Is the Bitcoin Halving Already Priced-In?
Supply contractions take time to affect prices.
Many argue Bitcoin’s price rises before a halving. Others say it comes after the event. And, to some, halving-induced price changes are a myth. Up 200% this year, is the Bitcoin halving already priced-in?
A popular narrative among crypto pundits is that the Bitcoin price begins rising about a year before a halving event. Head of research at Blockchain and co-founder of Mosaic, Garrick Hileman, explained to Forbes in 2018, “In the months leading-up to the last two halving events we saw Bitcoin’s price steadily trend upward, and then power higher following the reward halving.”
Some link the bullish momentum in the first half of the year to the pre-emptive accumulation of Bitcoin ahead of its next halving in May 2020. Morgan Creek Digital co-founder and partner, Anthony ‘Pomp’ Pompliano is not so sure. He asserted on Nov. 10 that “the Bitcoin halving is not priced in.”
So Who’s Right?
The third Bitcoin halving is roughly six months away. CoinMarketCap depicts relatively stagnant BTC price activity since June, with April to June showing the only period of sustained upward price momentum for the year. Given the continued rise of institutional interest shouldn’t it be surging by now?
Courtesy CoinMarketCap, BTC price year-to-date
The Reason for a Pre-Halving Price Uptick
‘Buy the rumor, sell the news’ is a well-established strategy among seasoned investors in traditional markets. It makes intuitive sense for an investor to accumulate an asset before an anticipated price uptick. That is especially the case if the event will have a known, quantifiable effect on supply and demand dynamics.
A recent parallel in crypto markets was the price action surrounding the Litecoin halving in August. Block rewards halved from 25 LTC to 12.5 LTC. Litecoin enjoyed a similar run-up in prices to Bitcoin in the first half of the year, with the increase from April to June marking the most significant period of price growth.
Litecoin began the year at roughly $30 and hit highs at the end of June around $140 well ahead of its halving. It now trades around $60.
Courtesy CoinMarketCap, LTC price year-to-date
Late volatility aside, Litecoin’s lackluster price performance since just before its halving to now suggests two things — the market is becoming more mature, and traders are less sensitive to hype.
But it could also mean demand for LTC has drifted. This may offset the impact of the drop in supply growth from its halving. Litecoin has little interest among institutional investors — and they are becoming important drivers of demand.
This is exemplified by Grayscale Trust’s crypto products. The firm’s Bitcoin Trust dominated its portfolio at 74% of total assets under management on a trailing 12-month basis at the end of Q3.
Recent inflows show a slightly more balanced distribution: $170 million entered into the company’s Bitcoin Trust fund for the quarter, while inflows into its non-Bitcoin funds were $83 million. The lion’s share of that, however, went into Grayscale Ethereum Trust and Grayscale Ethereum Classic Trust at $62.7 million and $18.4 million respectively.
On the other hand, Grayscale’s Litecoin Trust fund had assets under management of only half a million dollars as of Oct. 31. Institutional demand for Bitcoin substantially outweighs demand for Litecoin, suggesting a lack of price support for the latter — block reward halving or otherwise.
A Look at Bitcoin’s Brief History
Bitcoin’s historical price chart shows subdued but constant price rises preceding both the first and second halvings on Nov. 28, 2012 and July 9, 2016. It also illustrates enormous gains post-halving in both cases. First halving price gains continued for over a year. For the second halving, prices rose for almost 18 months.
Courtesy TradingView, Historical BTC price with halvings indicated
As Crypto Briefing has previously reported, the price of Bitcoin between 150 days before and one year after the first halving rose forty-fold. The equivalent figure for the second halving produced a six-fold return. After the second halving, however, prices continued rising to $20,000. Crypto hype, it must be conceded, played a substantial role in Bitcoin’s meteoric rise at the end of 2017.
Despite the limitations of a two-halving sample size, some patterns are observable:
First, a Bitcoin halving has a positive impact on price. Most, but not all, of that impact occurs after the event.
