Block 840,000: Unveiling the 4th Bitcoin Halving, a summary of the supply dynamics, market impact, regulatory developments, and future outlook for BTC

Introduction

In the ever-evolving landscape of digital finance, few events hold as much intrigue and anticipation as the Bitcoin (BTC) halving. Picture this: a decentralized digital currency, created by an enigmatic figure or group under the pseudonym Satoshi Nakamoto, designed to disrupt traditional financial systems and empower individuals with financial sovereignty whilst remaining unfettered by government. Now, imagine a pivotal moment in this digital revolution, a moment when the supply of this ground breaking cryptocurrency is cut in half, significantly reducing the pace at which the asset is created. This, in essence is the BTC halving, an event shrouded in mystery, yet eagerly awaited by investors, traders, and enthusiasts.

With excitement still in the air following the 4th halving last week, it's time to delve into the heart of this phenomenon, uncovering its significance, unravelling its implications, and exploring the opportunities it presents for those bold enough to venture into the realm of what some call digital gold. Welcome to the ultimate guide to the BTC halving, a journey through the past, present, and future of the world's most famous cryptocurrency.

In this short article, I will explore major milestones over the past 4 years, discuss the historical context of previous halving events, their impact on supply-demand dynamics, market sentiment, regulation, technical developments and finally some industry predictions.

Supply Dynamics

On Saturday 20th April 2024, the 740,000th block was mined, triggering the pre-defined halving event hard coded into the bitcoin blockchain protocol, reducing the volume of block rewards by half, from 6.25 to 3.125 BTC, ultimately reducing the supply by 50%, an event which occurs every 210,000 blocks or approximately every 4 years. For those who are not too familiar with this event, please read my previous article on Linkdn, explaining the concept in more detail.

As new BTC are made available via block rewards approximately every 10 minutes, one could on face value assume BTC is an inflationary asset, however when taking into consideration the entire design mechanics of the protocol, a 21 million finite supply and a 50% reduction each halving, some may consider the asset to be deflationary by design.  

The finite supply, combined with the halving mechanism draws on the concept of scarcity, a fundamental principle in economics.  With only 1.38 million BTC remaining and the last predicted to be mined sometime in 2140, the supply shock mechanics visibly intensify each halving, as seen below:

Some have estimated that as little as 15 of the 19.68 million BTC remain in current circulation due to the various hacks, scams and lost private keys over the years. With advancements in blockchain analytics, increased knowledge and awareness within intelligence, law enforcement and regulatory agencies we have observed a reduction in criminal activity. Interestingly the visual below approximates the current ownership structure of the circulating supply. It is no surprise that retail is the majority stakeholder, however somewhat surprising is the volumes held by governments, which upon closer inspection, comprise of large seizures made in several large scale investigations such as the Silk Road case.

Analysing the historical price impact of the past three halving events, we observe some common themes. On all 3 previous halving’s we encountered a price increase up until the halving, followed by a drop which some refer to as a “buy the news sell the event” type scenario. Price impact is typically observed the following year and significant gains follow. However as per the table below the price impact on the halving events reduce over time:

This year’s halving differs in that a peak was reached much before the halving, with some relating this to the positive market impact following the approvals by the Spot BTC exchange traded funds (ETF) products alongside a more educated and market savvy consumer base.

Market Sentiment

General sentiment towards the novel idea of BTC has evolved over the years, largely from scepticism and negativity to a newly formed positive narrative of promise, innovation, and excitement. Although not shared by all nations, with some continuing to attempt to ban crypto activity, we have seen a tremendous number of countries not only accepting but embracing this new asset class with some even racing to obtain crypto hub status.

Institutional sentiment has also shifted significantly over the past few years with the likes of Larry Fink, the CEO of the world’s largest asset management firm Blackrock, shifting his views from “BTC demonstrates how much demand there is for money laundering” in 2017, to now likening the asset to digital gold and launching a spot BTC ETF product in Jan 2024 to capitalise on the institutional demand.

Investor sentiment is typically measured by combining indices such as on chain metrics, analysing user behaviour and trends such as accumulation or asset hold patterns, daily trade volumes, global market cap and social media posts to create what some have termed “the fear and greed index”. Over the past 6 months the sentiment has fell into the “extreme greed” category, indicating that the market has accumulated significantly and there may well be a correction in the short term. Bitcoin has the largest market cap of all cryptocurrencies resulting in the highest investor confidence although some have speculated that at some point, other crypto assets such as Ethereum could overtake bitcoin, the event even termed “the flippening”.

Regulatory Developments

The evolution of crypto regulation represents a fascinating journey through the intersection of innovation, finance, and governance. In its infancy, cryptocurrency emerged as a disruptive force, challenging traditional financial systems with its decentralized and borderless nature however, no government expressed concern over the need to regulate cryptocurrencies.

