What is BTC halving? 

BTC Halving, a pivotal event in Bitcoin's lifecycle, involves dividing the reward given to miners for validating blocks in half. This reduction has profound implications for Bitcoin's supply dynamics.

Since Bitcoin's inception, it has experienced three halving events. The first occurred in 2012, reducing the block reward from 50 to 25 BTC. Subsequent halvings in 2016 and 2020 further cut the reward to 12.5 BTC and 6.25 BTC per block, respectively.

After the April 2024 BTC halving, the block reward dropped to 3.125 BTC every 10 minutes, maintaining Bitcoin's scarcity. With a maximum supply of 21,000,000 BTC and a current circulating supply of 19,701,228 BTC, halving events play a vital role in managing Bitcoin's issuance.

BTC Halving impacts miners who validate blocks, altering their rewards. This event underscores Bitcoin's economic model, influencing its supply dynamics and shaping investor behavior.

Previous halving events

Figure 1. Mezen’s presentation “Does Bitcoin Halving still matter?”

The 2012 halving marked Bitcoin's first test of its unique supply schedule, revealing a surprising appreciation in price despite uncertainty in the community about the impact of reduced miner rewards.

In 2016, the second halving event occurred on July 16, initially causing a slight price dip of around 10%. However, the market quickly rebounded, and over the following year, Bitcoin experienced significant growth, with some attributing the 2017 bull run to the effects of the halving. Indeed, within 365 days of the halving, Bitcoin surged by 284% to reach $2,506, ultimately surpassing $19,000 by the year's end.

Figure 2. Bitcoin’s halving timeline. Source: CoinDesk

Following the 2020 halving on May 11, Bitcoin's price continued to soar bullishly for a full year after the event, skyrocketing by over 559% from around $8,700 in 2020 to a staggering $56,000 in 2021.

Looking ahead to the 2024 Bitcoin halving, there is a unique trend emerging with a significant increase in institutional investors. The success of spot Bitcoin ETFs in the US, attracting a remarkable $1.5 billion within the first 15 trading days, signifies a major milestone in mainstream financial adoption. These ETFs offer a stable buffer against potential post-halving market volatility, indicating a maturing landscape for Bitcoin investment.

Why halving affects Bitcoin’s price?

The allure of potential riches draws much attention to these events. With the reduction in new bitcoins entering circulation, demand should theoretically remain constant, potentially driving up bitcoin's price. This has sparked passionate debates about bitcoin price predictions and market responses. Unlike state-issued currencies, Bitcoin's monetary policy is coded into the network, making changes require significant coordination and agreement among users. The 21 million coin cap adds scarcity, increasing their perceived value for some.

Furthermore, historical data from previous halvings suggests a correlation between these events and significant price rallies, fostering optimism among investors. Additionally, the anticipation surrounding halving events tends to fuel market sentiment, attracting new participants and driving demand upwards. Media coverage amplifies this effect, drawing attention to Bitcoin and cryptocurrencies, further stimulating investor interest. 

However, there are numerous other factors that influence Bitcoin's price. Mezen's Managing Director, Konstantin Molodykh, conducted an analysis of several of these factors.

Factors that determine the price of Bitcoin: supply

BTC holders

To analyze the supply, the panel considered the distribution of Bitcoin in wallets based on the time frame it has been held. The panel considered 5-7 years, 7-10 years, and 10 years+ BTC holder groups as they were influential in the BTC price. As of April 22,2024 it was found out the BTC holders of the above mentioned time frames possess 31.38% of the total distribution of bitcoins. 

Figure 3. Bitcoin HODL waves. Source: Lookintobitcoin

To better understand the behavior of BTC holder groups in the context of 1 year+, 5 years+, and 10 years+, the panel delved into each of these BTC holder groups. After analyzing each of these groups’s behavior, the team stated that movements associated with changes in bitcoin price dynamics are most typical for the category of short- to medium-term investors (1 year+). Most of the owners are traders and perceive bitcoin primarily as a short-term investment. This leads to a pattern of “buy at the bottom, sell on the news" behavior.

Groups whose ownership of assets exceeds 5 years do not differ in increased activity during periods of high price volatility (transferring funds to other wallets following price increases). They tend to preserve capital with a slight change in the volume of ownership.

A group that has owned assets for more than 10 years has a similar behavior model to a group that has owned assets for more than 5 years. However, they are even less characterized by drawdowns in terms of ownership.

Current profitability of investments

The prolonged bull cycle is driving cryptocurrency prices to new heights, with Bitcoin frequently updating its two-year highs. Short- and medium-term investors, who tend to be more active, view Bitcoin as a trading asset and seek to lock in profits.

One way to gauge market sentiment is through the Net Unrealized Profit/Loss (NUPL) metric. NUPL is calculated by dividing the unrealized gain/loss by the market capitalization. When analyzed, this metric provides valuable insights into Bitcoin investor sentiment:

• High NUPL values indicate that a significant portion of the market is in profit.
• Low NUPL values suggest that most market participants are experiencing losses.

