The Impact of Bitcoin Halving: What Makes This Time Different

Key Takeaways

• Bitcoin’s fourth halving event is expected to take place later this month.
• Spot bitcoin ETFs have fundamentally changed the market dynamics and could alter the supply and demand dynamics of the upcoming halving event.
• There are fewer bitcoins available to trade compared to prior halving cycles.
• Uncertainty around a rate cut by the Federal Reserve adds another layer of complexity to the upcoming halving event.

Bitcoin halving, an event that occurs roughly every four years, is expected to take place later this month. This event, which cuts the rate at which new bitcoins are generated by the network in half, has historically had significant implications for the cryptocurrency market. However, this time around, there are several factors at play that could set this halving apart from previous occurrences.

Bitcoin Price Is Trading Differently Ahead Of The Halving

In the lead-up to previous halving events, bitcoin has typically experienced a surge in price following the reduction in the rate of issuance. This time, however, bitcoin reached a new all-time high before the halving event, marking a departure from past trends. Analysts caution against attributing too much significance to price movements around the halving without considering broader market conditions.

Market conditions, such as uncertainties surrounding geopolitical events or economic trends, have historically influenced bitcoin’s performance around halving events. For example, the growth before previous halvings was influenced by factors such as Brexit and the ICO boom during the pandemic era.

Spot Bitcoin ETFs Have Turbocharged Demand

The introduction of spot bitcoin exchange-traded funds (ETFs) has fundamentally changed the market dynamics for bitcoin. These products, which began trading earlier this year, have seen significant inflows that have driven up demand and subsequently the price of bitcoin. The approval of bitcoin ETFs in the U.S. could significantly impact the supply and demand dynamics of bitcoin.

In a hypothetical scenario where only newly minted bitcoin were available for trading, the influx of funds into ETFs could drive the equilibrium price of bitcoin higher. This influx of funds far exceeds the daily new units of generated BTC, indicating strong demand for the cryptocurrency.

Fewer Bitcoins Available To Trade

One notable difference in this halving cycle is the declining availability of bitcoins for trading. The difference between circulating and illiquid supply has been decreasing since early 2020, indicating a shift from previous cycles. This trend suggests that investors are holding onto their bitcoins for the long term, reducing the supply available for trading.

Miners, who typically sell bitcoin ahead of halving events to cover operational expenses, have been holding onto their reserves due to the recent rally in bitcoin prices. This behavior has further reduced the available supply of bitcoins for trading.

Uncertainty Around The Fed’s Move On Rates

Another factor to consider during this halving event is the uncertainty surrounding the Federal Reserve’s potential rate cuts. The contrast between bitcoin’s predictable issuance rate and the uncertainties around monetary policy decisions adds another layer of complexity to the market. Central banks globally have begun shifting their monetary policy stance, which could impact investor sentiment towards alternative assets like cryptocurrencies.

The eagerness of major central banks to reduce interest rates despite strong economic growth has led to increased market inflation expectations. This risk of higher inflation may be driving demand for alternative stores of value like physical gold and bitcoin.

Overall, the upcoming bitcoin halving event is poised to be different from previous occurrences due to a confluence of factors such as spot bitcoin ETFs, declining availability of bitcoins for trading, and uncertainties surrounding central bank policies. Investors should closely monitor these developments to navigate the evolving cryptocurrency market.

Read the original article on Investopedia.