This Bitcoin halving cycle might play out differently: 21Shares report

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This halving cycle might see an earlier rally compared to previous ones mainly due to the impact of spot Bitcoin exchange-traded funds (ETFs), said 21Shares in a recent report. 

According to 21Shares, the circumstances surrounding the upcoming Bitcoin halving appear to diverge from historical patterns. A combination of factors on the supply and demand side creates favorable supply-demand dynamics; as a result, the rally for this halving cycle might kick off earlier than in past instances.

Notably, the introduction of spot Bitcoin ETFs has opened the door for significant institutional investment, leading to a surge in demand and price growth, 21Shares noted. Additionally, traditional finance players like banks and wealth managers are starting to offer Bitcoin investment options to clients, further fueling the demand for BTC.

“We’re starting to see the early innings of this with banks like Wells Fargo and Merrill Lynch providing access to spot Bitcoin ETFs to select wealth management clients, while Morgan Stanley is allegedly evaluating the Bitcoin funds for its brokerage platform. Cetera is also amongst the first wealth managers to officially roll out a formal policy on BTC ETFs, signifying that a new wave of demand is starting to roll in.”

While demand is strong, supply is decreasing, 21Shares highlighted. Existing Bitcoin holders are showing strong conviction by holding onto their coins, reducing the circulating supply. The firm also pointed to the fact that less Bitcoin is being held on exchanges, making it less liquid and available for purchase.

“Although the supply they [long-term holders] hold declined by 4% from 14.9M to 14.29M, the supply held by short-term holders has surged by over 33%, rising from nearly 2.3M to 3.07M. This showcases the balancing act between the two cohorts, which usually takes place at the start of a bull market post-halving, but now has emerged earlier due to the exogenous ETF demand, resulting in a near-neutralizing market force,” wrote 21Shares.

“This scenario would coincide with BTC’s exchange balance hitting a five-year low, reaching 2.3M,” added the team.

These factors, coupled with the reduction of new Bitcoin created following the upcoming halving, potentially make supply more tightening.

To analyze Bitcoin’s market sentiment and compare them to historical trends, 21Shares used two technical metrics: Market-Value-to-Realized-Value (MVRV) and Net Unrealized Profit and Loss (NUPL).

Currently, the MVRV Z-Score is around 3, lower than the 6 observed in February 2021 (a market peak). 21Shares’ key takeaways are Bitcoin might not be at its peak valuation yet compared to 2021. However, the MVRV is higher than historical averages for periods leading up to halving events, which was 1.07 on average in the last 3 cycles.

Similar to MVRV, NUPL suggests investors haven’t reached peak greed levels. Currently, NUPL is around 0.6, which is lower than the 0.7 observed before the 2021 price surge to $60,000. Compared to prior halving cycles, the current NUPL suggests a growing bull market.

In a word, both MVRV and NUPL suggest this halving cycle might be different with a potential earlier price surge due to ETF inflows bringing in new institutional investors. However, despite the bullish signs, the report acknowledges the possibility of short-term price corrections.

As noted by 21Shares, historically, it took Bitcoin (BTC) around 172 days to surpass its previous all-time high (ATH) and 308 days to reach a new cycle peak. However, Bitcoin already set a new ATH earlier this month, contrasting with previous cycles where it traded at an average of 40%-50% below its ATH in the weeks leading up to the halving.

“…the exogenous demand stemming from the ETF inflows could very well set a new precedent of growth during this cycle unlike previous ones, evident by Bitcoin’s impressive performance that broke its all-time high (ATH) before the halving,” wrote 21Shares.

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