to make profits, based on analysis of the asset’s historical behavior.”
According to Bitso’s report, there are several reasons why the halving is considered a “moment of optimism.”
As stated in the report, scarcity is a major factor in determining the value of any asset. With fewer new bitcoins entering circulation, those already in motion “become rarer and therefore more valuable.”
This aspect contributes to “the attractiveness of Bitcoin as an investment alternative.”
Bitcoin recently hit a new All Time High (ATH) of $73,600, nearly two and a half years after the peak of the last bull market. This is due to “a combination of factors,” the report claims.
Among them are, in addition to the halving: the introduction of BTC ETFs by large traditional financial managers (which in turn increases demand) and institutional FOMO “with companies allocating a percentage of their resources in bitcoin, due to its attractive profitability in relation to risk.”
The report argues that this milestone is important “not only for Bitcoin but for the entire market.”
Generally, when Bitcoin experiences an increase in its value, it tends to have “a positive effect on all cryptos, as it stimulates interest and confidence in other crypto projects, pointing to a possible recovery or growth of the industry.”
According to Bitso’s report, this is because it is “the largest and most well-known cryptocurrency and its performance is often considered an indicator of the overall health of the sector.”
As investors await the next halving and watch the rise in bitcoin prices, companies in the sector are also preparing for a possible “crypto summer.”
Bitso, Latin America‘s crypto-powered financial services company, claims it is improving its tech infrastructure to handle high transaction volumes during these periods of “increased interest in the assets.”
With the Bitcoin halving rapidly approaching, CI has received comments regarding the upcoming milestone and what it could mean beyond market speculation and price watching.
Marcos Nunes, CEO of the decentralized payments network Gnosis Pay, says:
“It’s becoming increasingly clear that Bitcoin and digital assets offer more than simply ‘paying with crypto’ for users. Rather, these assets serve as a lifeline for millions across the globe who live in countries with economic turmoil and hyperinflation. Take Argentina, where inflation spiked at 200% at the beginning of this year, with subsequent stablecoin usage dominance in the region. More broadly, in Latin America, around 70% of the population is unbanked or underbanked, with more than a third opting to use stablecoins for daily purchases in recent years.”
Nunes adds:
“Beyond Bitcoin’s specific halving events, the broader trajectory of digital assets suggests a growing role in mainstream commerce and financial transactions. Traditional payment systems are awash with archaic technology and inefficiencies. Today’s iPhones are attempting to communicate with 1960s technology in what is essentially a patchwork network for payments, with implications for UX. In fact, Almost no one is happy with the US financial system —only 9% of Americans are satisfied with it.”
Nunes further notes:
“The Bitcoin halving holds the potential to significantly influence the development of cross-border payment solutions and remittance services utilising blockchain technology.”
Nunes also mentions:
“With the increasing digitization of economies worldwide, the importance of digital assets lies in providing payment optionality and seamless payment experiences, ultimately driving their integration into everyday financial activities.”
Many other Bitcoin and crypto industry participants have also shared informative insights on the upcoming BTC halving event. Although it is not possible to accurately predict the Bitcoin price post-halving or even make any specific assertions about the digital currency network’s key metrics after the halving event, we can gain meaningful insights from comments shared by industry veterans.
CoinShares notes in an extensive research report that traditional commodities production “is sensitive to price because there is significant elasticity in production capacities.”
By way of example, if commodity prices rise, production will increase “as previously unprofitable supply turns profitable and enters the market.”
The CoinShares report further explains that the increased supply then “puts downward pressure on price until a new balance is established.”
And the opposite will happen if the price falls.
The report points out that this is “not the case with regards to the production of bitcoins.”
The production rate of bitcoins “is pre-determined by the Bitcoin protocol and is almost entirely inelastic in response to changes in price. If the price of bitcoins increases, the mining difficulty will increase, and the production rate will not.”
And if the price falls, the difficulty of mining “will fall, and the same amount of coins will still be produced every day. It’s hard-wired into the code.”
The CoinShares report also mentioned that the “only elasticity of production is that which is caused by increases or decreases in hashrate in between difficulty adjustments.”
As stated in the report, these happen “every 2016 blocks or about every two weeks, so even the short-term effects of changes in hashrate are temporary.”
On longer time scales, the only available mechanism “to reduce the production rate of bitcoins is the halvings and their timings are pre-determined.”
So when the halvings occur, “the ongoing bitcoin production is cut in half from one block to another, and there is no way of increasing it ever again.”
From a supply/demand point of view “the effect should be fairly obvious.”
The report adds that every day, “a certain amount of new bitcoins is added to the market.”
Mining is highly competitive, and “on average, miners have to sell the lion’s share of their daily 1,800 BTC (or an average of $13.3m per day in 2019) production to cover costs, causing a persistent selling pressure in the market.”
Demand has to match or exceed “the ongoing flow of newly minted coins merely to keep prices stable.”
The CoinShares report adds that if we are “assuming current demand for coins is sufficient to keep prices stable, a 50% reduction in new coins coming to market should create upwards pressure on the bitcoin price.”
Something to consider in this context “are flows into passive bitcoin investment products.”
Over the last quarter, inflows into products like Grayscale’s Bitcoin Investment Trust and CoinShares ETPs have “averaged around 500 btc per day.”
The report also mentions that “at a daily average issuance of 1,800 coins, these inflows eat up less than 30% of new coins.”
After the halving, though, if flows “remain steady (let alone grow, as they have for the last 4 quarters in a row), inflows will consume almost 60% of newly issued coins.”
In another comprehensive report from Grayscale, it is noted that despite evidence of a strong economy, the Federal Reserve will likely stick with plans “to cut rates this year, because short-term interest rates are well above policymakers’ estimates of ‘neutral’.”
