K33 founder: How will halving affect the Bitcoin market?

Author: Torbjørn Bull Jenssen, founder of K33, CoinDesk; Translated by Baishui, Golden Finance

There are many forces driving Bitcoin, but few of them attract the same level of attention as the halving (when the block reward is halved). Historically, halvings have proven to be important catalysts for bull runs, and while the rate of impact is declining, the upcoming halving may be important for Bitcoin's price formation.

At K33, we expect speculators to once again react to the halving event, as they have in all past halving events.

On average, Bitcoin appreciates 14% in the month leading up to the halving,

and we would not be surprised if 2024 is consistent with this. That said, there are many factors at play that neither we nor anyone else can predict with certainty.

But there are some things we do know.

Demand is key

First, the price of Bitcoin is always determined by the net demand to hold Bitcoin. While there is a certain number of Bitcoins available at any point in time, their value must adjust until investors achieve their desired allocation, for example in terms of USD.

To take a simple example: if there is only one Bitcoin, and two investors want to hold $1,000 worth of Bitcoin each, then a Bitcoin value of $2,000 per Bitcoin is only possible if each investor holds half a Bitcoin.

Inflation is currently around 1.8%, roughly the same as gold, and will fall to 0.9% in late April. This means that if demand does not change, the halving will only trigger a 0.9% price increase in the first year after the halving, compared to the situation without the halving.

If demand does not change, the market capitalization should remain the same. Since the annual inflation rate of Bitcoin stock is 1.8%, the price must fall by 1.8% for the market capitalization to remain the same. If the inflation rate is 0.9%, the decline would only be 0.9%.

The demand for Bitcoin is of course fixed, but ironically, the above analysis proves an important point: While the halving is a supply event, all of its impact on price must come from the demand side, because  almost no event is due to pure supply effects.

Holders Are Fully Invested

In other words, it seems that supply-side effects don't matter. But this isn't 100% true. The reason is that a lot of Bitcoin holders are fully invested. If the price goes up, they'll keep holding, but they don't have more dollars to buy Bitcoin with. Therefore, the price is determined to some extent by the balance between marginal buyers and marginal sellers, because total portfolio demand is endogenous and to some extent determined by the price.

To put this simply: imagine that all existing coins are held by strong hands, and not sold. Miners have to sell to cover their costs, but no one has to buy. For a given rate of new dollars flowing into Bitcoin, a halving of the new Bitcoin supply will cause the price to double. Once the price doubles, half the number of tokens will be enough to absorb the inflow of dollars.

A doubling of the price would be a big deal, but looking at past halvings and popular predictions like the long-debunked but still-used stock-to-flow model, optimists expect a 10x increase in price. This cannot be explained by the halving alone and would only happen if there was a massive increase in demand, which is unlikely.

Halving draws attention to Bitcoin’s scarcity

Halving could tip the balance between marginal buyers and sellers, trigger a bull run, and create a feedback loop where more people want to buy when the price rises.

In addition, the current halving has drawn attention to the absolute scarcity of Bitcoin, while Bitcoin is more accessible to investors than ever before thanks to the approval of US ETFs. Concerns about excessive US debt are also growing, leading some to see Bitcoin as a hedge against the risk of declining trust in the US dollar.

Against this backdrop, more and more people are beginning to understand Bitcoin’s halving and scarcity, and find it attractive. In this way, the halving acts as a Schelling point, accelerating Bitcoin’s already strong momentum. Therefore, we are unlikely to see a pre-halving rally followed by a correction until the underlying growth trend in adoption and awareness drives Bitcoin to new highs.

The halving day (likely April 20) when bitcoin production is reduced from 900 to 450 per day is unlikely to have any immediate impact, but combined with the awareness caused by demand, and the positive feedback from the price climbing, the impact of 164,250 for the whole year is definitely significant.

No changes expected on halving day

The upcoming halving is a known event that should be priced in according to the efficient market hypothesis. Bitcoin is a volatile asset with a correspondingly high expected future return, but events like the halving should have no predictable impact on the day of the event itself.

Sure, we can debate whether the efficient market hypothesis holds true. However, judging by the options market, the halving itself does not seem to have an impact. If anything, traders seem more interested in hedging downside with puts than speculating on a big upside with OTM (out-of-the-money) calls. In the medium term, there is a bullish bias, but we have recently seen a slow decline in optimism in the options market.

What Should You Do As An Investor?

While speculators may position themselves ahead of the halving event as they have in the past, long-term investors should try to focus less on the halving itself and instead focus on the demand side of the market.

Thus, the most important impact of the halving may be its marketing effect on Bitcoin and its long-term absolute scarcity in an inflationary fiat currency world.