The fourth Bitcoin halving is set to occur in the spring of 2024. Bitcoin halvings have traditionally been highly anticipated events in the cryptocurrency world, primarily due to the strong bull markets that have accompanied each of them so far. In this article, we delve into the halving event, examining what exactly happens, how bitcoin's price has behaved around previous halvings, and what to expect from the upcoming halving.
What is a halving?
Before we delve into the details of halvings, it is necessary to briefly explain the technical aspects of this event.
In the Bitcoin blockchain, transactions are grouped into blocks. These blocks are added consecutively to a data structure known as the "chain." The entities that add new blocks to the chain are called "miners."
Once a new block is added to the chain, miners engage in a competitive process to determine who gets to add the next block. In this competition, miners use their computers to solve a cryptographic puzzle, and the miner who solves it first gets to add the block to the chain.
As a reward for winning this competition, the miner receives a "block reward." This block reward is paid to the miner in bitcoins and is the only mechanism through which new bitcoins are issued into circulation. The amount of the block reward is defined in the Bitcoin protocol and is set to halve every 210,000 blocks.
Therefore, the halving of block rewards means that the issuance of new bitcoins is halved as well. Mining 210,000 blocks takes approximately four years, and this event of halving block rewards is referred to as a "halving."
To date, there have been three halvings. When the Bitcoin blockchain was launched in 2009, the block reward was 50 bitcoins per block. After the first halving in November 2012, the block reward was reduced to 25 bitcoins per block. Following the second halving in July 2016, it was reduced to 12.5 bitcoins per block. The most recent halving occurred in May 2020, reducing the block reward to 6.25 bitcoins, which is the current reward. The next Bitcoin halving is set to take place in April 2024, reducing the reward to 3.125 bitcoins.
Halving and Bitcoin Price
Why should such a relatively technical, pre-programmed event in the Bitcoin protocol, publicly known well in advance, command investors attention?
To put it briefly, the most significant bull markets in Bitcoin's history have consistently revolved around Bitcoin halvings. As shown in the chart below, Bitcoin's strongest price increases have typically started about a year before the halving and ended about one to one and a half years after the halving
Figure 1. Bitcoin price and bitcoin halvings
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We will examine each of the previous halving events and their impact on Bitcoin's price later in the article. At this stage, it is sufficient to note that each of the three previous halvings has been associated with a strong bull market, rewarding the investors who bought bitcoin before the halving by three-digit percentage gains (in the case of the first halving, even by five-digit percentages). Based on inductive reasoning, it would appear likely that the fourth halving, which is just over two months away as of the time of writing (February 2024), should also generate significant interest among crypto investors.
Note: Halving Cycles and Mini-Cycles
As a side note for clarity, it is necessary to briefly mention that bitcoin's price development has included other smaller price cycles apart from the four-year halving cycles. These cycles, unrelated to halvings, include:
A cycle from 2010 to 2011 when Bitcoin's price increased roughly a hundredfold and subsequently dropped by about 90%.
A cycle in 2019 when Bitcoin's price nearly quadrupled during the first half of the year and then halved during the second half.
These smaller cycles are characterized by relatively short durations (6-12 months) and the fact that, during a those bull markets, the price did not reach a new all-time high (ATH) in these cycles. However, price changes in these smaller cycles could still be substantial, which is interesting, especially from the perspective of short-term investors.
For clarity, in this article, the approximately four-year long cycles, centered around Bitcoin halvings, are referred to as "halving cycles," and the smaller price cycles occurring within them are referred to as "mini-cycles."
Three Full Halving Cycles
Now that we understand the concept of a Bitcoin halving, we can take a closer look at the three previous Bitcoin halvings and how they affected Bitcoin's price.
First Halving Cycle: 2011-2015
One year before the first halving, bitcoin had reached the bottom after the 2011 mini-cycle, and in November 2011 its price bottomed out at around $2.20. It then started to recover, and at the time of the halving in November 2012 it was already above $13. In February 2013, the price surpassed the previous ATH (around $30), after which the price rise significantly steepened, reaching a first local peak in April 2013 at around $230. This local peak was followed by a sharp correction of around -70% within a week back to $70. From this local trough, a new, steadily steepening rise began, culminating in a peak of $1,300 in December 2013, almost exactly one year after the first halving. From the peak, a bear market started, ending in a double-bottom pattern with the price going below $200 first in January 2015 and again in August 2015.
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Figure 2. Bitcoin price during the first halving cycle, covering the period from 2011 to 2015.
