Bitcoin gains 4% ahead 4th halving 💥

6:24 pm 18 April 2024

🕤 2 days to Bitcoin halving

This Saturday, probably around 5 AM GMT, the fourth ever halving of Bitcoin will take place. This is an important event for the cryptocurrency market, which investors, traders and short-term speculators from around the world are waiting for. Historically, after each of the previous three halving events, Bitcoin entered a time of dynamic increases, and each time investors asked themselves the same question. Will this time be different? So let's try to ask this question this time as well, and answer it by addressing the key issues arising from the cyclicality, as well as the changes that 2024 has brought to the cryptocurrency market and Bitcoin itself.

Historically, halving preceded Bitcoin's bull markets, which typically began about 12 months before the supply constraint and lasted for about 12 months afterward. The chart shows the price of Bitcoin one year before and one year after each of the previous halves. Remember that past performance does not guarantee future returns, and the market tends to fall into all sorts of cognitive errors. Foremost, more than 90% of Bitcoin's total supply of 21 million BTC is already on the market. Moreover, a total of only 3 halving seems a small sample to estimate the actual short-term impact on the price based on them. Nevertheless, in the long term, the halving limiting impact of BTC supply is quite obvious. Thus, we assume that BTC's short-term reaction is dependent, on general sentiment, and in keeping with the nature of Bitcoin's 'unintuitively' behaving, constantly surprising market, it may be contrary to prevailing sentiment.. Source: XTB Research 

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If history repeats itself

A well-known saying, by Mark Twain, says that 'history doesn't repeat itself, but it does rhyme'. Likewise (though never the same) have all, to date, cycles of cryptocurrencies. They have been characterized by extreme panics and euphoric rises. So in the first case, let's consider the impact of halving, in the scenario of an optimistic repeat of previous cycles for Bitcoin. In that case, on April 20, we may see a temporary decline (so-called selling the news), followed by a consolidation, a longer period of unwinding and a transition into the second, dynamic and final phase of Bitcoin's bull market. 

However, it seems that the 20% correction so far is already quite significant and in its dynamics coincides with the previous similar periods of decline, from 2023 and January 2024. All the previous ones turned out to be 'buying opportunities'. So we might as well see increases immediately after the halving, or for a while before it, although demand so far looks dormant. According to analysis by JP. Morgan, the futures market is still signaling overbought levels, and a volatility-adjusted valuation of BTC, relative to gold, suggests a price near $45,000. Nevertheless, in both scenarios, we can consider the initial short-term reaction as irrelevant to a further (upward) trend, and expect Bitcoin prices to move decisively higher over a halving horizon of several months.

A historically strong support level for Bitcoin prices has been the level of mining profitability, which is currently around $42,000 and illustrates the cost to miners. Another important support comes from the average purchase price of BTC by a short-term investor (so-called realized price around $59,000), which is trading at about a 7% gain under current BTC price, down from nearly 40% premium about 30 days ago. On-chain data, referring to previous cycles, specifically the amount of time BTC acquired by short- and long-term investors recorded a profit or loss, say that we may see about 5 to 12 months of bull market ahead. This would imply a peak in cyclical Bitcoin growth around Q4 2024 or Q1 2025. 

The broader picture of limited supply (which only translates into higher prices in a still-high-demand scenario) is compounded by no longer halving alone, as has been the case in previous cycles. Bitcoin has become a recognizable asset, and the available supply will be influenced more than halving itself by the activity of U.S. exchange-traded funds (ETFs), which, after 4 months of operation, already hold more than 5% of Bitcoin's total supply. Investors should therefore keep a close eye on sentiment on the Nasdaq100, bond yields and the dollar itself; the combination of these three factors could determine short-term price movement through certain behavior of ETF holders. A continued bull market in stock markets would likely favor bitcoin.

If history (doesn't) repeat itself

As is well known, Bitcoin is a deflationary asset, meaning that its supply is limited. The halving programmed into Bitcoin's code itself affects the cryptocurrency's inflation rate and cuts the mining reward in half (it will now drop from 6.25 to 3.125 per BTC block). Historically, it has created the prospect of increased demand, due to the expected bull market. As a result, investors have been reluctant to get rid of Bitcoin, expecting the value of their investments to rise in the medium term. But what if it really is 'this time will be different' and the current cycle will be completely disrupted? While just a few months ago such a prospect seemed less likely, we now see at least one factor that could determine this. Why current halving cycle may be shorter? The SEC acceptance of US ETFs had the 'halving effect', almost 4 months before the halving.

We are talking about US ETFs, which have 'swallowed' a massive amount of BTC in recent months. Only the two largest of a total of 10 of them, i.e. BlackRock Bitcoin Trust and Grayscale Bitcoin Trust, hold Bitcoins worth a combined total of almost 36 billion USD. Additionally, regulators in Hong Kong have approved the establishment of similar spot ETFs. Overall demand is now broader and has been enriched by investors, whose reactions may correlate more strongly with Wall Street. More so than was the case when Bitcoin was an alternative but very little-known asset. Bitcoin sentiment may be more closely related to what is happening in the stock markets.

A number of individual and institutional investors investing in exchange-traded ETFs will be adjusting portfolios according to, and assessing, the risk of their individual components. Bitcoin is still seen as a risky investment, and the Federal Reserve's restrictive policies and recent surprising inflation data supporting the dollar have caused capital to at least temporarily 'turn its back' on risky assets. Moreover, tensions between Israel and Iran in the Middle East have not helped the cryptocurrency at all, even leading to an increase in discounts, despite optimistic voices recently suggesting that bitcoin could provide a hedge for a period of military tensions. 

Nevertheless, while ETFs have seen recent outflows, and interest in them has waned, this is consistent with the cyclical nature of the market, and the lack of stronger selling suggests that many holders are adopting a long-term investment horizon, effectively limiting the supply of BTC. On the other hand, a potential sell-off in BTC collected by them could cause panic, potentially changing the cycle. The entire cryptocurrency market, as well as hedge funds pursuing a trend-tracking strategy, are watching ETF inflows as a major indicator of market strength. Rising oil prices, a tougher fight against inflation and economic data justifying the restrictive (and consequently potentially dangerous for stocks) policies of central banks ('higher for longer') seem to pose some risk to a halving cycle. On the other hand, however, the massive size of the U.S. economy's debt burden and resulting fiscal problems, and the potential continuation of the U.S. dollar's downward trend against assets (not necessarily currencies), continue to be tailwinds for speculative Bitcoin.

Bitcoin (D1 interval)

The price of Bitcoin has caught a breathlessness after a huge rally, but today gains almost 4%. The support level near $60,000 has so far held and is supported by two important levels. Both the 23.6 Fibonacci retracement of the upward wave from December 2022 and the 71.6 Fibo retracement of the downward wave from November 2021. In each of the previous bull markets, an important support level proved to be the average purchase price of BTC by a short-term investor (holding BTC for less than 155 days), which is currently around $59,000 and for US ETFs settles around $55,000. A dip below either of these two levels could lead to an accelerated sell-off. In the scenario of deeper declines and panic, the key levels are around $51,000 supported by past price reactions and the 38.2 Fibo, as well as the mentioned level of Bitcoin miner's profitability 'break-even' around $42,000.

Source: xStation5

The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.

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