From Surge to Stability: The Bitcoin Halving And Its Declining Dynamics of Supercycle Post-2024
Written by: Seongyun Kim (SY)
Reviewed by: Wooster Han, Subin An (SB)
Introduction
In the dynamic world of cryptocurrency, Bitcoin has taken its role as a leader, bridging the gap between speculative investments and recognized financial assets. The bull market in the overall crypto field has occurred roughly every 4 years, leading with the Bitcoin halving event and expanding to a supercycle, resulting in other altcoins to increase their value. It is important to understand Bitcoin’s price movement in order to understand the whole crypto market, and 2024 is expected to be a very significant year.
Two key developments stand out for their significant impact on Bitcoin’s valuation and global adoption: the upcoming halving event of Bitcoin, and the SEC’s recent approval of Bitcoin Spot ETFs. This article explores how these critical events are more than just milestones in the cryptocurrency narrative. They are catalysts for an era of legitimacy, institutional acceptance, and overall stabilization of Bitcoin price. Overall, the article explains how Bitcoin Halving works, and why there may be declining dynamics of its supercycle after 2024.
The Bitcoin Halving: A Scheduled Supply Shock
Most people who are interested in Bitcoin are familiar with the concept of Bitcoin halving. In essence, this process halves the subsidy given to miners, serving as a control mechanism for Bitcoin’s deflationary supply that is capped at 21,000,000 BTC. This event occurs every 210,000 blocks, approximately every four years, given the average block time of 10 minutes. Starting at 50 Bitcoins per block, the reward has undergone three halvings, with the next one scheduled for mid-to-late April 2024 when it will decrease to 3.125 Bitcoins per block.
The halving mechanism deliberates Bitcoin’s scarcity, akin to precious metals, underscores its proposition as a commodity rather than a security. By mimicking the extraction limitations of physical commodities, the halving events reinforce Bitcoin’s status as “digital gold,” enhancing its appeal as a store of value and a hedge against inflation.
This scarcity, coupled with decentralized control and absence of cash flows or ownership rights typically associated with securities, distinguishes Bitcoin within the financial landscape. This feature solidifies its fundamental value and utility as a novel asset class, making Bitcoin independent from conventional financial market dynamics.
The Origin of 50 BTC Reward: Insights into Satoshi’s Strategic Thinking
An interesting hypothesis was discovered during a discussion with Hashed Data Lead, Subin An.
The initial mining reward of 50 BTC has often been viewed as an unconventional choice. Choosing for a figure that neatly halves into whole numbers with each subsequent halving (like 32 or 64) would seem more intuitive, given that these figures can be divided by two multiple times without resulting in fractional numbers.
Relationship between Percentage of Bitcoin Left and its Halving Events
Source from Hashed
However, this choice becomes significantly more logical when viewed from the perspective of percentages. By starting with a reward of 50 BTC, Satoshi Nakamoto effectively ensured that, during the first four-year period, 50% of the total Bitcoin supply would be mined, leaving another 50% yet to be uncovered. Following this, a reward cut to 25 BTC means another 25% of Bitcoin is mined, and so on. This pattern forms a geometric sequence with a common ratio of 1/2, simplifying the calculation of the remaining Bitcoin percentage from the total supply. This approach not only illustrates Satoshi’s foresight but also highlights the elegant balance between simplicity and mathematical precision in Bitcoin’s design.
Navigating Post-Halving Waters: The Theory of the Supercycle
Moving beyond the explanation of the halving events, the concept of a Bitcoin “Supercycle” has gained traction. This theory suggests that the combination of reduced Bitcoin supply due to halvings and a simultaneous increase in demand could catalyze a prolonged bull market for cryptocurrencies, extending beyond the historical post-halving booms that repeat roughly every 4 years.
Relationship between Price of Bitcoin and its Halving Events
Source from EY and technopedia.com
Historically, there was a short-term decline in Bitcoin price before each halving, followed by a substantial increase in price later on. These repeated bull markets, or ‘supercycles,’ created a variety of opportunities for other cryptocurrency projects as well as for general investors, which is why these major events have garnered attention.
The Death Spiral (Bitcoin Halving — Hashed)
Source from Hashed
For the opposition perspective, one famous theory called “Death Spiral” has always been making speculative perspectives to the potential Bitcoin investors. The theory posits a scenario where there will be a continuous drop in Bitcoin’s price after halving, which eventually leads to a crash of Bitcoin and destroys the whole network. This is stated due to reduced block subsidy, hence lowering miners’ earnings. If the price of Bitcoin fails to compensate for the halved reward, miners may shut off their equipment to avoid operating at a loss, leading to a decrease in the network’s hash rate (the total computational power used to process transactions and mine new Bitcoins). A lower hash rate may increase transaction confirmation times and could potentially destabilize the network, resulting in further decrease of Bitcoin price. This scenario fuels fears of a vicious cycle, or “Death Spiral,” which may lead to a collapse of the whole Bitcoin network.
Generally speaking, the “Death Spiral” theory is conceivable; however, it lacks empirical support. The theory may create a reasonable narrative for a short term decline of Bitcoin’s price before halving. Historically, however, Bitcoin’s price has consistently surged following each halving event, marking every post-halving price dip as potentially the last opportunity for investors before an exponential price increase.
