Halving Cycles and the Bitcoin Price

A “Mildly” Bullish Outlook on Bitcoin during the 3rd Halving Cycle

Published in

Coinmonks

8 min readDec 20, 2020

The bitcoin halving events are an essential feature of bitcoin. Every 210.000 blocks the block reward for miners is cut in half. The halving of the block rewards happens roughly every four years. Each of these events is a negative supply shock to bitcoin. With that in mind halving cycles are a significant factor in bitcoins market cycles and people expect prices to increase after each halving. The effects of these negative supply shocks have achieved a lot of attention in recent years. Particularly with the release of the bitcoin stock-to-flow model by PlanB on March 2020, 2019. Historically the halving events have been bullish for bitcoin. The last halving took place on May 11, 2020. On that day the block rewards for miners did halve from 12.5 BTC to 6.25 BTC. We are now 223 days into the third halving cycle (as of 19/12/2020). This makes a comparison to the two previous cycles interesting. In the following, I will look at the development of the first two halving cycles and then compare the current cycle against the two and give some perspective on the price predictions that are out there and what we can learn from the first two cycles.

The first halving event took place on 28/11/12. It took 1319 days for the cycle to conclude (the halving date included). On the first halving day the block rewards did halve from 50 BTC to 25 BTC. In only 372 days bitcoin reached the new All-Time-High (ATH) of the cycle (see: Graph 1; Table 1). The price went up from $12,5 to $1237,6. That is an extraordinary price increase of 9880,65 percent.

Graph 1: Bitcoin price development days since 1st block reward halving (Datasource: investing.com)

The speed and magnitude with which this new ATH has been reached in the first cycle has not been met by the second halving cycle. The second halving happened on 09/07/16. With 1402 days it was a bit longer than the first one (see: Graph 2; Table 1). The block rewards were reduced to 12.5 BTC. The new ATH of $19.345,5 has been reached after 526 days (154 days longer than in the first halving cycle).

Table 1: Summary Statistics Halving Cycle 1 and Halving Cycle 2 (Datasource: investing.com). Note: I have used the average price in a given day and not the highest price in a given day, so the days for an ATH may differ using peak price in a given day. Overall that makes the calculations a bit more conservative.

In comparison, the first halving cycle had much stronger and faster effects on bitcoins price. Whether the extraordinary price developments of bitcoin during the first halving cycle are a once in a lifetime event in bitcoins history remains to be seen. But with institutional money gaining more and more interest in bitcoin we might be in for a surprise. It is crucial to keep in mind that more capital inflows are needed to achieve the same percentage-wise price. While the block reward halving decreases the inflow required to sustain a certain price level the higher price level increases the inflows needed to support a certain price level.

Table 2: Hypothetical selling pressure by miners at halving day if all block rewards are sold at the price on the halving day and respectively inflows needed to set-off this selling pressure and sustain price.

Assuming that miners are selling all their rewards and other than that all else stays constant, the amount of money to offset the selling pressure by miners has increased with each cycle (see Table 2). At today's price of $23.400 (20/12/2020) capital inflows of $21.060.000 would be needed to absorb the selling pressure of mining rewards (assuming all rewards are sold). So achieving the percentage-wise gains as in the first halving cycle is more difficult now. This is also a potential reason that the second cycle has been less extreme than the first one.

Graph 2: Bitcoin price development days since 2nd block reward halving (Datasource: investing.com)

Table 3 shows three scenarios for bitcoin's price target based on developments in the previous two cycles. These are hypothetical calculations on how the price would develop under certain conditions. During the first halving cycle the bitcoin price went up 99,81 times. If bitcoins price would increase by the same amount this cycle the new ATH would be $856.319. As mentioned before the price increase during that cycle was quite extraordinary, however. Scenario 1 is in the range of the best case price outlook as given by Seth Ginns. He sees a bitcoin price between $150.000 and $200.000 during this cycle but in a bullish scenario potentially reaching prices between $500.000 and $1.000.000 due to institutional investors entering the market. The latter would imply strong inflows of money by institutional investors.

