Bitcoin - Are We Back?

A deep dive into previous cycles and what makes this cycle different

The Bitcoin halving is just around the corner, however it may be less important than you think. First of all if you are new here let me explain what the Bitcoin halving is and why it has been the focus of every previous cycle.

Bitcoin halving cycle is a pre-programmed event in the Bitcoin protocol that reduces the block reward by half every 210,000 blocks, which occurs approximately every four years. The halving cycle ensures that the total supply of Bitcoin is limited to 21 million coins.

Bitcoin halving has been the center of attention in previous cycles for two main reasons:

The halving cycle reduces the rate at which new Bitcoins are created. This increases the scarcity of Bitcoin, which can lead to higher prices. Halving events have historically been followed by Bitcoin price rallies. This is likely due to a combination of factors, including the increased scarcity of Bitcoin, increased media attention, and increased investor interest.

How the Bitcoin halving cycle works:

Bitcoin miners are rewarded with Bitcoin for verifying transactions and adding them to the blockchain. The block reward is initially set at 50 BTC per block. After every 210,000 blocks, the block reward is halved. This process continues until the block reward reaches zero, at which point miners will only be rewarded with transaction fees.

History of Bitcoin halvings

2012: Block reward reduced from 50 BTC to 25 BTC.

2016: Block reward reduced from 25 BTC to 12.5 BTC.

2020: Block reward reduced from 12.5 BTC to 6.25 BTC.

Next Bitcoin halving

The next Bitcoin halving is expected to occur in April 2024 but let’s take a look at how the halving has shaped the price action in the past.

2012 halving:

• Block reward reduced from 50 BTC to 25 BTC.

• Bitcoin price was around $12 at the time of the halving.

• One year later, Bitcoin price had risen to nearly $1,000.

2016 halving:

• Block reward reduced from 25 BTC to 12.5 BTC.

• Bitcoin price plummeted to $670 at the time of the halving, but rose to $2,550 by July 2017.

• Bitcoin also reached a previous all-time high of about $19,700 in December 2017.

2020 halving:

• Block reward reduced from 12.5 BTC to 6.25 BTC.

• Bitcoin price was $8,787 at the time of the halving, rising to its all-time high of nearly $69,000 by November 2021.

As you can see, Bitcoin price has historically rallied after each halving event. This is likely due to a combination of factors, including the increased scarcity of Bitcoin, increased media attention, and increased investor interest.

Impact of the Bitcoin halving cycle

The Bitcoin halving cycle has a significant impact on the Bitcoin market. The reduction in the block reward can lead to increased scarcity and higher prices. Halving events have also historically been followed by Bitcoin price rallies as we have covered above.

The idea is that as the supply of Bitcoin decreases due to the halvings, the demand for Bitcoin will increase. This is because Bitcoin is a finite asset, with a maximum supply of 21 million coins. As the supply decreases, Bitcoin becomes more scarce, which can make it more attractive to investors.

There are a few reasons why investors might be attracted to scarce assets. First, scarce assets can be seen as a hedge against inflation. As fiat currencies become more inflationary, investors may look to store their wealth in scarce assets that are likely to hold their value. Second, scarce assets can be seen as a way to generate alpha. Alpha is the return that an investment generates above the market return. Investors who believe that Bitcoin is a scarce asset with the potential to generate alpha may be more likely to invest in it. Finally, scarce assets can be seen as a status symbol. Owning a scarce asset, such as Bitcoin, can make an investor feel wealthy and exclusive. This can also lead to increased demand for the asset.

It is important to note that the relationship between scarcity and demand is complex. There are many other factors that can influence demand for an asset, such as its perceived value, its utility, and the overall state of the economy. However, the scarcity of Bitcoin is one of the key factors that has made it so attractive to investors.

How will institutions stepping in to Bitcoin affect the price action? 

The entry of institutions into the Bitcoin market is expected to have a positive impact on price action. This is because institutions are typically large investors with long investment horizons. They are also more likely to use sophisticated trading strategies and risk management tools.

Here are some specific ways in which institutions can affect Bitcoin price action:

Increased demand - Institutional investors can buy large amounts of Bitcoin, which can lead to increased demand and higher prices.

Reduced volatility - Institutional investors are typically more risk-averse than retail investors. They are also more likely to use hedging strategies to reduce their exposure to risk. This can help to reduce the volatility of Bitcoin prices.

Increased liquidity - Institutional investors can provide much-needed liquidity to the Bitcoin market. This can make it easier for buyers and sellers to find each other, which can help to improve price discovery.

Increased legitimacy - The entry of institutions into the Bitcoin market can help to legitimize the asset class and make it more attractive to other investors. This can lead to increased demand and higher prices.

Overall, the entry of institutions into the Bitcoin market is a positive development for the asset class. It is likely to lead to increased demand, reduced volatility, increased liquidity, and increased legitimacy. All of these factors can contribute to higher Bitcoin prices. Now, what happens when a Spot Bitcoin ETF is approved? What, if any implications will this have to Bitcoin? The approval of spot Bitcoin ETFs is expected to have a positive impact on the price of Bitcoin. This is because spot ETFs would allow investors to invest in Bitcoin without having to buy and store the asset themselves. This would make Bitcoin more accessible to a wider range of investors, including institutional investors. In addition, spot ETFs would create a new demand source for Bitcoin. As more investors invest in spot Bitcoin ETFs, the price of Bitcoin is likely to increase along with increased demand, reduced volatility, increased liquidity, and increasing the legitimacy of Digital Assets.

Moving over the Bitcoin chart to see where we can expect to see the price move and its current boundaries leading up to the halving, there are one or two anomalies to look out for.

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