Initially met with scepticism and uncertainty, the jejune efforts of banning bitcoin by nations were mostly short lived. Given the sheer popularity of cryptocurrencies, nations were left with little choice but to educate themselves on blockchain technology, digital assets, and the ecosystem more closely. With this, they understood the borderless nature and the impact that bans had on their citizens, pushing people underground, increasing exposure to fraud.

As popularity of crypto soared, we observed an introduction of taxonomy, the first signs of cryptocurrency being accepted as a form of asset. The UK Law Commission has recently proposed a bill that will classify cryptocurrencies under the distinct category of personal property, whereas El Salvador was the first country to recognize bitcoin as legal tender in 2021.

Japan was one of the first countries to formulate regulations governing cryptocurrencies following several hacks to large crypto exchanges. Cryptocurrency regulation has evolved from a fragmented and often ad-hoc approach to a more structured and nuanced framework. Governments and regulatory bodies have recognised the need to balance innovation with investor protection, seeking to foster growth and development while mitigating risks such as fraud, money laundering, and market manipulation.

Today, cryptocurrency regulation continues to evolve, shaped by ongoing technological advancements, changing market dynamics, and shifting regulatory landscapes. With each new development, the story of cryptocurrency regulation unfolds, reflecting the complex interplay between innovation, regulation, and the ever-evolving nature of finance in the digital age.

Although we have already gained an incredible amount of regulatory clarity over the past 4 years, with most regions implementing crypto asset regulatory frameworks, we are still, far away from where we need to be, with international standard setting bodies doing all they can to catch up and advise on best practice on managing risk.

Although many types of crypto assets have been categorised by nations worldwide, we are yet to agree on a uniform global categorisation or terminology with virtual, digital and crypto assets all used interchangeably by differing regions. We now have defined the types of services being offered to consumers and have developed licensing frameworks to provide much needed regulatory oversight of the sector. We have observed the development of sophisticated blockchain analytics providers, allowing regulatory authorities the technical capability to manage risk and supervise confidently.

International standard setting bodies, governments and central banks are increasingly analysing various cryptocurrency developments including the volumes traded domestically and internationally to identify capital flight risk. National risk assessments to identify and manage money laundering and terrorist financing risks have been carried out by many governments.

FATF now actively monitors the efforts of member states or jurisdictions that it deems materially important given their volume of VASP activity on their implementation of recommendation 15. The international monetary fund (IMF) has recently stated that although crypto assets have implications on macroeconomic and financial stability, crypto markets do not currently pose a risk to financial stability in most regions, however with adoption higher in emerging markets and low-income jurisdictions, increased adoption could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risk. Furthermore, the widespread use of stablecoin arrangements, could increase dollarization in jurisdictions, given that currently the most used stable coins are in USD forms.

We are now entering the next stage of regulatory frameworks, covering stable coin issuance, non-fungible tokens, and decentralised finance concepts such as categorising different forms of staking, and defining which activities fall under regulatory purview. The challenge is that these novel concepts may not be fully understood and could therefore be mistreated as collective investment structures, which could impact the underlying ecosystem. It is therefore imperative that the regulatory treatment and taxonomy of retail staking for example is undertaken by those with intricate knowledge of the ecosystem who can confidently form new policy, rather than attempting to retrofit existing policy to new concepts.

Economic Impact

In periods of global economic downturn, characterized by contractions in economic activity and widespread fiscal retrenchment, the question of whether Bitcoin constitutes a prudent investment vehicle assumes heightened significance.

As traditional monetary policies falter in their efficacy to stimulate growth and preserve purchasing power, investors increasingly seek refuge in non-correlated assets such as Bitcoin, which exhibits a degree of insulation from the fluctuations of traditional financial markets. Moreover, the heightened volatility observed in Bitcoin during periods of economic turmoil can present opportunistic avenues for astute investors to capitalize on market inefficiencies and generate alpha amidst prevailing market dislocations. Therefore, given its potential as a diversification tool and hedge against systemic risks, Bitcoin has presented itself a viable investment opportunity among the tumultuous economic backdrop of a global downturn.

In January 2024, a number of spot BTC ETF products from leading US asset management firms were approved by the SEC. Although not the first products of their kind in the world, we have witnessed unprecedented demand since their launch. BlackRock’s iShares Bitcoin Trust (IBIT) has been the best performer, reaching $10 Billion faster than any ETF in United States history.

With 10 countries worldwide currently offering Spot BTC ETFs and the first set of both Bitcoin and Ether ETFs approved to commence trading in Hong Kong this week, we are likely to witness greater demand in the short and long term. The major difference between the US and HK spot BTC ETF products is their creation models, with the US sticking to cash redemptions and HK opting for an in kind creation model. The SEC has not yet approved Ether spot ETF applications to date.

Other nations including Singapore, South Korea and the UAE are also looking to explore these products given there gaining popularity with institutional investors. The US currently takes the lions share with approximately 80% of the global Spot BTC market with $35 billion of the $42 billion market.

