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Being the top asset with the largest market capitalization amongst all crypto assets, Bitcoin plays a crucial role in shaping overall market dynamics, influencing investor behavior, and impacting price movements of the broader crypto universe. Understanding these correlations is essential for new investors looking to navigate the complexities of the crypto market effectively. However, particularly for Bitcoin, there are a couple of additional forces at play, both from its inherent supply dynamics, and an ongoing surge in demand from mainstream institutions via the newly launched spot Bitcoin ETFs. So for anyone interested in crypto investing, remember that there’s Bitcoin and then the rest of crypto. The “digital gold” narrative for Bitcoin has never been stronger and the upcoming “halving” will further cement that position in investor portfolios.

What is Bitcoin Halving

The one true value proposition of Bitcoin is its fixed supply schedule, with the 21 million BTC supply cap, programmed in the network’s algorithm for periodic release with each block mined. Bitcoin halving event occurs due to a feature within the Bitcoin algorithm. It involves reducing the mining rewards given for adding new blocks to the blockchain. When Bitcoin started, miners received 50 Bitcoins for each block added. However, after every 210,000 blocks or roughly four years, there is a halving wherein miner rewards get slashed by half. This process makes Bitcoin supply diminish over time, making it a digitally scarce asset with each passing event of the halving. The daily release of new Bitcoin decreases, strengthening its position as a store of value, in a world where money printing has become the norm for central banks. Investors should not look at BTC as an inflation hedge, but rather as a hedge against monetary debasement.

The last halving event occurred in 2020. According to estimates, we anticipate the next halving event in April 2024. During this event, mining rewards will decrease from the current 6.25 Bitcoin per block to 3.125 BTC per block added to the blockchain. To put this in perspective, currently around 900 Bitcoins are generated daily. After the halving event, this number will decrease to 450. But this cycle is definitely different from a demand perspective.

What do previous halving events tell us

While history may not repeat itself, it certainly rhymes. Previous halving events have led to price increases in anticipation caused by the upcoming supply shock. Basic economics suggests that prices will likely rise if demand for Bitcoin remains steady while the supply is cut in half. Notably, the current cycle sees new demand sources, particularly from institutional investors through newly launched spot Bitcoin ETFs. Past trends suggest that sustained demand coupled with reduced supply could lead to positive price movements. Quantitatively, if the daily release of Bitcoin drops from 900 to 450 after the halving, while spot Bitcoin ETFs continue to absorb more than 5,000 BTC daily, it may create a potential imbalance that could drive prices higher. Last week was a great example of how this plays out, as BTC demand by the ETF inflows was over 9000 per day, 10x of new supply, and resulted in a surge in prices to above $64k.Various reputable investment firms have provided estimates of BTC’s future performance. Standard Chartered suggests a price target of around $150,000 by mid-2025, while Cathie Wood mentions the possibility of prices reaching $500,000 by 2030. It is important to note that these are just estimates, and nobody can accurately predict the future. Nevertheless, we are truly in uncharted territory as this is the first time in history that we have consistent ETF demand for an asset that has a fixed supply.

Additional force fueling BTC’s price action

Spot ETFs for Bitcoin are likely to cement its position as a new asset class. Traditional finance giants like BlackRock and Fidelity are now offering Bitcoin as an asset for portfolio diversification to their trillion-dollar clients, as it would boost their risk-adjusted returns. If even a small percentage, like 1%, of their assets are allocated to Bitcoin ETFs, it could lead to significant demand. In just two months since the ETFs launched, we have witnessed a substantial inflow of funds, with the BlackRock ETF accumulating more than $9 billion in assets under management (AUM), while the Fidelity ETF has gathered over $6 billion. These are phenomenal numbers for a newly launched ETF and their trading volumes are already at par with the most traded ETFs globally. The institutional onslaught is just beginning, as current spot ETF exposure is being actively managed by these asset managers. But the real flood of inflows is expected from passive investments in the asset class, where BTC ETF would be a part of a broader portfolio purchase. Already, Fidelity in Canada, is offering an “All-in-One” investment product to its clients which has exposure to various asset classes, with a 1-3% portfolio allocation for BTC ETF. If this adoption continues across other asset managers, we can expect constant buying pressure on BTC prices.

A word of caution and opportunity

We are witnessing the beginning of the bull market typical of the halving cycle. Investors should avoid taking leverage positions, as the market might move against their expectations. Short-term traders are likely to keep an eye on spot Bitcoin ETF flows, as well as macroeconomic indicators like interest rates. On the other hand, long-term investors might consider using any current dips to accumulate assets for a four-year horizon; the next halving cycle.

As a lesson in Economics 101, these demand and supply factors, coupled with decreasing interest rates, could send BTC prices higher and the markets already seem to be reacting in anticipation of the same. Crypto Spring seems to have arrived early.

(The author is Investments Lead, CoinSwitch Ventures)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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