Bitcoin Halving: Bearish Implications?

23 Apr 2024

Every four years, the Bitcoin network undergoes a significant change known as "halving,” a process that reduces the rewards for mining new blocks by half. This mechanism is built into Bitcoin’s protocol to control inflation and cap the total supply at 21 million coins. Halving events, therefore, are pivotal, highly anticipated occasions within the cryptocurrency community, often triggering speculation and market volatility.

Bitcoin's price trajectory often responds dramatically to halving events. After the first halving on November 28th, 2012, when the mining reward dropped from 50 BTC to 25 BTC, Bitcoin's price skyrocketed from $12 to $1,075 within a year, a stunning 8,858% increase. This surge was coupled with a drop in Bitcoin's inflation rate from 25.75% to 12% by January 2013. The second halving on July 9th, 2016, exhibited a similar pattern.

Bitcoin Halving Schedule

Bitcoin Halvings from 2009 - 2040

Many believe that the price of Bitcoin will immediately increase following a halving. While historical trends have shown price increases following halvings, these gains have not always been instantaneous and are influenced by a wide range of factors beyond just the halving event. On the opposing view, many think that the Bitcoin halving is already priced in. While some anticipation of the halving may be factored into Bitcoin's price, the complexity of market dynamics and external factors suggests that the entire impact of the halving might not be fully accounted for in advance.

Despite the generally bullish sentiment, recent geopolitical tensions following Iran's drone strikes toward Israel on April 13, 2024, triggered market turbulence. Bitcoin experienced a sharp decline, reaching its lowest level in a month. This event led to a sell-off, shedding about 8% of Bitcoin’s value in a brief period. Historically, though, such geopolitical conflicts have eventually fueled the cryptocurrency market.

Currently, Bitcoin is exhibiting a pre-halving retracement characterized by bearish signals and lateral market movements. A technical analysis of the weekly time frame reveals the formation of a Cup and Handle pattern in Bitcoin’s price chart. Traditionally, this pattern can proceed further downward movements. Notably, there is robust support within the $60,000 to $61,000 price range. Should this support level be breached, it is plausible to anticipate a retraction towards the $51,000 mark.

In a note to clients last week, Goldman Sachs acknowledged that Bitcoin’s past three halving cycles have resulted in massive price run-ups in the aftermath – though the exact time it took to reach a new all-time high afterward has differed greatly. This cycle looks even more different: Bitcoin already topped its previous cycle’s all-time high above $69,000 in March, one month before the halving even occurred. “Caution should be taken against extrapolating the past cycles and the impact of halving, given the respective prevailing macro conditions,” analysts said.

In a Wednesday report, JPMorgan predicted that Bitcoin’s price would not rise following the event and that it would be more likely to resume declines that began earlier this month. The bank’s outlook remains consistent with its relatively bearish forecasts throughout the year, refusing to be swayed by growing optimism around Bitcoin spot ETFs or the halving. The analyst used the price of gold as a reference point, as both assets share a similar investment thesis as a risk-off store of value and inflation hedge. On a volatility-adjusted basis, the bank argued that Bitcoin’s price should only be $45,000, meaning its current market price ($63,700) is significantly overbought.

Backing their case is a continuing long bias in Bitcoin futures’s open interest and a lack of venture funding in the crypto industry this year.

“The technical picture for bitcoin is rather worrying, as we saw no rebound after the price drop on Friday and Saturday,” added Alex Kuptsikevich, FxPro’s senior market analyst, in an email to Forbes. “On the contrary, the market seems to be getting used to current prices in anticipation of a halving.”

Whatever the view of the banks and analysts, the full effects of the halving remain to be seen. Time will tell if they are bullish or bearish, but what remains certain is that the drama surrounding the latest upstart asset class remains as strong as ever.