Will the Next Bitcoin Halving Be Another Hype Cycle?

Now that spot bitcoin exchange-traded funds (ETFs) are live in the U.S., market watchers are looking for the next potentially bullish event to drive cryptocurrency gains. Following the U.S. Security and Exchange Commission’s (SEC) long-awaited decision to approve these financial products, bitcoin ETFs have simultaneously overperformed and underwhelmed expectations – representing the pluses and minuses of a market driven by hype.

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The top three bitcoin ETFs have seen well over half a billion dollars worth of capital inflows (not counting Grayscale’s $22 billion fund, which was converted over from the existing GBTC trust and has seen sizable outflows), signifying the significant customer demand for traditional on-ramps into bitcoin (BTC). In the weeks leading up to the date of approval, Wednesday, Jan. 10, bitcoin rallied to a recent high of ~$48,000.

Many analysts and traders are now hoping the upcoming bitcoin halving — when the rate of new bitcoins issued to network validators (aka miners) is slashed — could be a similar catalyst for crypto prices. There is a longstanding debate whether these programmatically triggered events that occur once every four years are “priced in.”

The approval of bitcoin ETF’s last week may give some indication of what’s to come for the next bitcoin hype cycle. The listing of 11 new bitcoin funds was a clear moment to sell, at least in hindsight, and bitcoin has since sagged ~12% to $42,250 today. It remains too early to say whether bitcoin ETFs will draw in billions of new dollars and investors, a prediction that hangs on actual demand for bitcoin.

Meanwhile, the bitcoin halving (sometimes halvening) narrative is a supply-side story: bitcoin’s price could pop after the supply of new coins entering the market becomes constrained, assuming use of the Bitcoin network remains steady or increases.

To some extent, the bitcoin halving narrative is a post-hoc rationalization for the fact that bitcoin has in fact gone on a tear in the months after every halving so far. For instance, six months after the network’s second halving in 2016 (when the emissions of new coins per block fell from 25 to 12.5 BTC), bitcoin crossed the $1,000 threshold for the first time. A similar rally happened in 2020, when bitcoin set a new all-time high.

But there’s little to suggest that these price increases are directly related to the halving, outside of the increased bullish sentiment and media coverage that typically precedes the event. CoinShares, in its latest “Mining Report” noted that there’s a “peak in hashrate growth often occurs about four months before the halving, likely due to a ‘Bitcoin rush,’” which could represent positive sentiment.

Except the economic logic around a bitcoin supply shock is a bit shaky, considering that the supply of new bitcoins will actually continue to increase for the next century or so, at which point all 21 million bitcoins will have been mined. Satoshi Nakamoto designed the Bitcoin network to subsidize miners through these rewards to stimulate adoption, hoping that over time transaction fees will grow large enough to sustain network security and validation.

CoinShares doesn’t offer a price prediction in its report, which instead makes the case that bitcoin mining will grow more competitive after the halving, knocking out the least efficient miners. While Bitcoin has become 90% more efficient since the last halving, hashrate (which represents the amount of computing power put towards network security) and cost structures have also increased.

In fact, the current bitcoin mining difficulty is at historic highs, with computing power jumping over 100% in 2023. CoinShares predicts this to fall off after the halving with a “miner exodus.” The company also said the “average cost of production per coin” could normalize at just under $38,000 post-halving, given the complicated interrelation between hardware and electricity costs, difficulty levels and the cost structures that determine whether certain miners are making or losing money, which determines how many miners are on the network.

What exactly does this mean for bitcoin price predictions? Well somewhat contradictorily, if bitcoin prices remain above $40,000 it may actually drive miner returns lower. CoinShares doesn’t offer this prediction as such, but given that miners are often the largest sellers of bitcoin, reduced profitability may also create selling pressure from that group.

There are plenty of others who disagree, and see the halving as another potential positive catalyst for bitcoin prices. But it’s important to note that everyone has their own incentives. The only near-guarantee when it comes to the halving is that it’s another moment for hype.