Market Byte: Counting Down to 2024 – Exploring Bitcoin Halvings
Michael Zhao
Last Updated: 5/24/2023 | 13 min. read
Amidst the rapidly evolving world of cryptocurrencies, Bitcoin remains the trailblazer, capturing the imagination of investors, technologists, and the general public since its inception in 2009. With its finite supply capped at 21 million coins and a unique process known as “halving” governing its supply dynamics, Bitcoin has distinguished itself from traditional fiat currencies by mimicking the deflationary nature of rare commodities. Looking ahead to the next halving, which is expected to occur a year from now in May 2024, this piece will delve into the impact halvings have on the ecosystem, and why they are crucial to understanding Bitcoin’s long-term prospects. Further, the potential influences on Bitcoin’s price changes around halving events, such as the stock-to-flow model, miner selling pressure, and prevailing macroeconomic factors will be examined.
Halvings and Historical Price Action
Source: https://www.researchgate.net/figure/bitcoin-inflation-vs-time_fig1_263617756, as of 5/11/23
The charts seem to agree: history shows us that Bitcoin’s price has consistently risen in the months following each historical halving event:
Past performance is not indicative of future results.
Source: CoinDesk, Coin Metrics. For illustrative purposes only.
This would seem to be incompatible with the idea of efficient markets1. Why wouldn’t market participants fully anticipate and price in such a well-telegraphed event? Multiple explanations for this behavior have been proposed.
One framework to understand how Bitcoin halvings could influence its price is the Stock-to-Flow (S2F) model. S2F is a tool for quantifying the “scarcity” of a particular resource, and has been extensively applied to commodities like gold and silver. Here’s how it works:
Stock: The “stock” in the Stock-to-Flow model refers to the total available supply of a commodity. For Bitcoin, this would be all the bitcoins that have been mined and are currently in circulation.
Flow: The “flow” is the amount of new supply added to the stock or supply over a given period of time. For Bitcoin, the flow is the number of new bitcoins being mined and released into circulation.
Stock-to-Flow Ratio: The S2F ratio is calculated by dividing the stock by the flow. This gives a measure of scarcity; the higher the S2F ratio, the more scarce the resource is. For example, gold has a high S2F ratio because its supply (stock) is large and it’s mined (flow) at a relatively slow rate.
In the context of Bitcoin, the S2F model becomes particularly interesting due to Bitcoin’s halving events. Each time, the reward for mining a new block of bitcoins is halved. This effectively cuts the “flow” of new bitcoins in half, which, all else being equal, would double the S2F ratio and increase Bitcoin’s scarcity.
Past performance is not indicative of future results.
Source: Glassnode, as of 5/15/23
The Stock-to-Flow model offers a straightforward and quantifiable way to assess Bitcoin’s scarcity. By accounting for the number of bitcoins currently available and the rate at which new ones are created, it presents a clear picture of how “scarce” Bitcoin is at any given time. Historical data appears to validate the model, as there has been a general correlation between Bitcoin’s price and the S2F model. As the ratio increases, typically indicating increased scarcity, the price has tended to rise.
While the Stock-to-Flow model provides an intriguing perspective, it has several limitations. First, it makes a simplifying assumption that scarcity is the primary determinant of Bitcoin’s price. This might not always hold true as numerous other factors also influence the price – like demand, market sentiment, technological advancements, and broader economic conditions. Another potential pitfall of the S2F model is its reliance on Bitcoin’s relatively short history. Bitcoin has only experienced a few halving events, which means the model is extrapolating based on a small dataset; the correlation observed between the S2F ratio and Bitcoin’s price might not necessarily persist into the future. Finally, the biggest issue with the S2F model is that it presupposes that the market is fully aware of, and responds to changes in Bitcoin’s scarcity. Yet, the issuance of Bitcoin is already known since inception; logically, it doesn’t make sense that price follows scarcity if the scarcity is already known in advance.
In essence, while the Stock-to-Flow model provides a useful perspective on Bitcoin’s scarcity, it should not be used in isolation. It’s a tool among many, and investors should always consider a broad range of models when attempting to predict Bitcoin’s price.
A Miner’s Perspective
One theory that presumes decreased rewards are bullish for Bitcoin revolves around the idea that there is less sell pressure after a halving event. Because miners need to cover operating costs, they are forced to sell a certain amount of their mined rewards a day. This leads to constant potential daily sell pressure that needs to get absorbed into the market. However, with a halving event, there is less bitcoin to sell, because less bitcoin is mined. How does this theory hold up in reality?
We ran a regression analysis using on-chain and market data to determine the impact of miner selling on the price (Figure 3). At a high level, we used price percentage change as the dependent variable, and miner bitcoin selling activity relative to bitcoin spot volume, to see if there was a relationship between how much the miners sold versus the price change.
Figure 3: Miner Sell Pressure Impact on Bitcoin Price
Past performance is not indicative of future results.
Source: Grayscale Research, Coin Metrics (trusted exchange volume data), Glassnode (miner supply data), data from 1/1/2016 – 5/1/2023
Interestingly, historical data from January 1st 2016 to May 1st 2023, as shown in Figure 3, suggests that even when the amount of Bitcoin sold by miners exceeds 1% of the total spot volume of that day, we don’t see a statistically significant impact on price. These findings challenge the existing paradigm, suggesting that the impact of halvings on the price of Bitcoin through miner sell pressure may have been overstated in the past.
What about the macroeconomic factors that surround the halving? While Bitcoin’s internal dynamics are important, we must also consider the broader economic context. Macroeconomic factors, including global economic volatility and shifts in monetary policy, can exert significant influence on Bitcoin’s price. Let’s dive into each one.
Figure 4: Bitcoin Price Returns After Halvings
Source: Grayscale Research, Coin Metrics
Past performance is not indicative of future results.
The Y-axis percent returns scales differ for each graph to accommodate the range of values being represented during each halving. You should refer to each respective axis label when reviewing the graphs.
A macro analysis of the three Bitcoin halvings in 2012, 2016, and 2020 reveals the complex interplay between Bitcoin’s programmed scarcity and the broader macroeconomic environment. Each halving was accompanied by distinct global economic circumstances that influenced Bitcoin’s price trajectory. Despite these varying contexts, a common theme emerges: heightened economic uncertainty seems to coincide with increased interest in Bitcoin, potentially amplifying the price effects of the halvings. However, it’s also evident that the relationship between macroeconomic conditions and Bitcoin price is multifaceted and can be influenced by a multitude of factors beyond the halving itself.
While it may be tempting to view Bitcoin’s halvings as a catalyst for price appreciation, our exploration throughout this piece suggests that the truth is far more nuanced. Bitcoin’s price has historically followed an upward trajectory surrounding each halving event, but attributing these price increases solely to the halving oversimplifies the complex dynamics at play.
In essence, while the halving event is certainly significant, it’s not the only piece of the puzzle. It serves as a predictable, scheduled event within the Bitcoin ecosystem, around which a multitude of unpredictable factors swirl. Understanding these drivers can equip us with a more comprehensive perspective, fostering informed decision-making within the world of Bitcoin.
Important Information
The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein.
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1. The Efficient Market Hypothesis (EMH) suggests that financial markets are efficient and quickly incorporate all available information, making it difficult to consistently outperform the market. It comes in different forms, but at its core, the EMH states that it is nearly impossible to consistently achieve above-average returns by exploiting market inefficiencies.
2. The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities (BC_5YEAR) and 5-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_5YEAR) shown on the FRED website. The latest value implies what market participants expect inflation to be in the next 5 years, on average.
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