Excell with Options: Bitcoin Halving on the Horizon

There has been a lot of news with bitcoin this year. The ETF news, while well-expected, has been a major catalyst. A 70% move higher on a year-to-date basis would have anyone talking about the asset. However, as we get into April, perhaps the biggest news in the Bitcoin market will be the Bitcoin halving expected on April 19. You can see from the chart above how the reward to bitcoin miners has been halved about every four years in practice. In reality, it occurs every time 210,000 blocks are added to the chain. This regulated decrease in the supply of bitcoin, as the rewards the miners earn for validating the block becomes the new supply of bitcoin in the market, is one of the principal reasons many like to own bitcoin in the first place particularly with the supply of fiat currency not regulated and certainly not dwindling.

While the Bitcoin halving events are certainly well-known, they have also been seen as catalysts for a move higher in the past. On the one hand, one can say that a reduction in supply for a given amount of demand should lead to higher prices. However, efficient market practitioners might suggest otherwise, wondering how the price would not fully reflect that well ahead of the event. If I look back through time, using a logarithmic chart, I can see that post each halving, there has been a large move though the moves have gotten smaller and lasted not as long. After the first halving, the price moved from $12.35, where it was at the event, to $964 a year later, a 7700% move in a year. At the second halving in July of 2016, the price was $663 at the time of the halving and moved to $2,500 a year later for a 277% move. At the third halving in May 2020, there was more volatility, going from $8,500 to a high of $65,000 about eight months later before settling in around $37,000 a year later, still a return of over 300%. While there are only a few data points, and this is not a statistically significant sample size, there is still the expectation that the reduction in supply will have a similar positive impact on price.

Perhaps a reason for the expectation of higher prices is that it is not only the supply that is changing but also the demand. As I mentioned earlier, the changing regulation of bitcoin has opened the possibility of Bitcoin ETFs, creating a potential new source of demand from investors who were not already involved in the market. In the chart above, I can see that the assets under management in Bitcoin ETFs is now up to $55 billion. While this number has stabilized somewhat in the past month or so, it has been a major driver of higher prices. The potential combination of strong demand and less supply has some thinking that the move in bitcoin post the halving could actually be larger than we have seen in the past couple of cycles.