Table 3: ATH calculations based on the previous two Cycles. Scenario 1 and Scenario 2 are equivalents and Scenario 3 is assuming a linear downward trend in gains based on Cycle 1 and Cycle 2. Prices are in USD (Datasource: investing.com)

In the second cycle the percentage gains have been substantially lower and the bitcoin price “only” increased 29.68 times. If history repeats and scenario 2 is realized during this cycle this implies a price of $254.650. This price is very close to the price predicted by the Bitcoin Stock-to-Flow Cross Asset Model by PlanB that forecasts an average price of $288.000 somewhere between 2020 and 2024. PlanB sees bitcoin's price to potentially overshoot that prediction and reach a price 3 times of that as stated in a What Bitcoin Did Episode from September 7, 2020 (see from 1:36:00h onwards). This would bring bitcoin to a price of $864,000 which is surprisingly close to the predicted price of scenario 1. Furthermore, the price is below that according to a report by CitiBank that bitcoin could reach a price of $318.000 by December 2021. It is also below the price mentioned in a more recent statement by Scott Minerd, the CEO of Guggenheim Investments. Based on their fundamental evaluation bitcoin should be worth $400.000 (they are not mentioning a timeframe, however). Following this, the price calculated based on the second halving cycle's multiplicator does not seem to be completely unreasonable.

However, as can be seen in Table 3 the multiplicator has decreased from the first to the second cycle. So what if that drop is a trend? If we assume that the trend in the decline of the multiplicator is valid and we take it as linear we get a multiplicator of 8,83. This would lead to an ATH price above $75,000. Compared to the other ones this is substantially lower, but it still is a bullish outlook on bitcoin. With institutional money entering the market this seems to be a rather conservative scenario.

To give some perspective on those price predictions it is useful to look at the percentage gains since the halving day for all three halving cycles. As already mentioned the first halving cycle has been extraordinary which means trends in the current cycle are barely visible in the full cycle graphs. So I am only looking at the graphs showing the development up to the most recent day for this cycle (for further reference the other graphs are included in the Appendix). Graph 3 is shortened to the days passed since the current cycle's halving event and only cycle 2 and the current cycle are included (18/12/2020). It can be seen that neither the previous nor the current cycle can catch up with the first cycle. Compared to the first cycle in the current cycle bitcoins percentage gains are still relatively low. To reach a price of $856.319 its price would need to accelerate at a much higher pace. While not impossible the conditions have to be very favorable and for example, massive amounts of capital of e.g. institutional investors have to flow into the bitcoin markets. Hence to my mind, this scenario is possible but not very likely.

Graph 3: Percentage change in bitcoin price since the halving event. All three cycles. 223 days into the cycle (halving day included) (Datasource: investing.com)

What can be seen in Graph 3 is that in the current cycle bitcoins price has been pulling away from the percentage gains in cycle two. However, due to cycle 1 dominating the graph this trend is not as visible. Therefore I excluded cycle 1 In Graph 4. The trend becomes more visible here. Looking at that graph it seems unlikely that scenario 3, that of linear decelerating price gains, with a valuation of $75,000 will play out as we are already outperforming cycle 2. It instead seems that price gains of the current cycle have decoupled after day 180. Does that mean that bitcoins price will overshoot scenario 2? No, not necessarily. As we are still early in the cycle it has to be monitored in the coming months whether this decoupling holds or whether the bull market this cycle has just started earlier than in cycle 2. But if that trend continues we would end up at a higher price than in scenario 2.

Graph 4: Percentage change in bitcoin price since the halving event. Cycle 2 and the current cycle. 223 days into the cycle (halving day included) (Datasource: investing.com)

So where does this leave us? The price predictions we read on Twitter and in the media are in a vast range. They can be in the area of five figures or even in the higher six-figure range. No one really knows where we are going. Particularly with institutional investors entering the bitcoin market it is hard to predict. With giants like MassMutual and Global Investment Firm Jefferies entering the market and giving legitimacy to bitcoin and bitcoin becoming a legitimate alternative to gold, we might be in for a surprise though. Based on the recent developments, I think that scenario 2 with a price target of $254.650 for this cycle is not unrealistic and we will see the new bitcoin ATH for this cycle in the range of $100k and $300k with a clear tendency to the upper bound. If one thing is for sure: The outlook for the current cycle and bitcoin is bullish!

For more regular updates follow me on Twitter: @JanWues

Disclosure: The above article references an opinion and is for information purposes only. It is not intended to be investment advice.

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