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Hope you all are having a great start to February.

This time around we focus on one of crypto’s longest-lasting narratives: the Bitcoin halving. As Bitcoin approaches its fourth issuance reduction, investors may be trying to front-run this historically bullish event.

We evaluate the supply-side impact that the halving is expected to have on the market, the psychology behind the cycles that have built around it and the increasingly important demand metrics guiding crypto’s near-term trajectory.

Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.

• Fees on the Bitcoin network dropped slightly though they remain twice as high as they were during the low set in October 2022
• Ethereum fees remain strong, with 16k ETH ($26M) burned this week alone and the amount of ETH in circulation reaching a new post-merge low

Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances

• Exchange flows had a modest week both for Bitcoin and Ether as CEX-related FUD seems to be finally behind us

Bitcoin Halvening Narrative Building Up

Crypto’s oldest narrative is back. With still more than a year to go before Bitcoin’s “halvening”, chatter about it and bullish price predictions surrounding it have already begun.

For the uninitiated, the halvening consists of a 50% reduction in the amount of BTC rewards issued to miners, thus halving Bitcoin’s inflation rate. This process takes place roughly every four years and has been programmed into Bitcoin’s software since its genesis. This reduction in issuance has been the base for Bitcoin’s sound money appeal and part of many’s investment theses for crypto cycles. A more in-depth overview of Bitcoin’s halving and supply-side metrics can be found here.

Just over a month into 2023, Bitcoin appears to be outperforming stocks and many other crypto-assets — is the Bitcoin halving the reason behind this?

Cycle psychology — As price rallies preceding and after halvings have been commonplace for Bitcoin, investors begin to anticipate its effects

• Though it’s nearly impossible to prove how much the halving has to do with Bitcoin’s 35,000% 10-year return, there is a bullish consensus surrounding it among market participants
• Given this four year pattern, investors are likely acting in advance of what they may foresee as a next bull cycle
• This psychological loop may arguably be more bullish than the halving itself

This interest surrounding Bitcoin’s halving is evident in the increasing Google searches for it.

Via Google Trends

Increasing, but not overheated — Google searches are in an up-trend, but still far from where they were during the last halving

• Worldwide Google searches are now at a value of 77, reaching their third highest relative level over the past year
• Relative to the past five years, we are still at a level of just 3, pointing to an almost negligible relevance to the 100 level set the week of the last halving in May 2020
• Often times peak 100 Google searches coincide with tops for prices as positions may be too crowded when they reach such widespread attention
• Therefore, the increasing interest surrounding Bitcoin’s halving may be optimistic near-term as it still does not seem overheated over longer time frames

Even though it has become consensus that the halving is bullish for Bitcoin — is its *actual effect* that positive?

Bitcoin’s issuance will be reduced less drastically — Even if the percentage decline is the same, each Bitcoin halving becomes progressively less impactful in terms of the absolute effect it has on the issuance rate

• With 91.8% of Bitcoins already being in circulation, the amount issued per day is small relative to the supply already being traded
• Bitcoin miners’ rewards make up only 0.1% of BTC’s daily on-chain volume, making their selling pressure small relative to all the Bitcoin being traded
• Currently miners issue around 970 BTC (~$22.8M) per day and it is poised to reduce to just 485 (~$11.4M)

The $11.4M reduction in selling pressure is simply peanuts in comparison to the $42.3B Bitcoin trades daily per Coingecko data. This is why we conclude that the narrative surrounding the halving may be more bullish than the halving itself. Given the patterns Bitcoin has historically repeated, the anticipation game drives investment and speculation surrounding this easily-understood hopium.

Since Bitcoin’s supply has been built into its software since its inception and the issuance amount becomes increasingly negligible, it makes more sense to look at demand-side metrics, particularly who’s buying.

Whale Accumulation — Looking on-chain we see that addresses holding over $10M worth of Bitcoin have increased their holdings the most over the past 30 days

• This move highlights strong conviction in Bitcoin building up among institutions and high net worth individuals
• Though it’s unclear how much of the buying is halving-related, whales and long-term holders tend to accumulate during bear markets and beginning of bull markets and start selling after new all-time highs are reached

Are we simply repeating yet another four-year cycle even if the halving is mathematically irrelevant?

As discussed a couple of weeks ago, the high correlation Bitcoin has developed with broader financial markets may make this pattern more nuanced this time around. The Fed’s less restrictive stance taken this week sparked buying activity across all markets and could potentially help fuel a halving-related rally if it persists. Broader adoption metrics are also likely to influence the scale of the rally that Bitcoin may perform in anticipation of its halving.

While we still cannot confirm the continuation of the halving-led cycles, it is worth stating that human psychology does not change much historically — and less so within just four years.