Many people overlook this point: a key impact of the halving is that it changes the ratio of forced to willing sellers in the market.
Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by Luffy, Foresight News
The fourth Bitcoin halving will take place on April 20. At current prices, this will result in a reduction of $11.5 billion in the value of newly produced Bitcoins each year.
This sounds optimistic, and to some extent it is. All else being equal, a reduction in the new supply of Bitcoin should translate into an increase in price.
Bitcoin halvings have historically proven to be positive for price. In each of the three previous halvings, Bitcoin’s price surged within a year of the halving:
2012: 8,839%
2016: 285%
2020: 548%
But the halving is one of the most anticipated events in the capital market. It is actually written into the Bitcoin code, and we knew about the upcoming halving 15 years ago. The efficient market theory tells us that it should have been priced in by the market in advance.
But is it really like that?
Forced sellers vs. voluntary sellers
Here are my thoughts on the Bitcoin halving.
There are two types of sellers in any market: forced sellers and voluntary sellers.
For example, if someone has to sell their house this month because they lost their job, they are a "forced seller." Chances are, they will accept a lower price than a "voluntary seller," perhaps even a much lower price.
For Bitcoin, most of the forced selling comes from miners. Bitcoin mining involves a lot of direct costs: buying mining chips, installing mining machines, paying electricity bills, etc. Miners need to recover these costs, so they are forced to sell most of the Bitcoin they mine to get cash to pay for expenses.
Overall, everyone else falls into the "willing seller" category.
Unlike forced sellers (who are largely price insensitive), voluntary sellers will sell at different prices: some will sell at around the current price of $60,000, some will sell at $100,000, some will sell at $1,000,000, and some will sell at somewhere in between.
Furthermore, it is crucial to note that these prices change depending on individual and market conditions. For example, if there is a lot of good news in the market, someone who is interested in selling may change their mind and not be willing to sell unless the price rises significantly.
Why is this important?
Many people overlook this point: a key impact of the halving is that it changes the ratio of forced to willing sellers in the market.
For example, suppose that new investors entering the Bitcoin market want to buy 1,000 Bitcoins per day on average. Currently, Bitcoin miners produce approximately 900 Bitcoins per day. These investors can receive 90% of the Bitcoins from forced sellers and 10% from voluntary sellers.
However, after the halving, miners will only be able to produce about 450 bitcoins per day. With the same demand, new investors will only be able to get 45% of the bitcoins from forced sellers, while the remaining 55% must come from voluntary sellers.
Since Bitcoin’s liquidation price is determined in part by the willingness of those willing sellers, we expect the post-halving market to react differently to changing market conditions than it did pre-halving.
Is Bitcoin Pre-Priced?
Let’s get back to the original question: Is the halving already priced in?
To some extent, the answer is yes. Everything I have said above is public knowledge, and therefore is likely factored into the current Bitcoin price. But that price is based on the market’s current estimate of future Bitcoin demand.
What if the estimate is wrong? That’s when you’ll see the true impact of the halving.
If future demand for Bitcoin exceeds what the market currently anticipates, buyers will have to scramble to acquire Bitcoin in a different market than before the halving — one with half as many forced sellers. This could lead to a significant price increase as unexpected future demand attempts to take Bitcoin away from a higher percentage of willing sellers.
This is why I think the halving is bullish. I think the market is underestimating the long-term demand for Bitcoin for a number of reasons. For example, I don’t think the market has fully appreciated how big of an opportunity the ETF market will present once large institutions and the roughly $60 trillion U.S. wealth management industry are able to allocate to Bitcoin ETFs, which could start happening as early as the third quarter. I also don’t think the market has fully factored in the extent to which growing inflation concerns could drive Bitcoin allocations.
If I’m right, and I’m happy to see this happen, this excess demand will drive a scramble for Bitcoin from holders who don’t want to sell.