So the bull market of the first halving cycle started about 12 months before the halving, and before the halving the Bitcoin price increased sixfold. The bull market continued for about 13 months after the halving, during which time the price increased 100-fold. In total, the bull market lasted about 25 months, during which time the bitcoin price from trough to peak increased about 600-fold.
Second cycle: 2015-2019
The bear market following the first halving bottomed out in September 2015, about 10 months before the second halving in July 2016. The bitcoin price reached a bottom at about $190, from which it rose to around $650 in one year at the time of the halving. The previous ATH of $1,300 was reached about 9 months after the halving, and again the price increase accelerated significantly, peaking at about $19,000 in December 2017, about 17 months after the halving.
The price peak was again followed by a down market of -85% for just over a year, bottoming out in December 2018 at around $3200.
Figure 3. Bitcoin price during the second halving cycle, covering the period from 2015 to 2018.
So the bull market of the second halving cycle started about 11 months before the halving, and before the halving the Bitcoin price roughly tripled. The bull market continued for about 17 months after the halving, during which time the price increased 30-fold. In total, the bull market lasted for about 28 months, during which time the bitcoin price from trough to peak increased about 100-fold.
Third cycle: 2019-2023?
The bull market of the third cycle started from the December 2018 price base of $3200. By midsummer 2019, the rate was already hovering around $13,000, raising hopes of a new ATH. However, these hopes quickly faded as the price started to fall in the autumn, and at December was already below $8 000. Just before the COVID-19 pandemic struck, the price had recovered to just over $10 000, until the “Covid crash” in March 2020 wiped out more than 50% of the price. By the time of the halving in May 2020, the price had recovered again to around $9,000, and from here started a gradual rise, exceeding the previous ATH of $19,000 in December 2020. Reaching yet another new ATH accelerated the price rise. In summer 2021, a local peak of over $63 000 was reached, and after a -50% correction in summer, the final ATH of around $69 000 was reached in November 2021.
The peak was again followed by another bear market, with the lowest value so far reaching around $15 500 in December 2022. If this remains the final bottom of the cycle, the bear market can be observed to have been very similar in duration (around 13 months), and slightly less severe in depth (around -77%) compared to previous ones.
Figure 4. Third Bitcoin halving cycle 2019-2023(?)
In conclusion, the bull market of the third halving cycle started about 17 months before the halving, and before the Bitcoin price tripled the halving . The bull market continued for about 18 months after the halving, during which time the price increased 6-fold. In total, the bull market lasted about 35 months, and during that time the bitcoin price from trough to peak increased about 20-fold.
In the first cycle, the price of bitcoin from trough to peak therefore increased by about 600 times, in the second by about 120 times and in the third by about 20 times.
Fourth cycle: 2023-2027?
Having briefly described the three completed halving cycles, we can briefly outline what the next cycle might look like. It should be stressed that everything that follows is based purely on extrapolation from previous halving cycles and should by no means be taken as a forecast. In keeping with the old truth of investing, historical events are never a guarantee of the future events. It should also be noted that with only three data points available, other well-founded extrapolations could also be made. What is presented below should therefore be seen as just one possible scenario among many.
Taking these side notes into account, based on previous halving cycles, one could extrapolate that:
1. The local bottom reached by bitcoin in December 2022 at around 15 500 USD would fit well into the pattern repeated in previous cycles of a bear market of about -80% in magnitude and lasting about a year following the peak.
2. From this trough, bitcoin has previously recovered by the time of the halving to reach a value of about 50% of the previous market top at the time of the halving, which would mean about $35,000 in April 2024.
3. The previous ATH is reached on average about nine months after halving, which would mean a price of about $70,000 in January 2025.
4. Extrapolating from the ratios of the previous peaks, the next peak would be about double the previous peak, i.e. about $140,000, and would be reached in autumn 2025.
5. The peak has been followed by a bear market of about one year's duration. Given the gradual dampenings of the bear market, the cycle bottomn would be found sometime in the autumn of 2026 in the order of $40 000.
Figure 5: Hypothetical Bitcoin cycle 2023-2027
Even with a risk of overemphasizing the point, it is worth reiterating that the above is only an extrapolation of what has happened so far. In assessing the likelihood of the above scenario, one should at least bear in mind the different macroeconomic environment compared to previous halving scenarios (see below Halving and bull markets: correlation or causality?)
Realistic returns: the impact of time diversification
Bitcoin's price rises, calculated from cycle bottoms to cycle tops, give almost astronomical returns. However, it should be remembered that the various bottoms and tops represent only the very short-lived extreme of a sharp price swing. The probability of hitting such short-lived prices with a single purchase is, from an investor's point of view, purely theoretical, let alone a possibility that an allocation made with a single purchase would hit them.
