The Bitcoin halving is the most popular topic in cryptocurrency these days. With less than 4 days until halving, many have no idea how prices will react. We take a look at the past and the present to address potential price action.
Most people that recently entered the Bitcoin space have no idea what the halving is all about. Consequently, most resources trying to explain the topic are getting super technical which makes it even more confusing.
In simplest form, the Bitcoin “halving” is an event that occurs about every 4 years. Since Bitcoin is still relatively young in age, it’s only experienced two other halvings ( 2012 and 2016 ). The reason so many people are bullish on the “halvings” is because it’s supposed to essentially make Bitcoin more “valuable.”
This theory is based off the fact that the halving:
Reduces the number of Bitcoin entering circulation: There will only be 21 million Bitcoin ever available ( total supply). Right now, of that 21 million, about 18.36 million has already been mined ( in circulation ). Under the current mining infrastructure, the network pays out about 12.5 Bitcoin every 10 minutes in “block rewards.” This is how more Bitcoin enters circulation on a daily basis. When halvings occur, these metrics get slashed to control inflation levels. Upon the next halving, only 6.25 Bitcoin will be entering circulation every 10 minutes. With this being said, the annual inflation of Bitcoin will soon be 1.8%. Right now the annual inflation of Bitcoin hovers around 3.65%.
Inflation Levels - Outside of Bitcoin markets, the global economy experiences much higher annual inflation. According to Statista, global inflation is expected to hit 3.56% this year. Bitcoins current inflation level was in line with the global economy, but it will soon be much lower than global annual inflation levels.
The Financial Impact
Bitcoins financial infrastructure is something the world has never seen before. In traditional assets, supply levels can be manipulated. Take stocks for example. Company executives have the ability to enable reverse or forward splits, which ultimately alter supply levels. On the monetary side, we’ve seen the Federal Reserve inject trillions of dollars to keep the economy afloat. The problem here is that the Federal Reserve has had to drive interest rates extremely low to support their agenda. As interest rates approach negative territories, evolving assets like Bitcoin are gaining traction. Treasury rates recently hit all time lows as investors flocked to “safe haven assets” to protect against monetary and economic uncertainties. With this being said, investors now enter an era where they start to look for alternative assets that can aid in wealth generation. As described above, the Bitcoin halvings create a much different environment.
Bitcoin supply levels can never be manipulated, and halvings are enacted to reduce inflation. The halvings create a value driver in that less Bitcoin is available to purchase when miners have less to sell. It creates a natural supply vs demand environment that we haven't seen in decades. As many countries continue to experience double digit inflation levels, Bitcoin becomes a viable monetary solution.
Bitcoin Price Performance During Halvings
We take a look at how Bitcoins price reacted to previous halving events
- November 2012 - Right when the 1st Bitcoin halving occurred. Post halving, Bitcoins price increased from $11 to $1,000 a year after the halving ( +8,990% )
- July 2016 - Right when the 2nd Bitcoin halving occurred. Post halving, Bitcoins price increased from $700 to nearly $20,000 by 2017 ( + 2,757% )
What’s Different This Time?
As outlined in previous reports, Bitcoins price has matured to a point where it’s starting to follow traditional markets more heavily. The liquidity crisis that the economy recently encountered is something Bitcoin never went through. With Bitcoin being a liquid market, it experienced a sharp sell-off as investors went risk-off into cash. Other liquid markets like Gold even encountered sell-offs in this environment. Coronavirus and macro uncertainties have caused Bitcoins correlation metrics to skyrocket. If we look at the data below, you will see that in a 2 year time frame, Bitcoin had a 0.15 correlation to the S&P 500 which is fairly low.
If we flip the switch to the last 90 days, we can see that correlation has surged sitting at 0.50. If we were to go farther back than just 2 years, we could see that Bitcoin was much less correlated to traditional markets. The increased correlation is a risk Bitcoin faces right now even after the halving event this month. The fact of the matter is that during financial turmoil, Bitcoins become more correlated to traditional markets.
What Could Change - Inflationary Pressures
Despite Bitcoin correlation being a concern, this could very well evaporate. As discussed above, Bitcoins inflation rate will be substantially lower than the global economy. This could make the attractiveness surge in the financial environment we face today. Aside from the United States, many other countries got hit substantially harder financially. As these economies move forward, there will definitely be inflationary risks that occur. Take the United States for example. They’ve injected trillions of dollars during Coronavirus to hopefully stimulate the economy. This mechanism is typically called “demand pull inflation.” Historically speaking, inflationary issues have surfaced from central banks that have rapidly increased the supply of money. In addition, when the money supply expands, it can also lower the value of the dollar.
Take Venezuela for example. Between 2013 and 2019, the government created all sorts of inflation by printing more cash. The result was “hyperinflation” which essentially resulted in their currency becoming worthless. People then began to use eggs as a financial currency.
Bitcoin Technical Analysis
With the macro events in place right now, we see more importance focusing on short term trends opposed to guessing the halving results. With the previous halvings occurring in a traditional bull market, there’s just too many uncertainties that exist right now since we could be on the cusp of a recession.
As discussed in a recent report, Bitcoins price is passing a major milestone. With BTC outperforming during a global pandemic, this could also be a catalyst that pushes the price into bull zones post halving. Bitcoins price has rose +24% year to date and +56% the last 52 weeks.
Bitcoin halving sentiment should be explained in short-term price action this week.
Bitcoins price has built solid support at $8,000 levels. This will be a crucial area to hold post halving. In the short-term, you could see that bullish momentum forming from the halving if Bitcoins price can surge and hold $9,100 levels. If this can be accomplished, you could see the bull run testing $10,500 in the short-term. On the flip side, if the halving fails to create that momentum that many are looking for, watch out for the $8,000 rejection which could send it to $7,200 levels in the short-term.
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