Cutting Through the FUD Part III — The BTC Halving is Priced in

Lately, a narrative that has become popular is “the BTC halving is priced in because everyone knows about it. If you don’t understand this, you don’t understand how markets work. I noticed people in crypto circles have increasingly adopted this idea. I beg to disagree.

The argument that BTC halving is already priced in relies on the well-known assumptions which underpin the core of modern finance, in particular — the Efficient Market Hypothesis (EHM) which in its strong form states that asset prices fully reflect all available information. Therefore, the market gets priced in ahead of the event, so the occurrence of the event should not have any impact on its price.

For example, if Amazon pre-announces strong Q4 earnings today, the stock reacts right away and when it discloses Q4 earnings after the quarter, the stock should not react assuming there are no other surprises.

In crypto, the argument goes that since the halving event is known in advance, the market should already have priced it in well in advance, so why would the actual halving impact the price?

I spent over 20 years looking at global equity markets and am a proponent of EMH. In the crypto market, EMH also applies in most cases. However, I am highly skeptical of the EMH narrative as it applies to the halving event.

My skepticism stems from:

1. Unlike equities or other traditional assets, crypto assets are much harder to value, and there is no consensus on how to value an asset like BTC, so there is no way to determine accurately if the halving event is priced in.
2. Even if people anticipate it and attempt to position ahead of the event, only the long term HODLers are able to realistically do so. Take the last 2 month’s selloff as an example. The miners have capitulated and the short term traders have been liquidated. Even the long funds and hedge funds have probably pared back their holdings or hedged their positions. So this expected bullish positioning has been “washed out” and long positions will have to be re-established if these participants want to position for the halving event.
3. Moreover, even if the market was positioned for the event, the actual halving reduces the incremental supply of coins from miners such that if the demand side was relatively stable (ie. speculators aren’t looking to sell immediately post halving in anticipation of further gains), incremental demand would still outstrip incremental supply to push up prices.
4. Some analysts have argued that Litecoin’s price collapse (down almost 70% since peaking in late June 2019) ahead of its recent halving on Aug 5, is further evidence that Bitcoin will suffer the same fate. The comparison is not relevant in my view for a number of reasons: 1) LTC’s price rose 5.5x from its Dec 2018 lows to its peak in late June 2019 (BTC rose only 4.5X during the same period), so the market did anticipate its halving; 2) its price behavior is almost identical to the previous cycle where it also rose sharply before halving and sold off about 1.5 months before the halving; 3) BTC’s halving occurs 9 months later and its price behavior is totally different than LTC’s. In the past 3 cycles, it has risen gradually towards the halving and then rose exponentially as the halving reduces the block rewards. The difference in price movements suggest that there is steady underlying demand for BTC while the LTC movement is mainly due to short term speculative flow.
5. A recent study into the stock-to-flow showed the possibility of a power law relationship between Bitcoin’s price and its scarcity — a statistically high correlation between the two with a low probability of coincidence. It also aligns with the same SF relationship of gold and silver. Gold’s stock-to-flow ratio is around 66 years, whereas bitcoin’s is approximately 25 years. After the halving, Bitcoin’s supply will be reduced in May 2020 to 6.25BTC per block and thus increase the ratio of the stock-to-flow to 50 years. According to the World Gold Council, Gold has a total market value of about $7.8 T. Bitcoin’s current market value is $130 B.

BTC’s Stock-to-Flow will rise to 50 years post May 2020 halving

Bottomline: I believe the EMH argument while valid, likely won’t play out as the narrative suggests. I still expect a gradual pre-halving run up as we approach the event and an exponential move post halving.