In Grayscale Research’s view, this macro backdrop—as well as favorable supply/demand technicals “due to the halving—could be consistent with further increases in Bitcoin’s price this year.”
There is an increasing conversation in crypto markets about Ethereum, which faces competition “from other smart contract platform blockchains, as well as a pending decision about spot ETF approval in the US market.”
Meanwhile, Bitcoin’s price has consolidated in “a relatively narrow range since reaching an all-time high on March 13.”
The report from Grayscale adds that although certain macro risks have increased, Grayscale Research sees “a glass half full, continuing to believe further increases in price are possible this year.”
Since Bitcoin’s high on March 13, 2024, changes in valuations for traditional assets “look consistent with a more positive outlook for global economic growth, as well as higher inflation risks.”
On a risk-adjusted basis (i.e., accounting for each asset’s volatility), gains have been “led by physical commodities, equity markets in Western Europe and Emerging Markets, as well as assets tied to US consumer price inflation.”
Perhaps reflecting rising medium-term inflation risks, long-maturity Treasury bonds “significantly underperformed.”
The Grayscale report adds that certain technology-oriented market segments (e.g., the Nasdaq 100, BioTech stocks, and recent IPOs) were flat or declined.
After outperforming most other assets since the start of the year, Bitcoin and especially Ether “underperformed on both an absolute and risk-adjusted basis.”
Lower odds of Fed rate cuts “have likely contributed to Bitcoin’s recent pullback.”
Since mid-March 2024, US economic indicators “have continued to surprise on the upside.”
For example, the March Employment Report, published Friday, April 5, 2024, “showed monthly job gains of about 300,000, rising labor force participation, and a higher average workweek.”
Evidence of a strong economy and moderately higher inflation readings have “resulted in reduced expectations for Fed rate cuts.
At one point in January 2024, markets had “priced as many as seven 25bp rate cuts this year.”
As of Monday, April 8, 2024, this had been “trimmed to just under three 25bp rate cuts.”
All else equal, rising short-term interest rates will “tend to support the value of the US Dollar and weigh on the value of Bitcoin.”
Nonetheless, the central case outlook “continues to be for lower short-term interest rates—both in the US and every other major market except Japan.”
As recently as its March 19-20 meeting, “a majority of Federal Reserve officials shared expectations to reduce rates three times this calendar year, despite forecasting stronger GDP growth and higher core inflation.”
Moreover, the Fed’s framework is “likely to continue to steer policy toward lower interest rates, even if near-term data continue to show strong nominal growth.”
According to their latest projections, Fed officials seem to believe “that short-term interest rates will be 2.5-3.0% in the longer-run, which can be interpreted as their estimate of the ‘neutral’ policy rate.”
Because current policy interest rates at 5.25-5.50% are well above their estimate of “neutral”, the central bank believes that monetary policy has “become unnecessarily tight now that inflation has moderated.”
Although there is debate about the level of neutral interest rates in policy circles, the Fed’s line of thinking “is likely to keep rate cuts on the table.”
In Grayscale’s view, Fed rate cuts in “the context of strong economic growth and above-target inflation should be considered positive for Bitcoin.”
In addition, Bitcoin’s supply/demand technicals “are likely to tighten as a result of the upcoming halving event (the Bitcoin halving will occur in block number 840,000; at the current rate of block production, this will likely occur in the early morning hours of April 20, US Eastern Time).”
At the halving, the rate of new Bitcoin issuance “will fall by half, from about 900 coins per day to about 450 coins per day, or by $31.5 million at an average Bitcoin price of $70k.”
Although net inflows into the US-listed spot Bitcoin ETFs “have slowed since February and March 2024, they have still averaged about $80mn per calendar day over the last two weeks.”
Taken together, a strong economy, “likely central bank rate cuts, and favorable supply/demand technicals should support Bitcoin’s price.”
After a period of consolidation in Bitcoin’s price, measures of active trader position (e.g. funding rates) now “appear more balanced, which also may indicate a favorable market outlook over the short-term.”
There is increasing conversation in crypto markets “over the outlook for Ethereum, the second largest blockchain network by market capitalization.”
Since the mid-March high for crypto markets, the Ethereum network’s Ether token (ETH) has “underperformed Bitcoin (BTC) by about six percentage points.”
Unlike Bitcoin, which dominates the Currencies Crypto Sector, ETH faces meaningful competition “within the Smart Contract Platforms Crypto Sector.”
And although the ETH ecosystem has seen a meaningful increase in active users this year, “the network’s modular architecture has meant that this has not translated into a commensurate increase in fee revenue because new activity is taking place primarily on Layer 2 chains and sidechains.”
ETH may also have been held back “by lower perceived odds of spot ETF approval.”
According to the decentralized prediction platform Polymarket, consensus expectations for spot ETH ETF approval “have fallen about 20% from around 80% in January.”
A decision by the SEC on approval or denial is “expected by late May 2024.”
Bigger picture, Grayscale Research remains optimistic about the outlook for Ethereum.
Token value accrual ultimately “derives from network adoption for sustainable (i.e., non-speculative) use cases.”
Compared to other smart contract platform blockchains, Ethereum continues “to boast the most users, developers, and applications.”
Ethereum should, therefore, be “well-placed to compete for users over time. That being said, there continue to be near-term risks to ETH valuation related to spot Ethereum ETF approval, and competition with the Smart Contract Platforms Crypto Sectors is likely to remain intense.”
For Ethereum to retain its leading position, its ecosystem will need to “remain the leading destination for the deployment and adoption of decentralized applications over time,” the Grayscale report concludes.