Bitcoin stands out as a decentralized and secure network that has gained prominence as a store of value in recent years, primarily due to the halving mechanism programmed into its code.

To thoroughly understand this process, it is useful to examine the concept of Bitcoin mining. Similar to gold miners who physically labor to extract gold from the earth, Bitcoin miners employ significant computational power to solve complex cryptographic puzzles necessary to validate a transaction block and generate new Bitcoins (BTC). This activity is incentivized by a well-defined reward system.

When Satoshi Nakamoto created Bitcoin in 2008, he established that the initial reward for mining a block was 50 BTC, worth about $5 at the time. This reward is automatically halved every 210,000 blocks, which occurs approximately every four years. This means that the number of Bitcoins issued per block is halved, as first evidenced in November 2012 when the reward dropped to 25 BTC (worth between $3,375 and $28,037 at the time). Subsequent halvings further reduced this figure to 12.5 BTC in 2016 and to 6.25 BTC in 2020.

Currently, with the Bitcoin price hovering around $70,000, the average cost of mining a single Bitcoin is estimated to be around $29,000, varying based on hardware capacity and other technical factors. The next reward reduction is scheduled for April 18, 2024, when the mining prize will drop to 3.125 BTC.

Beyond the economic aspects of mining, it is essential to reflect on the true purpose and value of Bitcoin, which is sometimes mistakenly labeled as a speculative bubble. The halving mechanism is designed to impose a maximum cap on the quantity of Bitcoins available, aiming to make it a scarce and valuable commodity, similar to gold. Thanks to the advanced technology it relies on, the demand for Bitcoin is tied to the growing need for an alternative and decentralized monetary system, and its value is significantly influenced by the progressive reduction of its supply.

This mechanism not only emphasizes the scarcity of Bitcoin but also contributes in a complex way to its market valuation.

How Does the Halving Work?

The Bitcoin halving mechanism, known as “halving,” is a fundamental feature of the Bitcoin network, programmed to cease the issuance of new coins around the year 2140, or as soon as nearly the twenty-one millionth BTC is mined. This process stipulates that the reward for each mined block is reduced to 1 satoshi in the final 210,000 blocks. The Bitcoin network’s programming enforces a rounding down to the nearest whole number, thus establishing the maximum limit of coins mined at 20,999,999.9769 BTC.

The competitiveness in the Bitcoin network constantly drives more nodes to actively participate in creating the next block. This financial system is primarily governed by three critical parameters:

• Hash Rate: Indicates the computational power employed by miners to process transactions and maintain the network’s security. A high hash rate means fiercer competition among miners but also ensures greater network security.
• Mining Difficulty: This metric refers to the complexity of the “puzzles” that miners must solve to generate a new block. The difficulty automatically adjusts based on miner participation, ensuring that the average block generation time remains about 10 minutes.
• Block Time: The average time required to create a new block on the blockchain.

The interaction between these parameters is crucial: an increase in hash rate speeds up block production beyond the target time of 10 minutes. Consequently, the network performs a “difficulty adjustment” every 2,016 blocks to increase the complexity of the puzzles and slow down the production of new blocks, realigning it with the desired block time. Similarly, a drop in hash rate will lead to a lowering of the difficulty.

The timing accuracy of halving events is not absolute, but predictability is still high. Our “Bitcoin: Halving Countdown and Analysis” dashboard offers estimates based on the average block time of the last 90 days; for further details, it is possible to scan the QR code at the end of the report.

After the last Bitcoin is mined, miners will continue to earn through two sources: block rewards and transaction fees from network users. Over time, although block rewards will decrease, fees will become the main form of income for miners, emerging as a vital tool for financial sustainability in the advanced phase of the Bitcoin network.

What Is the significance of Bitcoin Halving?

Having explored what Bitcoin halving is and its mechanisms, it is time to delve deeper into the reasons for its necessity. Historically, centralized control of the money supply has been the norm since the birth of central banks in the 17th century. In this report, we will examine the financial system of the United States as a reference model. The control of the money supply is managed through two main levers:

• The Federal Reserve (Fed) directs monetary policies using various tools, such as state securities trading to regulate the amount of money in circulation; imposing reserve requirements on banks to influence lending and the creation of new money; and manipulating interest rates.
• The issuance of new money is the task of the Bureau of Engraving and Printing (BEP), under the control of the Fed. This implies that the Fed can request the BEP to issue new money to meet needs, without time or quantitative constraints.