Figure 4. Bitcoin NUPL. Source: BGeometrics

Currently, the NUPL value fluctuates between 0.56 and 0.66, close to its historical highs, signaling high profitability for Bitcoin investors. Historically, such levels have been associated with large asset sales as investors seek to realize their profits.

However, NUPL alone cannot unambiguously predict investor behavior due to changing risk tolerances over time. To complement NUPL, metrics that track on-chain activity, like the Spent Output Profit Ratio (SOPR), are essential. Unlike NUPL, SOPR focuses on completed transactions and reflects actual investor behavior:

• SOPR values less than 1 suggest that more investors are selling at a loss.
• SOPR values greater than 1 indicate that more investors are selling at a profit.

Figure 5. Bitcoin SOPR. Source: BGeometrics

The SOPR metric confirms the patterns identified by NUPL. During periods of increasing potential profit, investors, particularly short-term and small investors, prefer to lock in their gains. This behavior can increase the supply of tokens on the market, acting as an additional force influencing Bitcoin prices.

Mass withdrawal of investors from GBTC 

After the SEC approved U.S.-listed ETFs tracking Bitcoin, the $27 billion Grayscale Bitcoin Trust converted into an ETF. Thereafter, the firm's Grayscale Bitcoin Trust has been bleeding assets this year since converting to an ETF in January. The market's erratic reaction to GBTC is explained by 2 key points: attracting investors to buy before SEC approval due to a significant discount, and a higher level of commissions compared to other ETFs.

Awaiting regulator approval, Grayscale's trust was trading at a discount to its underlying assets that reached almost 50% in December 2022, following the collapse of crypto exchange FTX. With approval from the SEC, the investors cashed in on the opportunity making over a 100% profit by selling it.

Figure 6. US bitcoin ETFs draw $1bn. Source: EEAGLI

Black swan events 

These are other unpredictable events that could also play a part in altering the price of BTC. Developed by Finance professor and former Wall Street Trader Nasim Nicholas Talib, the Black Swan theory is a concept that refers to highly unexpected events that have three main characteristics. They are unpredictable, have a massive impact on the economy, and after they have occurred it is made rational by people. 

For instance, the persistent conflict between Palestine and Israel, the potential conflict between Taiwan and China, the Real Estate Bubble: in China, the growing US national debt, and the potential of an oil crisis, are some of the black swan events. 

Factors that determine the price of Bitcoin: demand

Increase in money supply

When the money supply increases, more liquidity flows into the market. Central banks determine the volume of this additional liquidity based on the current monetary policy. External incentives can prompt citizens to spend rather than save money, stimulating various sectors of the economy. Consequently, the dynamics of global money supply becomes a key indicator affecting both the stock market and the cryptocurrency market.

Public perception about BTC

Bitcoin is commonly perceived as an asset for two main reasons:

1. Its limited supply and inflation control mechanisms give it an inherent value, reminiscent of gold.
2. The considerable influence of external macroeconomic factors on its price suggests that Bitcoin has speculative characteristics, akin to instruments in the stock market, especially equities.

Introduction of new products within the Bitcoin ecosystem

Ordinals & inscriptions
Ordinal NFTs as they exist today were made possible by the Segregated Witness (SegWit) and Taproot updates to the Bitcoin Protocol, which took place in 2017 and 2021, respectively. Ordinals are means of creating Bitcoin NFTs by attaching data such as images, videos, and more to an individual satoshi on the base Bitcoin blockchain. This has significantly affected demand, as a lot of blockchain-users wanted to make NFTs on BTC, leading to a several-fold increase in the number of transactions on the blockchain.

BRC-20 token 
BRC-20 tokens use an experimental standard to create fungible tokens natively on Bitcoin.Utilizing this protocol, BRC-20 tokens are inscribed with JSON data, providing additional functionalities like token deployment, minting, and transfer on the Bitcoin network​​​​.

Potential use cases for BRC-20 Tokens include P2P transfers (between wallets) on the Bitcoin network. It could also be used for De-Fi Applications such as BTC-based finance protocols and decentralized exchanges and for tokenization of assets (RWAs).

Key takeaways

As the halving continues every four years and the miner rewards dwindle, the security of the system will suffer much more than the near-term price drops. The panelists stated that this reduction in miners in the ecosystem could potentially destabilize the economic incentives underlying Bitcoin’s security.

However, if the price increase outpaces the reward reduction, as has been the case in the year after each prior halving, mining can remain profitable, even with fewer coins per block. This is because the survivors pick up the network's market share as others exit.

“In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes. I’m sure that in 20 years, there will either be very large transaction volume or no volume,” Nakamoto wrote.

Today, BTC price is influenced by many factors — both macroeconomic and crypto-related. Bitcoin faces a complex future where its role, security, and decentralization will be continually tested by both internal economic mechanisms and external market forces. 

The bottom line is that Bitcoin was not actually created with the intention of being treated as an investment, but it was created to be more of a payment method that did not require the involvement of third parties in a transaction. Hence, is BTC serving the purpose that it was actually intended for is the question that needs to be answered.