Secondly, with each consequent halving the run-up begins sooner than before. Most of the price movement occurs in the first half of the run-up period, before essentially flatlining as the halving approaches.
Prices began climbing before the first halving in May 2012 and peaked in August, before the November event. In the second halving, prices began climbing in September of 2015 and peaked in December, ahead of the July 2016 halving.
The earlier anticipatory buying before the second halving is explicable. Traders knew what to expect. Counterintuitively, crypto traders circa-2012 likely skewed tech-savvy and crypto literate, making the delayed pre-event buying for the first halving difficult to explain. Perhaps nobody really understood what impact it would have.
Thirdly, the impact of a block reward halving takes longer to eventuate with each halving. The first halving took 13 months before a peak BTC price in the four years between halvings. The second halving took 18 months before BTC peaked to all-time highs before beginning its descent into the crypto winter of 2018.
Strix Leviathan Analysts Are Not Buying the Narrative
Analysts at Strix Leviathan dispute the impact of a supply shock on crypto prices. In a July analysis that compared price behavior surrounding 32 halvings across 24 assets to the wider crypto market, the Seattle-based investment management platform concluded that “assets experiencing a halving — both leading up to and following a halving — perform no better than the rest of the market.”
However, one of their assumptions is somewhat questionable. The analysis assumes that “An immediate and abrupt shift in supply relative to demand will represent itself in an asset’s price fairly quickly following a miner reward reduction.” Historically speaking, contracting the money supply does not have an immediate impact on economic activity.
Research published by the Bank for International Settlements reported several studies that found that the implementation of contractionary monetary policy has a lagged impact on markets. Among U.S. companies, one study found that “more than half the adjustment in the manufacturing capital stock occurs in the first year, but it takes over four years to be complete” after tightened monetary policy.
Another study found money supply’s impact on exchange rates to be “gradual and prolonged,” with the full effect taking two to three-and-a-half years. There was no evidence of an immediate impact of a money supply shock on GDP. The effect grew stronger over time, taking roughly three years to fully play out. One model of the impact of increased interest rates on consumer spending found that “the average length of the monetary policy lag is 6.4 quarters.”
Given these lags, Strix Leviathan’s assumption of an impact ‘fairly quickly’ is misplaced, especially as cryptocurrency markets mature.
Bitcoin Is Not Like the Rest
The findings do not apply to Bitcoin, and nor did they intend to. The first Bitcoin halving was not included in the analysis. A data set of 32 halving events is preferable to one with only two, but considering the comparative demand fundamentals of Bitcoin, as Grayscale’s figures suggest, the study has limited relevance to the forthcoming halving.
Strix Leviathan’s study also included halving events for projects such as COLX, ranked 504th by market cap, ONION, with daily volumes under $3,000, and ANC, with a daily volume of less than $30, ranking 1,536th. Lumping these projects into the analysis was designed to expand the sample size. However, it is not conducive to generating reliable average metrics for the effects of reward halvings when it comes to Bitcoin.
As reported by Crypto Briefing last week, Bayern LB published findings suggesting the halving has not been baked into Bitcoin’s price. Applying a stock-to-flow ratio method of analysis, which effectively treats Bitcoin as a commodity, the Munich-based bank found that Bitcoin’s ratio will be close to that of gold after the 2020 halving: it will double to 53, while gold’s ratio is 58. Their maximum price prediction post-halving for Bitcoin based on that model is $90,000.
With a current price around $9,000, their assessment is that there has been no pre-halving inflows in anticipation of the forthcoming supply shock. Many will point to the rapid price gains this year from less than $4,000 to highs of almost $13,000 as evidence of some anticipatory accumulation. The timing of most of those gains is reasonably consistent with the pattern outlined above — that halvings cause bullish sentiment increasingly further ahead of the event, before flattening out.
But the sample size of two halvings is statistically inadequate. There are also matters of attribution. What level of influence, among the many on a crypto asset’s price, does the halving represent?
The jury is out on exactly what will happen. But Bitcoin’s historical pattern suggests the halving pump mostly occurs after the event and not before it.