The consequences of inefficient money supply management include various negative effects of centralization. For example, the expansion of the Fed’s balance sheet has often been a prelude to inflation increases, as evidenced by the data. This phenomenon has led to situations of hyperinflation and currency devaluation in the past, as occurred in Germany in the 1920s and in Japan in the 1980s.

In 2008, the vision of Bitcoin emerged as a response to the failures of the traditional financial system. After the global financial crisis, characterized by a severe lack of transparency and accountability, Satoshi Nakamoto launched a new idea of a monetary system: a limited-number, programmed, and publicly traceable currency through a distributed ledger on thousands of nodes.

The comparison between the centralized model of the Fed and the decentralized model of Bitcoin highlights significant differences:

• Bitcoin’s monetary policies are managed through the verification of transactions by tens of thousands of nodes, operating globally and incessantly, with a transparent and open process accessible to all.
• The supply of Bitcoin is fixed at a maximum of 21 million BTC, which will be gradually distributed over approximately 130 years, similar to gold miners adding gold to the market by consuming resources.

The halving process is crucial as it highlights Bitcoin’s coded and immutable monetary policy, completely independent of any centralized control and unchanged regardless of economic conditions.

What Are the Consequences of Bitcoin’s Four-Year Halving Cycle?

After analyzing the halving mechanism and its reasons, let’s examine the historical effects, miner behavior, and market price repercussions.

Why Does the Halving Occur Every Four Years?
Although Satoshi Nakamoto’s motivations for establishing a four-year halving cycle are not entirely clear, this time interval coincides with significant events such as U.S. presidential elections, which generate economic uncertainty. This coincidence might be interpreted as an attempt to mitigate the instability of traditional financial systems that occurs during political transitions, especially considering the broad impact of U.S. fiscal policies on the global economy. Moreover, the four-year period may serve as a psychological reference point, akin to traditional economic cycles, elections, or significant sports events.

What Has Been the Impact of Halving on Bitcoin Prices in Previous Cycles?
Over time, the effect of halving on Bitcoin prices has gradually diminished, with each subsequent event producing increasingly smaller growth rates. For example, after the first halving, Bitcoin saw a 5,500% increase, followed by a 1,250% increase after the second, and about 700% in the current cycle. This more controlled growth over time indicates a maturation of the Bitcoin market, stabilizing similarly to traditional assets like gold. Exponential growth is often a symptom of speculation, while steady and sustained growth suggests greater stability and adoption. Nevertheless, external investments, such as those from ETFs, could define a new growth standard for this cycle, as demonstrated by Bitcoin’s exceptional performance, which surpassed its all-time high (ATH) before the halving. It is hypothesized that this phenomenon may originate from a supply shock, a concept that will be further explored later.

How Does the Halving Affect Miner Operations?
The halving significantly impacts miners by reducing block rewards, affecting profitability, and altering operating costs, all dependent on Bitcoin’s value at the time. If rewards decrease, an increase in Bitcoin’s price could offset the losses. Some miners, like Marathon and Core Scientific, have chosen to refinance to maintain the liquidity necessary to continue operations. Despite the challenges, the withdrawal of miners from the network causes mining difficulty to drop, reducing energy consumption and making mining more economically advantageous. This invites miners to re-enter the network, strengthening its hash rate. Conversely, some miners may be forced to sell their reserves, a topic that will be analyzed through the use of a proxy metric to evaluate their selling pressure.

What Do Miners Do in Anticipation of the Halving Event?
One of the main indicators of their interest is manifested through their deposit activities on exchange platforms. Typically, miners proceed to sell Bitcoin to cover operational costs, such as electricity bills and expenses related to purchasing and maintaining the necessary hardware.
During the current halving cycle, it has been observed that miners are selling a smaller quantity of Bitcoin compared to previous cycles. Specifically, in February 2024, the average of Bitcoin deposited on exchanges was 127 BTC, nearly a 70% reduction compared to the 417.4 BTC deposited in the February-March 2020 period.
It is essential to consider that miners must face their operational costs expressed in U.S. dollars. This leads them to leverage the high Bitcoin prices, driven by the increase in ETF investments, thereby improving the market reach and accessibility of the cryptocurrency.

