Beware the predictive power of Bitcoin halvings

a year ago

The fourth Bitcoin halving will occur in April 2024

Previous halvings have preceded sharp price rises

There are other factors at play, however, meaning caution should be taken when assuming that halvings for predictive power

Before we get to the heart of this piece, let us present a chart. It shows the Nasdaq Composite, the tech-heavy American stock index. Marked on the chart are three as-yet-unnamed events. What do you notice?

These events seem to all be followed by positive periods of expansion. They are, if you have not deduced by the title of this piece, the three Bitcoin halvings that have occurred to date.

You may sense where we are going with this, but it is surprising how often the timing of these halvings within a macro context is overlooked within the crypto space. Halvings mark the dates at which the block subsidy reward on the Bitcoin blockchain is halved, and occur every four years. In other words, the new issuance of Bitcoins – released to miners as they work to validate new transactions – is cut by 50% every four years.

This supply cut phenomenon is central to the underlying concept of Bitcoin, a hard-capped currency with a pre-determined supply schedule, immune to the whims of money printers and an elastic supply. It follows that many point towards this draining supply as an inevitable boost to the price.

This is a fascinating relationship with regard to the long term performance of Bitcoin, but there is also an intriguing subplot to follow in the short-term: are these halvings priced in?

Because they happen in advance, the argument that they should be priced in is an easy one to make, and essentially draws upon one of the most famous mantras in finance: the efficient markets hypothesis (EMH).

And yet, the stellar performance of Bitcoin following previous halvenings leads some to swear that halvenings undoubtedly pump the price in. We will not go into that side of the argument here (on a high level, it is a complex relationship between miners and price moving towards the cost of production and is not necessarily as easy as just preaching the EMH).

For now, we will play devil’s advocate and point out reasons why one should be careful regarding the assumption that Bitcoin will inevitably spike next year, given the next halving is slated for April 2024.

The above chart clearly shows that halvings to date have preceded boisterous performance for Bitcoin. But remember our chart from the top of the piece? The Nasdaq has also accelerated strongly following previous halvings.

Do Bitcoin halvings push Nasdaq’s price up? Obviously not. The fact is that the halvings to date have lined up extremely well with global liquidity cycles, meaning that macro conditions have been soft and risk assets have taken advantage.

Besides, our sample size is literally three here, far too small to draw any concrete conclusions from. Not to mention the first halving was in 2012, when Bitcoin was unknown to everyone outside of a very niche Internet community. Even in 2016, the asset had far less liquidity than today (even after the recent dip). Finally, the 2020 halving coincided with a one-in-a-generation pandemic and an explosion of expansionary monetary policy. Obviously, there were factors beyond the halving that were pushing Bitcoin up.

What happens at the next Bitcoin halving?

This is not to say that Bitcoin will not jump post-halving next year. Indeed, when looking at the expectations of the market around the future path of interest rate hikes, we could well get the next halving again dovetailing neatly with global liquidity expansion.

Additionally, as caveated earlier, the halving may not be priced in. We are not affirming it is not, we are merely preaching caution in the wake of a very small sample size and a near-perfect match with global liquidity.

As also mentioned earlier, we will follow on with an in-depth piece around the economic argument that the halvings may actually not be priced in (spoiler alert: it may not even violate the EMH to say it is not priced in, as paradoxical as that may sound). But for now, this is just a warning: the halving is intriguing to all involved in the crypto market, but a blind assumption that it will act as a stout push factor for the Bitcoin price simply based off what has happened in the past could be a mistake.

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