A major selling point for Bitcoin is that there will never be more than 21 million of them. Bitcoin was created with an eventual limit to prevent loss of value due to an ever-increasing supply. The way this works is that every four years the reward for mining Bitcoin is cut in half. Each time this has happened the price of Bitcoin has subsequently risen. There are predictions that the Bitcoin price after the 2024 halving (in April) will more than triple in value over the following year or so. Are these predictions realistic? Is halving the only factor to consider in regard to Bitcoin’s price going forward?
What Has Driven the Price of Bitcoin?
When the first halving occurred in 2012 Bitcoin was at $13 and it peaked at $1,152 the following year. At the time of the 2016 halving it was at $664 and peaked at $17,760 the next year. At the time of the third halving in 2020 Bitcoin was at $9,734 and it peaked at $67,539 the following year. If you only read these numbers it would seem that halving is a major factor in driving the price of Bitcoin. But we have seen a severe crypto winter follow the 2021 Bitcoin price peak. Historically high inflation and significant interest rate increases by the US Federal Reserve drove crypto prices down. This financial stress caused the collapse of overleveraged crypto businesses and investors. Investor sentiment in Bitcoin and the crypto world at large fell drastically. It remains to be seen if the next halving of Bitcoin will bring out a complete recovery to pre-crypto winter times.
What Happened to the Spot Bitcoin ETF Hype?
One factor that drove the price of Bitcoin higher in recent months was the prospect of spot Bitcoin ETFs being approved by the Securities and Exchange Commission. In December 2023 we suggested that one should buy on the rumor and sell on the news with Bitcoin and prospects of new exchange traded funds. When the SEC did approve the first ETFs to follow the spot price of Bitcoin the market briefly peaked and then fell back. The longer term response sees to be a loud “ho hum.” In that regard we believe that Bitcoin investors need to be careful about bidding up the price of Bitcoin in advance of the next halving event in April 2024.
Regulation and Bitcoin’s Future
One of the folks who say to expect a surge in the price of Bitcoin after the next halving is Anthony Scaramucci. He urges crypto fans to support Joe Biden in the coming presidential election instead of Donald Trump. His point is that crypto needs a degree of regulation to avoid a repeat of things like the FTX mess. The chaos of a second Trump term might be good for Bitcoin in the short term but a disaster in the longer term according to this guy who worked briefly in the Trump White House. While halving helps the price of Bitcoin it does not have the capacity to reverse the wave of bad things that would come with a new administration focused solely on settling “the Donald’s” personal grievances to the detriment of rational governance.
Bitcoin Stability Versus Falling US Credit
The magic of Bitcoin is that there will never be more than 21 million of them and there are already about 19.5 million. The point of halving is to slow the speed at which the remaining Bitcoin tokens are mined. Halving does not cut the number of Bitcoin in half or cut the price of the token. It cuts in half what Bitcoin miners are paid to produce new Bitcoin blocks. Let us put aside the speculative frenzy that periodically overtakes Bitcoin. And let’s put aside the insider dealing that led to the collapse of FTX and others. Going back to the origin of Bitcoin we have an idea for a way to buy and sell over the internet anywhere in the world. And the idea is to do this with a reliably stable digital currency. Then we see the difficulty that the US Congress has coming to grips with a budget, taxes, and issues of governance. It is not surprising that major credit agencies have downgraded US debt in the form of US Treasuries. Over the long term the US government is its own worst enemy and the greatest ally of Bitcoin as a stable medium of exchange over the years. This does not so much rely on Bitcoin multiplying in price after its doubling but rather maintaining more stability over the years.