The Halving Effect: The Compass of Bitcoin’s Four-Year Cycle
The halving represents the most anticipated event in the Bitcoin landscape. Scheduled for April 2024, the fourth halving will see the reward for block mining for miners drop from 6.25 to 3.125 BTC, thus halving the annualized inflation rate of Bitcoin from about 1.70% to about 0.85%. This change follows the programming of the asset towards the maximum limit of 21 million units. The supply shock caused by the halving, along with the narrative created around it, has historically favored a Bitcoin overperformance in the following 12 months. On average, it takes 172 days for Bitcoin to surpass its previous all-time high post-halving, and 308 days to reach a new cycle peak once the previous one has been surpassed. Currently, with Bitcoin trading near its historical high, the trend of this cycle may differ from previous ones, when the price was typically 40%-50% below the historical peak in the weeks leading up to the halving. Furthermore, in February, Bitcoin recorded the largest monthly growth ever seen in dollar terms, increasing by over $20,000 and demonstrating an unprecedented level of enthusiasm for the cryptocurrency even before the actual halving.

What’s New in This Bitcoin Halving Cycle?

On this occasion, Bitcoin appears to be on a novel path, characterized by an increase in institutional adoption and an expansion of practical applications. Let’s analyze the current situation of Bitcoin supply and demand to better clarify what the novelties are.

Analysis of Supply and Demand Dynamics and Their Impact
To understand the possible consequences of the upcoming Bitcoin halving, it is essential to analyze the current dynamics of supply and demand. There are several emerging factors that not only diverge from previous cycles but could also precipitate an early rally. Let’s explore some of these elements.

BTC Spot ETFs in the United States
The approval of Bitcoin spot ETFs represents a pivotal moment in the history of this cryptocurrency, paving the way for traditional investors towards this innovative asset class. The significance of the initial success of these ETFs is notable, given that the value of Bitcoin has increased by about 50% since its debut on the stock market. These ETFs have also recorded extraordinary trading volumes, indicating marked interest from the traditional investment sector, with a peak of over one billion dollars in inflows in a single day, precisely on March 13, 2024.
The success of BTC spot ETFs in the USA has reached unprecedented levels, with nine issuers (excluding Grayscale) accumulating about 30 billion dollars in assets under management in just two months of activity. Including all ten issuers, it is observed that they have obtained more than half the market share of gold ETFs, which is estimated to amount to 90 billion dollars.

From the Demand Side: Buying Pressures from ETFs

Recently, Bitcoin has recorded a steady growth that has led to significant interest in spot ETFs in the United States, with net inflows exceeding 10 billion dollars. This phenomenon has translated into an average inflow of about 2,500 BTC every two weeks, equivalent to about 150 million dollars, tripling the daily Bitcoin production of 900 units and anticipating an increase up to 5.5 times post-halving, when production will drop to 450 units per day.

ETFs currently own more than 400,000 BTC, a quantity that exceeds the 240% annual supply of Bitcoin post-April halving, which is about 164,000 units. The current demand has also absorbed about 4.5% of the available Bitcoin supply, a figure based on Glassnode estimates, which include highly liquid and liquid assets, in addition to the supply of short-term Bitcoin holders and exchange balances, totaling about 4.7 million BTC.

The value of the ETF market in the USA, which stands at 7 trillion dollars, quadruples that of the European market. Before the approval of the ETFs, 77% of asset managers were reluctant to invest in Bitcoin. Now, with Registered Investment Advisors in the USA managing about 114 trillion dollars and bound by a 90-day moratorium for post-launch investments of new products, even a small 1% allocation in Bitcoin could generate significant inflows, potentially doubling the current market capitalization of Bitcoin and causing a supply shortage.

We are observing the early stages of this trend with banking institutions such as Wells Fargo and Merrill Lynch starting to offer access to Bitcoin spot ETFs to selected wealth management clients. Morgan Stanley is also considering introducing Bitcoin funds on its brokerage platform. Cetera is among the first wealth managers to implement a formal policy on Bitcoin ETFs, thus signaling the start of a new wave of demand for this asset.

From the Supply Side: Increasingly Less Liquidity

The supply of long-term and short-term Bitcoin holders — investors who have maintained their Bitcoins for more than 155 days — is showing firm confidence and determination. The quantity of Bitcoin held by long-term holders (LTHs) reached a historical peak in December, touching 14.9 million BTC, before decreasing to the current 14.29 million BTC, representing almost 70% of the total supply.

Similarly to what happened in the 2017/18 and 2020/21 cycles, LTHs have gradually ceded their shares during the current cycle, stimulated by the significant approval of ETFs. Despite the supply in their possession decreasing by 4%, going from 14.9 million to 14.29 million BTC, the supply of short-term holders has grown by 33%, increasing from about 2.3 million to 3.07 million. This dynamic bears witness to a balance between the two categories of investors, typical of the onset of a bull market post-halving, which this time occurred prematurely due to external demand generated by the ETFs, creating an almost perfect balance of market forces.