A more realistic way to estimate the achievable returns is to look at what would have happened if a typical time diversification had been followed. What kind of returns would an investor have achieved if he had spread the entry and exit of his positions over 3, 6 or 12 months? The table below answers this question. In the scenario described, the investor has split both purchases and sales of bitcoin into 3, 6 or 12 tranches. The purchases and sales have been made in consecutive months, at the end of each month, at the best possible time (i.e. with the 3/6/12 months simple moving average of the Bitcoin price being optimal).
Figure 6: Absolute price change and the realized return with different time-diversification lengths
In our view, the 12-month entry and exit windows represent an indication of realistic return potential for the individual investor. In the optimal 12-month window, purchases and sales would have multiplied the initial investment by about 100x in the first cycle, by about 30x in the second cycle, and by about 10x in the third cycle. Absolute returns would therefore have fallen by factor of five from one cycle to the next, and returns on a 12-month entires and exits factor of three.
For illustrative purposes, a 12-month optimal position taking in the last cycle, starting in 2019, would have implied purchases at an average price of around $5 500 (absolute bottom around $3 800), and sales at an average price of around $47 000 (absolute top around $69 000). Assuming that December 2022 indeed represented the bottomk of the next cycle, the average price of new optimal 12-month purchases would have been $22 000, with an absolute bottom of around $15 500. Such average prices for position entries and exits can be considered very successful, but realistic.
In summary, the rates of return based on absolute price bottoms and absolute price tops for bitcoin can be considered as purely theoretical. Taking and unwinding a position spread over six or 12 months gives a better picture of the returns that an investor could realistically have achieved. Having said that, it is of course true to say that the returns offered by Bitcoin have been quite exceptional, being even in the last cycle around 1000%.
Halving's impact on the rest of the crypto market
In addition to the Bitcoin price cycle, we can briefly look at the impact of Bitcoin halving on the rest of the crypto market. In general, cryptocurrencies are very strongly correlated with Bitcoin in the short term. As a rough generalisation, the smaller the token, higher its beta relative to Bitcoin.
In the first halving cycle of Bitcoin, looking at other cryptocurrencies is not particularly useful. There were few alternative cryptocurrencies, and their market values were very small compared to bitcoin, with bitcoin accounting for more than 99% of the total crypto market value.
At the time of the second halving cycle, alternative cryptocurrencies were already starting to exist. In the previous wave, in November 2015, the combined market value of non-bitcoin currencies had been around $40 million. By halving, their combined value had risen to around 200 million, and especially after halving, their values started to skyrocket in the wake of bitcoin. At the peak of the cycle in January 2018, their value peaked at around $470 billion, meaning that the price increase from bottom to top was a staggering 10 000 times greater. By comparison, bitcoin's rise from trough to peak was around 100 times.
In the third halving cycle, the non-bitcoin crypto market was at the bottom in December 2018 valued at about $43 billion, about doubling by the halving to about $85 billion. This time, too, the halving and Bitcoin's price rise was followed by a veritable rocketing of alt-coins. At its peak, the alt-coin market reached a value of around $1 700 billion in November 2021. From trough to peak, the alt-coin market price increase was about 40 times, compared to a 20-fold increase in bitcoin's value.
In the third cycle, in particular, the significant increases in the values of other cryptocurrencies occurred shortly after bitcoin's strongest price increase. After halving (May 2020), Bitcoin first grew faster than the rest of the crypto market until January 2021, after which the rest of the market grew much faster. A perfectly optimal strategy for a crypto investor would therefore have been to first take a position mainly in bitcoin, and as the bull market progressed to shift the allocation to altcoins.
Halving and bull markets: correlation or causality?
Looking at how the Bitcoin price has behaved in the context of previous halving events, we can easily conclude that there is a clear temporal correlation between halving and the bitcoin bull market. The second, and much more difficult question is, to what extent do these events have causality in addition to correlation?
There is a reasonably strong hypothesis among bitcoin investors that halving is indeed the cause of bull markets, or at least a significant driver of them. This thesis is based on the simple assumption of a triangle of supply, demand and price. Bitcoin halving reduces the supply of bitcoin on the market, which, if demand remains the same or increases, inevitably leads to an increase in price. A rising price, in turn, increases the attention and media coverage that bitcoin receives, bringing in new investors and pushing the price up further.
The problem with proving this hypothesis is, of course, that bitcoin and the crypto market do not live in isolation from the rest of the financial world. Macroeconomic events are also reflected in the crypto market, probably more and more directly the larger the asset class grows. In the case of the Bitcoin halving, each of these has seen significant macroeconomic factors at play at the same time.
