The most recent Bitcoin halving occurred on April 19. Although the market impact has been relatively subdued in the past few days, investors generally anticipate significant gains nine to 12 months after this quadrennial event.
All three previous halvings have preceded Bitcoin bull runs and many market participants anticipate its fourth will be another catalyst for growth. However, the fourth halving fell against a significantly different backdrop than the previous three. To briefly summarize what happened, the Bitcoin halving is an automated process that cuts the reward for mining a new block in half. It occurs once every 210,000 blocks, or roughly every four years. The latest halving cut miner rewards from 6.25 BTC to 3.125 BTC.
Despite the increase in sentiment brought on by the spot ETF approvals, improving liquidity conditions, and higher transaction fees, macroeconomic conditions have introduced an element of uncertainty to the market following this latest halving.
Previous market impact of the Bitcoin halving
In the past, the short-term impact of the halving has been mixed, while the long-run impact has been more bullish. However, it’s important to consider several factors when analysing the impact of the latest halving. Firstly, the sample size of three is not enough to be conclusive and secondly, the event itself is often priced in well in advance.
Efficient markets, in theory, reflect all known information about an asset. Since the halving is pre-programmed and most market participants are familiar with the event, it therefore must be priced based on the Efficient Market Hypothesis. Under this hypothesis, we would assume that markets have already absorbed this latest halving and priced in the reduction in supply. Participants have had ample time to incorporate this information, which has been expected since the network’s creation.
Looking back, Bitcoin’s market performance on the 60 days on either side of the previous halvings has been mixed, according to our data. In 2016 and 2020, Bitcoin’s price was relatively muted.
In 2012, there was stronger growth 60 days after miner rewards were slashed, but the state of market structure likely played a role here. Bitcoin was less widely traded and highly illiquid at the time, and markets are prone to sharp moves when liquidity is thin. So, while the halving event itself is important in that it reduces issuance of Bitcoin, it’s not enough to move prices on its own. The Efficient Market Hypothesis is limited here in that it doesn’t consider changes in demand for Bitcoin, it simply reflects current expectations of demand.
What is different now?
There are several differences in market conditions today compared with the previous halvings.Miners fees have increased following previous halvings, however, fees have remained elevated for longer following the fourth halving, according to our data.
Last weekend, fees spiked as a new protocol on Bitcoin drove demand for block space. The average network fee surged on Saturday, reaching an all-time high of $146, almost breaking Ethereum’s all time high of $196. This was significantly higher than Ethereum’s average fee of $3 on the same day, according to our wallet data.
The spike in fees was perhaps the most significant development over the halving weekend, catching many market participants by surprise, despite warning signs.
This increase in fees was anticipated after Ordinals creator Casey Rodamor announced plans to launch Runes, a protocol for issuing fungible tokens on Bitcoin. Similar to the launch of Ordinals, a protocol for inscribing data and images on newly created blocks, Rodarmor’s latest project (Runes) increased the demand for block space on Bitcoin and boosted the fees earned by miners.
The halving has typically been a selling event for Bitcoin miners as the process of creating new blocks incurs significant costs, forcing miners to sell to cover costs. This dynamic means miners are likely to accept lower prices as they rush to convert Bitcoin into cash to cover overheads.
Bitcoin price after the halving
As the market impact of the fourth halving plays out over the next few months, liquidity will likely play a significant role. Liquidity in financial markets refers to the ease with which an asset can be bought or sold without significantly affecting its price. Ever since the approval of the Bitcoin spot ETFs, liquidity has almost fully recovered since lows reached in the aftermath of the FTX collapse.
This is good news for Bitcoin because stronger liquidity can reduce price volatility and lessen the impact of selling. Strong liquidity is crucial to supporting a sustained rise in Bitcoin’s price over the coming months. This also contributes to improved demand as better liquidity increases confidence in markets. Since the halving, Bitcoin’s aggregated market depth increased from $323.91mn on April 14 to $419.97 on April 22.
While global liquidity is approaching all time highs, a big drop in weekend trading activity could have negative consequences. Weekend and overnight liquidity management is a challenge for crypto markets that trade around the clock, causing Bitcoin’s weekend trading activity to fall consistently over the past three years. The halving didn’t have an immediate impact on weekend trade volumes, according to our data. During the weekend of the halving, daily trade volume was sluggish at around $10 billion.
Macroeconomic conditions
Bitcoin’s previous halvings and subsequent bull runs came during a sustained period of lower interest rates and consistent inflation. Between 2009 and 2016 the US Federal Reserve held interest rates at around 0.25%. The central bank briefly increased rates to 2.5% in 2019 before cutting to 0.25% again by the time of Bitcoin’s third halving in 2020.
Low interest rate environments incentives investors to put their money to work and typically benefit risk assets. While Bitcoin has sometimes behaved like a safe haven asset during market tumults it is more often correlated with risk assets and as such benefitted from lower interest rates. This is the first time a halving has taken place in a high interest rate environment, so there is no precedent to how Bitcoin will trade in the long-run.
What's next for Bitcoin?
The reality is Bitcoin’s halving alone won’t be a catalyst for a sustained bull run over the next 12 to 18 months. It may have enjoyed massive returns following its previous halvings, but the latest event comes as the asset class matures and macroeconomic conditions remain uncertain.
A sustained bull run will depend on Bitcoin being an attractive investment option for new investors, who will likely come to crypto via spot ETFs in the US - as well as Hong Kong. Therefore, robust liquidity and increasing demand will play a crucial role in improving Bitcoin’s value proposition in the coming months.