This scenario aligns with the drop in BTC balance on exchanges, which has reached a five-year low, settling at 2.3 million, consolidating the hypothesis of an imminent supply crisis.

If the current trend continues, the supply side of Bitcoin will become progressively less liquid, predisposing the conditions for a marked reduction in available supply and the potential initiation of a parabolic price escalation.

On-Chain Dynamics in View of the Halving

Market Value to Realized Value Ratio (MVRV – Z-Score)
The MVRV Z-Score is an analytical tool for assessing Bitcoin’s price by comparing its current market capitalization to the realized value. The realized value represents the aggregated sum of the value of all BTCs, calculated on the price of the last transaction, thus serving as an indicator of the average acquisition price of BTCs in circulation. The Z-Score normalizes the MVRV metric, quantifying how many standard deviations the current MVRV is from the historical average. A significantly higher MVRV than the realized value may suggest an overvaluation of BTC, a signal that historically has coincided with market peaks, and vice versa. Currently, the MVRV Z-Score of BTC is approximately 3, in sharp contrast to the 6 recorded in February 2021. Despite this, compared to previous halving cycles, Bitcoin shows minor behavioral changes, as evidenced by the increase in its realized price, with an average of 2.4 in the last 30 days against 1.07 in the same period of the three past cycles. This suggests that investors have recently purchased BTC at higher prices, reflecting the last transaction price of Bitcoin. Although the MVRV is higher than the historical average, it indicates the possibility that we are at the dawn of a new bull market for Bitcoin, potentially triggered more by the approval of the ETFs than by the classic market euphoria linked to the halving.

Net Unrealized Profit and Loss (NUPL)
Analyzing the Net Unrealized Profit and Loss, or NUPL, we find parallel results. This indicator measures the profitability of Bitcoin holders by comparing the market value of their holdings with the original purchase price, functioning as an important barometer of market sentiment. With a value of 0 indicating complete capitulation and 1 indicating maximum euphoria, the current NUPL stands at 0.6, not reaching the greed levels of 0.7 observed during the growth period up to 60,000 dollars between February and March 2021. Comparing the current NUPL with those of the months preceding the three past halvings, an upward trend is observed, with a current 0.6 against the average of 0.42 of the previous cycles. This strengthens the hypothesis that capital inflows via ETFs are anticipating post-halving market activities, suggesting a possible moderate correction of BTC in the coming weeks, in line with historical precedents. The on-chain analysis also shows that this cycle might diverge slightly from the previous ones, suggesting a possible early inclination of the cycle itself.

The Halving Coincides with a Favorable Market Structure

In 2024, the “halving year,” we witness a convergence of favorable factors for Bitcoin, which together shape an interesting dynamics of supply and demand:

• Favorable Macroeconomic Environment: With the Federal Reserve having kept interest rates unchanged in the last two meetings, market expectations suggest a probability of about 39% of at least one rate cut by June 2024 and 51.9% by December 2024, according to data from the CME FedWatch Tool. This climate of uncertainty, compounded by contradictory economic data signaling persistent inflation, highlights the benefits of a stable and rigorous monetary policy. Confidence in such a policy is reinforced with each new halving.
• Increase in Purchases via ETFs: The approval of a Bitcoin ETF in the USA has reinforced the market structure of the cryptocurrency, with over 10 billion dollars of net inflows since its launch and an accumulation of more than 400,000 BTC, which exceeds the 240% annual post-halving emission.
• Illiquid Supply from Long-Term Holders: In addition to the halving effect, there is a significant amount of Bitcoin held by long-term investors, defined as those who have not moved their BTCs for at least 155 days. This quantity has stabilized around 14.29 million BTC, approximately 70% of the circulating supply, as of March 15, 2024.
• Resistance of the “Whales”: Despite the market having touched highs from the previous cycle, large investors (whales) with more than 1,000 BTC have not sold, demonstrating considerable confidence in Bitcoin. This, even though the price reached 60,000 dollars, a level that in the past often triggered massive sales. The current rally is still seen with great growth potential, even though 99.6% of the circulating supply is currently profitable, a condition that usually leads to aggressive profit-taking and potential price drops.

In summary, considering all these factors, the outlook for the most important cryptocurrency appears decidedly optimistic. This cycle could present peculiarities compared to the previous ones. Although investors must remember that Bitcoin remains an high risk asset with high volatility, which could lead to deep price corrections, the overall conditions appear promising for the next cycle.