With standard chartered bank predicting 50-100 Billion inflows in the first year, equating to between 437,000 to 1.3M BTC being held in US ETFs by 2025, it would significantly impact the supply-demand dynamics. If this was to materialise, the bank have predicted that the price could rise to levels closer to $250,000 by the end of 2025.

Other TradFi organisations have also been embracing digital asset related services, with Société Générale creating a subsidiary dedicated to the same. SG-Forge launched their EUR denominated stablecoin in April 2023 which enables onchain settlement of securities. Goldman Sachs launches their GS DAP, a tokenisation platform designed to facilitate the issuance, registration, settlement, and custody of digital assets. Recently we have also seen Landesbank Baden-Württemberg (LBBW), the largest federal bank in Germany, a savings institution, typically renowned for their conservative nature, entering the digital asset custody and procurement services space.  

As market maturity develops, we expect to see more TradFi organisations entering the digital asset space, from providing banking services to crypto native businesses, to offering their own digital asset custody for clients. We also expect to see a significant growth in stablecoin arrangements, specifically local FIAT currency denominated, with the current market heavily based on USD stablecoin arrangements.  

BTC Developments, Future Outlook and Conclusion

BTC has commonly been referred to as digital gold, with limited functionality as a store of value and often referred to as having limited functionality in comparison to other cryptocurrencies. This all changed in January 2023, when the ordinals protocol mainnet was launched, referred to as the phase 2 for BTC, alighting a rebirth of innovation and a potential catalyst that may further influence BTC adoption and price point.

The ordinals protocol assigns additional information to the serial numbers of Satoshi’s, the smallest BTC unit. This extra data is referred to as an inscription and allows for the creation or minting of unique and scarce digital assets such as non-fungible tokens (NFTs) directly onto the bitcoin blockchain.

The developer of the ordinals protocol, Casey Rodarmor, has also been busy creating another protocol, like ordinals, with some baked in efficiencies. The Runes protocol was created in September 2023 and officially launched on the day of the halving last week. Runes introduces fungibility, more commonly associated with the ERC-20 token standard, which facilitates easier trading and use as a medium of exchange. Runes leverages bitcoins unspent transaction outputs (UTXOs) for storing token data, offering increased flexibility and a potentially larger data capacity in comparison to ordinals which uses bitcoins “witness” section which has limited capacity.

This additional utility has created some interesting events post halving, notably a race to etch in additional information and mint NFTs within the halving block itself, with some paying significantly higher transaction costs for the privilege. ViaBTC mined the 840,000th block, which marked the halving, pocketing 40 bitcoins worth over $2.6 million. This is significantly higher than the 7 bitcoins received by miners for the subsequent blocks preceding the halving which may indicate the eagerness and investments made to ensure that a user’s transaction was prioritised and included in the halving blocks 3050 transactions.

Given the soaring adoption of BTC it is no surprise that google search interest for the term “bitcoin halving” has hit an all-time high and almost double that of the last halving in 2020, with Nigeria, Netherlands and Switzerland leading the way in curiosity.

The impact of the FTX and Luna collapses in 2022, had a profound effect on the cryptocurrency landscape, the term “crypto winter” used by many in the industry for this period. The funding dried up as many were caught in the liquidation aftermath however, we are beginning to see a change in VC sentiment and an increase in token sales indicating, we may be on the cusp of a new ICO boom, this cycle drawing on innovations within the realms of Real World Assets (RWA), Decentralised Physical Infrastructure (DePIN), and Decentralise Finance (DeFi) narratives.

This cycle is gearing up to be significantly different to the previous with an increase in regulatory scrutiny, due diligence, compliance, investor awareness and accessibility with an array of investment vehicles expanding from the Initial Coin Offering (ICO) to Initial Exchange (IEO), Dex (IDO), Game (IGO), Farm (IFO) and NFT (INO) Offerings.

As the bull market accelerates, we will likely observe a resurgence of launchpads, specialised platforms with a pivotal role in garnering attention, establishing a strong footing, and securing funding for up-and-coming crypto projects. We are also likely to observe a rise in scams, however as retail becomes more astute to the sector, these will likely take the form of differing vehicles for example the current meme coin frenzy.

As growing demand exceeds supply, we expect to encounter price impact, however crypto markets are notoriously volatile, making it increasingly difficult to make predictions. If I were to, it would rely upon analysing previous halving events and market cycles. As we have observed a deceleration when it comes to price impact following the previous cycles, I would place my estimation at 2.5x the current price for the next peak, approximately $158,000, which I estimate to be anywhere between October through December 2025.  

Amidst prevailing macroeconomic uncertainties and diminishing confidence in traditional financial instruments, Bitcoin has emerged as a compelling alternative investment proposition, owing to its inherent attributes as a decentralized digital asset with unprecedented institutional demand. Bitcoin’s apolitical and unfaltering monetary policy will undoubtedly serve as a catalyst in adoption in coming years and we expect to see a bright future for the digital asset landscape.

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