So how does halving “actually” lead to an increase in Bitcoin’s price? The mechanism reduces the mining reward by half, measured in Bitcoin units, meaning that miners are not adversely affected if Bitcoin’s price doubles or increases even further. This pattern has consistently held true across Bitcoin’s timeline, and it is important to understand Bitcoin’s fundamental value beforehand, in order to understand this phenomenon.
Bitcoin is NOT a Security. It is an Ingenious Commodity.
As mentioned above, the fundamental value of Bitcoin comes from its characteristic as a commodity rather than a security. Its value is derived from its inherent scarcity and demand, much like gold or silver, yet it is executed in a much more ingenious manner.
Bitcoin is the first commodity in human history governed by strict supply laws over time, setting it apart from traditional commodities like gold, silver, and oil, whose values can diminish as human intervention increases supply. For instance, if gold’s price rises, additional mining can increase its supply, eventually leading to a price decrease. In contrast, Bitcoin operates as a programmed commodity, immune to manipulation by any organizations regardless of their power. Created by the autonomous inventor Satoshi Nakamoto, who then vanished, Bitcoin stands as a fully decentralized yet profoundly influential form of capital with strict supply laws.
From Supercycle to Sustainability: Bitcoin’s Future Mining Profits come from the Transaction Fees
So far, the historical explanation of Bitcoin’s supercycle theory has been stated. Now, let’s understand why it is believed that there may no longer be supercycles in the upcoming future.
By February 2035, it is expected that 99% of all the Bitcoin that can ever exist will be already mined. This is crucial to supercycle theory, because it involves gradual change in miners’ profit source.
There are two types of profit that miners receive when new block is created:
Miner Income = Block Subsidy + Transaction Fee
- Bitcoin subsidy reward:
After spending substantial electrical power and finding the correct hash value, a new block is added to the chain, and Bitcoin subsidy is given to miners. It started with 50 Bitcoins per block, and each halving event reduces the reward amount by half.
2. Bitcoin transaction fee:
Miners also receive Bitcoin transaction fees for creating new blocks. The current amount of transaction fee for miners is still less than the subsidy reward, but as the halving continues and more transactions will execute in the Bitcoin layer, the transaction fee will eventually be greater than the subsidy rewards.
Later on, the miners will rely more on the transaction fee over the subsidy reward. Of course, it will occur somewhere between now and 2140 (when all Bitcoins have been mined). It will be a very gradual process, but important enough to keep in mind that miners will no longer rely much on block subsidies. This means that the supercycle theory, that occurs due to subsidy halving, may no longer occur. And Bitcoin will eventually stabilize its price and gradually expand just like the other traditional commodities.
The Catalyst for the Super Era: US Pension-Backed Capital Flow into Bitcoin ETFs
US Total Retirement Market Assets (Bitcoin Halving — Hashed)
Source from ICI.Org
On January 10th of this year, the SEC officially permitted Bitcoin spot ETFs, allowing certain U.S. institutions to include Bitcoin spot in their funds. The capital in the U.S. financial market includes a significant portion from pensions, amounting to $38.4 trillion (approximately 5100 trillion KRW) injected into the market in the last quarter of 2023. This capital is typically used for purchasing long-term investment products, and with the approval of Bitcoin ETFs, sustained buying pressure can be anticipated.
Gary Gensler, the current chairman of the SEC, was likely aware of the pension capital moving into Bitcoin despite its volatility and the potential for supercycles. Typically, pension funds aim to generate consistent profits for U.S. citizens’ retirement, relying on stable, long-term investments like the S&P 500 or real estate. The high volatility associated with Bitcoin’s historical supercycles raises concerns about its suitability for institutional investment. However, the SEC’s approval suggests that Bitcoin’s supercycle may see a reduction in volatility, accompanied by increased trading volume and sustainable buying pressure. This change can weaken the Bitcoin supercycle and stabilize its price.
In addition, with the inflow of pension-backed capital, the market is expected to witness enhanced liquidity and stability, further attracting more institutional investors. As Bitcoin price stabilizes, it makes Bitcoin a more attractive option for other conservative investment funds. As the ecosystem evolves, the integration of Bitcoin into pension funds could serve as a model for other cryptocurrencies, potentially ushering in a new era of digital asset investment that bridges the gap between traditional finance and the burgeoning world of crypto.
Conclusion
As we navigate the intricate dynamics shaping Bitcoin’s journey beyond 2024, it becomes evident that the landscape may set for a new transformation. The halving event and the approval of Bitcoin Spot ETFs mark pivotal developments, not only underscore Bitcoin’s growing legitimacy but also foreshadow its stabilization in the financial ecosystem. In essence, the once dominant narrative of a Bitcoin supercycle, characterized by dramatic price surges post-halving, is gradually giving way to a more stable and mature market environment. This evolution reflects a broader understanding of Bitcoin’s intrinsic value as a digital commodity, independent of speculative cycles. As we look to the future, the integration of Bitcoin into traditional investment portfolios suggests a promising horizon where Bitcoin continues to play a central role in the ever-evolving world of cryptocurrency.
Disclaimer: This article is intended solely for informational and educational purposes and should not be construed as financial advice, investment recommendation, or an endorsement of Bitcoin or any specific cryptocurrency strategy. The content presented is based on data and sources believed to be reliable at the time of writing, but its accuracy and completeness cannot be guaranteed. Cryptocurrency investments carry risks, including the loss of some or all of your investment, and may not be suitable for all investors. Past performance is not indicative of future results. Readers are encouraged to conduct their own research and consult with a professional financial advisor before making any investment decisions. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of any financial institution, service provider, or other organization.
