Bitcoin Halving: Supply, Demand, and Statistical Analysis

There is still more than a month until the fourth Bitcoin Halving. This halving will reduce the Bitcoin issuance reward for miners from 6.25 BTC per block to 3.125 BTC. Although studying past halving cycles can provide a reference for the potential price movements of Bitcoin, the sample size of three events is too small to provide sufficient data support to predict the impact of the halving.

With the launch of the US spot BTC ETF, the market dynamics of Bitcoin have undergone a fundamental change. In just two months, its net inflow has reached billions of dollars, irrevocably altering the landscape. Major institutional participants can now invest through these tools, and Bitcoin's reaction to this Halving may differ from the previous three cycles. Understanding the current technical supply and demand situation is even more important, as it can help us better understand Bitcoin's potential.

Although the new Bitcoin supply limit is an important factor, it is just one of many factors. Since the beginning of 2020, the supply of Bitcoin available for trading has been declining, which is a significant change compared to previous cycles. However, recent data shows that since the beginning of the fourth quarter of 2023, the active BTC supply has increased significantly by 1.3 million, while only about 150,000 new Bitcoins have been mined during the same period. Although the market is more capable of absorbing this supply than in the past, we believe that it should not oversimplify the complex interactions between these market dynamics.

Every time 210,000 blocks are mined, the Bitcoin miner reward will be halved, which occurs approximately every four years. This halving is expected to happen in mid-April this year, reducing the annual issuance rate of Bitcoin from 1.8% to 0.9%. After the halving, the monthly production of Bitcoin will be about 13,500, and the annual production will be about 164,250.

The Halving mechanism will continue until all 21 million Bitcoins are mined, which is expected to occur around the year 2140. The potential significance of the Halving lies in its ability to enhance the focus on the uniqueness of Bitcoin: a fixed, deflationary supply schedule that ultimately creates a hard cap on supply.

Unlike physical goods, the supply of Bitcoin is inelastic. Moreover, Bitcoin is a growth story. The utility of the Bitcoin network expands with the number of users, which directly affects the value of the token.

The analysis of the impact of Halving cycles on Bitcoin performance is limited, as our experience is confined to three Halving events. Studies on the correlation between previous Halving events and Bitcoin prices should be interpreted with caution. Bitcoin's performance in previous Halving events is likely to depend on the context, which may explain why its price trends vary so significantly across different cycles.

The US spot Bitcoin ETF is reshaping the market dynamics of Bitcoin. The inflows into the ETF are expected to absorb most of the supply in a gradual and sustained manner. In the long run, this stable demand condition could have a positive impact on Bitcoin's price, as it creates a more balanced market with less volatility from concentrated sell-offs.

The Bitcoin spot ETF in the United States has attracted a net inflow of $9.6 billion in the past two months, with total assets under management reaching $55 billion. This means that the cumulative net growth of BTC held by these ETFs is nearly three times higher than the new Bitcoin supply generated by miners. All global spot Bitcoin ETFs currently hold approximately 1.1 million Bitcoins, accounting for 5.8% of the total circulating supply.

In the medium term, ETFs may continue to maintain or even increase current liquidity, as large brokerage firms have not yet begun to offer these products to clients. Considering that there are still over $6 trillion in funds within U.S. money market funds, along with the upcoming interest rate cuts, there may be a large amount of idle capital entering this asset class this year.

One way to measure the supply of Bitcoin available for trading is to take the difference between the circulating supply and the illiquid supply. The level of available Bitcoin supply has been on a downward trend over the past four years, dropping from a peak of 5.3 million BTC at the beginning of 2020 to the current 4.6 million. This marks a significant shift compared to the steady upward trend in available supply observed during the previous three Halvings.

However, investors should not overlook several key factors that may influence selling pressure:

1. Not all illiquid Bitcoins are "trapped".
2. Some holders may provide liquidity by using Bitcoin as collateral.
3. Miners may sell their Bitcoin reserves to expand their business or cover other costs.
4. A short-term holding amount of around 3 million BTC is not small, and as the price fluctuates, speculators may still profit and exit.

Since the fourth quarter of 2023, the active supply of BTC has increased by 1.3 million, while newly mined Bitcoins are only about 150,000. Part of the active supply comes from miners themselves, who may be selling reserves both to take advantage of price trends and to establish liquidity in the face of declining income.

At the same time, the inactive supply of Bitcoin has been declining for three consecutive months, which may indicate that long-term holders are beginning to sell. In the cycles of 2017 and 2021, there was about a one-year time frame from the peak of inactive supply to the highest price moment of the cycle. The number of inactive Bitcoins in the current cycle seems to have peaked in December 2023.

However, it is still unclear what proportion of these Bitcoins has been transferred to exchanges, locked in cross-chain bridges, or used for other financial transactions. Although the trading volume of Bitcoin into exchanges has doubled this year, the Bitcoin balance on exchanges has decreased by 80,000. This indicates that, in addition to ETFs, there are other pools of funds that are helping to offset the influx from long-term and short-term holders to exchanges.

Bitcoin exhibits a multiplier effect similar to that of commodity derivatives, where the notional value of outstanding Bitcoin derivatives significantly exceeds the market value of physical Bitcoins. Due to the Bitcoin derivatives market amplifying spot trading volume several times, analyzing only spot public exchange data cannot fully reflect the true liquidity and adoption in the Bitcoin economy.

This cycle may indeed be different. The continuous daily net inflow of the US spot Bitcoin ETF will continue to be a huge tailwind for this asset class. With the supply of newly mined Bitcoins set to undergo Halving, this will tighten market dynamics further. However, this does not necessarily mean we are about to enter a supply-constrained situation.

Bitcoin spot ETFs have officially become a new class of digital assets, allowing mainstream financial institutions to incorporate them into traditional portfolios, marking an important milestone in the mainstream adoption of Bitcoin. The current price trend may just be the beginning of a long-term bull market, needing further price increases to push the supply and demand dynamics into balance.