Will the next Bitcoin halving be another hype cycle?

Author: Daniel Kuhn, CoinDesk; Compiled by: Songxue, Golden Finance

Now that a spot Bitcoin exchange-traded fund (ETF) has gone live in the United States, market watchers are looking for the next potential bullish move events to drive cryptocurrency gains. Following the U.S. Securities and Exchange Commission’s (SEC) long-awaited decision to approve these financial products, Bitcoin ETFs have both exceeded and underperformed expectations — illustrating the strengths and weaknesses of a hype-driven market .

The top three Bitcoin ETFs have seen capital inflows well in excess of $500 million (excluding Grayscale’s $22 billion fund, which grew out of the existing GBTC Trust Funds have switched and have seen significant outflows),which suggests there is huge client demand for traditional on-exchange trading. In the weeks leading up to the Wednesday, January 10 approval date, Bitcoin rallied to recent highs around $48,000.

Many analysts and traders are now hoping that the upcoming Bitcoin halving - a significant cut in the rate at which new Bitcoins are issued to network validators, also known as miners - could be a catalyst for cryptocurrency prices. Similar to a catalyst. There’s a long-running debate over whether these programmatic trigger events, which occur every four years, are “priced in.”

Last week’s approval of a Bitcoin ETF could be a sign of what’s to come in the next Bitcoin hype cycle. The launch of 11 new Bitcoin funds was an obvious sell-off moment, at least in hindsight, and Bitcoin has since fallen about 12% to $42,250 today. It's too early to tell whether a Bitcoin ETF will attract billions of dollars and investors, a prediction that depends on actual demand for Bitcoin.

Meanwhile, the Bitcoin halving (and sometimes halving) narrative is a supply-side story: Assuming usage of the Bitcoin network remains stable or increases, new generations enter the market. The price of Bitcoin is likely to increase after the supply of the coin is restricted.

To some extent, the Bitcoin halving narrative is an afterthought rationalization, sinceBitcoin has actually surged in the months following each halving to date . For example, six months after the network's second halving in 2016 (when the Bitcoin reward per block dropped from 25 BTC to 12.5 BTC), Bitcoin surpassed the $1,000 threshold for the first time. A similar rally occurred in 2020, when Bitcoin hit new all-time highs.

But aside from the usual increase in bullish sentiment and media coverage that precedes a halving, there is little to suggest that these price increases are directly related to the halving. CoinShares noted in its latest "Mining Report" that"Peaks in hashrate growth typically occur around four months before the halving, likely due to the 'Bitcoin boom,'" which could represent positive emotions.

In addition to the somewhat shaky economic logic surrounding Bitcoin supply shocks, consider that the supply of newly mined Bitcoins will actually continue to increase over the next century or so, by which time all 21 million Bitcoin will be mined. Satoshi Nakamoto designed the Bitcoin network to subsidize miners with these rewards to stimulate Bitcoin adoption in the hope that over time transaction fees would grow enough to maintain network security and verification.

CoinShares did not provide a price forecast in its report, but suggested that Bitcoin mining will become more competitive after the halving, phasing out the least efficient miners. While Bitcoin’s efficiency has increased by 90% since the last halving, the hash rate (which represents the computing power of the network’s security) and cost structure have also increased.

In fact, Bitcoin mining difficulty is currently at an all-time high, and by 2023, computing power will jump by more than 100%. CoinShares predicts that this number will drop due to a “miner exodus” after Bitcoin’s halving. The company also said that "average production costs per coin" may be normal after the halving, given the complex interrelationships between hardware and electricity costs, difficulty levels, and the cost structure that determines whether certain miners make or lose money. down to just under $38,000. This determines how many miners are on the network.

What exactly does this mean for Bitcoin price predictions? SSomewhat paradoxically, if Bitcoin prices stay above $40,000, it could actually reduce miners’ returns. CoinShares did not provide this forecast, but given that miners tend to be the largest sellers of Bitcoin, reduced profitability may also create selling pressure on this group.

There are also many who disagree and consider the halving to be another potential positive catalyst for Bitcoin price. But it's worth noting that everyone has their own motivations. When it comes to the halving, the only thing that’s guaranteed is that it’s another hype moment.