The mid-halving event has historically been bearish for Bitcoin and that will likely weigh on sentiment again this time around, but Bitcoin’s short-term price action will remain difficult to predict.
That means that we are about halfway through the current cycle, a point which is known as the mid-halving event.
All else being equal, the reduction in new supply should lead to an increase in Bitcoin’s price, and this correlation has been observed in the past.
As shown in the chart above, the stock to flow ratio of various assets including Bitcoin is correlated with the asset’s market cap.
While the hundreds of Bitcoins being created every day right now are certainly noteworthy, it will seem less important when, for example, 4 Bitcoins are created per year instead of 8.
My graphic above shows Bitcoin’s chart in each of the past two halving cycles, as well as in the first half of the current cycle.
Since we are at the mid-halving event, the third year in this cycle would refer to the next 12 months starting now.
Before worrying about another 40% drawdown, note that Bitcoin’s volatility has reduced with each passing cycle as its market cap increased and more institutional investors bought in.
However, the current cycle is anomalous because it shows a much earlier rally relative to the peak, which also occurred a couple months earlier than before.
One is that the halving events are becoming less relevant to the price action over time as the stock to flow ratio increases.
There is an infamous story of a researcher from last century who discovered that for a few years in a row, the top performing stocks in one year would go on to beat the market again in the following year.
Although there are many possible causes of this change, one reasonable theory is that once people became aware of the strategy to buy the best performing stocks at the end of the year, they bid them up to unreasonable valuations before the year ended.
With two full halving cycles in the books, there is enough history for people to see clear patterns in Bitcoin’s price action based on its halving cycle.
This is a good warning for long term Bitcoin bulls to avoid timing the market based on past cycles; those who sell now in anticipation of a bearish third year could very well end up missing a rally.
History tells us many things about Bitcoin, and depending on which parts of history you look at, it’s easy to construct a bullish or bearish narrative about Bitcoin’s future and how the mid-halving event will impact it.
As I’ve discussed in my previous articles, the continued devaluation of fiat currency, the increasing interest in Bitcoin from larger investors/corporations/governments, and the increasing number of applications for blockchain technology are fundamental reasons to believe that Bitcoin has a bright future.
I will probably start adding to Bitcoin again in the coming months, even though I can’t say for certain whether its price at that point will be higher or lower than the current price.
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Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock ownership, options, or other derivatives.