At the time of the first halving in November 2012, the US Federal Reserve had announced just two months earlier that it would launch a massive bond-buying programme (so-called QE3). This created a significant positive sentiment in stock markets, with the S&P 500 index rising by almost 30% and the Nasdaq index by almost 40% in 2013. The first halving thus took place in a remarkably positive macroeconomic environment. Although bitcoin was still a relatively small investment at the time, it is not unreasonable to assume that at least part of its dramatic price increase was caused by a favourable macroeconomic environment that strongly favoured high-risk investments.
At the time of the second halving in 2016, macroeconomic conditions were perhaps the most neutral of the three halving events. The most significant event of the same period was the UK's Brexit referendum a couple of weeks before the halving, which created uncertainty in the markets. For the first few months after the halving, Bitcoin's price moved downwards in line with the stock market. Most of the actual bull market did not take place until the middle of 2017, which was also an excellent year for the stock market (SP500 +19%).
Perhaps the most pronounced macroeconomic events were seen in the third Bitcoin cycle in 2020. The Covid 19 pandemic and the resulting global crisis triggered a historic monetary stimulus around the world, leading to a significant increase in asset class valuations. Between 2020 and 2021, the SP500 index rose by around 50% and the Nasdaq index by around 80%. By the time of the third halving, Bitcoin had already become a major investment, and in 2021 it was among the world's top 10 most valuable assets. There is therefore reason to believe that the historically favourable investment environment for risky asset classes played a significant role in the bull market around the third halving.
Figure 7: Bitcoin (blue), SP500 (turquoise) and Global Net Liquidity Index (yellow).
In conclusion, it is very difficult to disentangle the importance of Bitcoin-halving from the macro environment that clearly favoured riskier assets like Bitcoin at the same time. Demonstrating causality would require a counterfactual example, i.e. halving in the absence of favourable macroeconomic conditions. It is of course possible that such an example could be obtained in spring 2024, provided that monetary policy has not yet turned expansionary by then.
Summary
In this article we have looked at three halving events so far, and their impact on the market price of Bitcoin. So what should we expect from the next halving in spring 2024?
As noted earlier, the difficulty in predicting the future is that this time the macroeconomic environment may differ significantly from previous halving events. Therefore, we cannot, at least not exclusively, rely on the view that history will repeat itself and that we will again see Bitcoin's price rocket.
On the other hand, it would also be surprising if the halving were not accompanied by any positive price movement. Halving as an event has strong meme value, and it is likely that many investors will be willing to bet on history repeating itself.
In our view, the critical watershed will be whether the market's risk appetite stemming from the monetary situation and the bets on halving by investors who fundamentally believe in Bitcoin will be enough to push Bitcoin above its previous ATH of around $69,000. If this happens, it will be widely reported in the media, which in turn will bring a lot of new investors into the market.
Figure 8: Google search index for the keyword "bitcoin". Exceeding the ATH in early 2017 and late 2020 will trigger a multiplication of Google searches. The halving itself in the middle of 2016 and 2020, on the other hand, produces only a barely perceptible increase.
In this scenario, it would not be surprising if the entry of new, less sophisticated investors into the market fuelled a manic final phase of the bull market, with Bitcoin reaching a closing price of $100,000-$150,000. In this case, it would also be easy to see that at the end of the bull market, alt-coin would also experience significant price increases.
In a more pessimistic scenario, the risk appetite of investors would not be sufficient to raise the price beyond the $40 000-60 000 range. In this case, the halving and its aftermath would remain an internal boil in the crypto sector and would not reach the mainstream at all. If the bitcoin rally were to end prematurely, altcoins might not see a significant bull market at all. Falling below the previous ATH and breaking the long-term sustained appreciation trend to date would be a major blow to the Bitcoin story, and would certainly test faith in the digital gold narrative.
There is therefore still a great deal of uncertainty surrounding the market implications of the next halving. It is therefore wise for the crypto investor to be prepared for all scenarios. In addition, while waiting for the halving, it is worth keeping a close eye on macroeconomic trends. As noted earlier, the macro-economy, and in particular the prevailing monetary policy, has a significant impact on the returns of risky assets. While the Bitcoin issuance is programmed and known well into the future, macroeconomic cycles are more difficult to predict and there is still a lot of uncertainty in the upcoming months. It is also worth keeping an eye on the progress of new bitcoin spot ETF funds, as they could open up the crypto market to a whole new set of investors just on the cusp of a halving and a potential bull market.
Whether or not history repeats itself in the next Bitcoin halving, it will be an interesting time in the crypto market this spring. Kvarn will keep closely monitoring the market as the halving approaches and provide you with information to help you make well-considered investment decisions.
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