Bitcoin will go through its approximate quadrennial halving on April 19, 2024. The past three halvings coincided with tremendous runups in bitcoin (BTC) prices, the last of which echoed through the ether market.

What’s going to happen

On April 19, the “block reward” for mining a new block of bitcoin will drop from the current 6.25 bitcoin to 3.125 bitcoin. This will likely reduce the number of BTC produced per day from the current pace of around 900 to approximately 450, tightening supply.

Of the 21 million BTC that are set to be mined between now and 2140, 19.6 million, or 93.3%, have already been created. Of that 19.6 million, perhaps as much as 20% may have been permanently lost, leaving us with probably 15-16 million BTC in circulation. As such, the reduction in new supply could have a substantial impact on prices, as was the case in the past. 

BTC prices and past halvings

From bitcoin’s inception on January 3, 2009 through November 28, 2012, its block reward was set at 50 BTC per new block. During this period, on average, there were 7,369 BTC created per day, or about 2.7 million annually. On November 28, 2012, the block reward dropped in half from 50 to 25 BTC. Under this regime, which lasted until July 9, 2016, there were, on average, 3,978 BTC created per day, or about 1.45 million per year.

The block reward dropped from 25 to 12.5 BTC on July 9, 2016, and the daily and annual creation of BTC slowed to 1,875 and 684,000, respectively, over the next three years and 10 months. The most recent halving occurred on May 11, 2020, when the block reward dropped to 6.25 BTC, leading the daily and annual creation of bitcoin to slow to 906 and 330,770, respectively (Figure 1). 

Figure 1: BTC’s next halving could take annual supply down to 165,000 coins from 330,000

Each of the three previous halvings were followed by two market impacts. First, prices rose. In the 365 calendar days after the November 28, 2012 halving, bitcoin prices rose 8,447%. In the year following the July 9, 2016, halving, bitcoin prices rose a more modest, but still impressive 290%. In the 12 months after the May 11, 2020, halving, bitcoin prices jumped 559% (Figure 2). During this last rally, ether outperformed bitcoin, rallying by 2,116% versus the U.S. dollar, which put it up 236% versus bitcoin. During the intervening periods, BTC prices barely increased at all. 

Figure 2: BTC rallied sharply in the 365 days following past halvings of new supply

But should we expect such a large crypto rally this time? There are reasons to be sceptical. For starters, BTC prices have already been on a steep upward slope, and ether has been outperforming bitcoin. Perhaps cryptocurrency markets are more efficient to the market impact of bitcoin halvings now than they were in the past when the markets were still relatively new.  If so, they might not rally as much afterwards. 

Also, growth in BTC trading volume on the crypto exchanges has slowed. It grew exponentially from 2009 to 2012, less so from 2013 to 2017 and scarcely at all since (Figure 3). That said, the recent news about spot bitcoin ETFs in the U.S. appear to have created a steady source of new demand and an uptick in trading volumes which is about to collide with an upcoming reduction in supply.

Figure 3: The number of daily transactions has sometimes presaged bitcoin rallies and falls

It’s also worth noting that bitcoin has become less volatile in recent years. If volatility remains lower than it was in the past, that might mean fewer extreme moves both to the upside and to the downside (Figure 4). 

Figure 4: BTC’s trailing 1Y volatility recently fell to a record low

During past post-halving bitcoin rallies, miners’ revenue per transaction has also served as an indicator when BTC was getting toppy. In its 15-year long history, BTC has suffered four great crashes:

  1. a 93% drop between June and November 2011
  2. an 83% drop between November 2013 and January 2015
  3. an 82% drop from December 2017 to December 2018 and
  4. a 70% drop from November 2021 to November 2022

Each of these previous bear markets was preceded by a sharp rise in what terms “cost per transaction,” which is more precisely defined as miners’ revenue per transaction (Figure 5). This measure is already on a steep upward slope having recently jumped from $50 to $165. That said, each of the previous peaks in miners’ revenue per transaction was above the previous peak and thus far, in 2024, it remains far below the $300 per transaction levels in 2021 and 2022 and presaged bitcoin downturns. Even so, investors might want to keep a close eye on it, especially if it exceeds its 2021-22 highs. 

Figure 5: Spikes in miners’ revenue per transaction signalled coming bitcoin bear markets

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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