From CoinShares Research Blog By Christopher Bendiksen

Another halving is looming. At this point, most people know what’s going on — bitcoin’s ongoing monetary inflation rate is cut in half. And it will stay at its new level, about 0.9%, for approximately the next 4 years, at which point it’s cut in half again.

We have covered the technical aspects of the halving in detail previously, so we won’t get into that this time around, but the end effect is what you see below. Completely predictable monetary inflation, trending to zero over time, resulting in a supply cap of just below 21m btc, reached some time around the year 2140.

We have also covered the non-technical aspects of the topic extensively both during and after the last halving as well as over the years in general, but as is tradition, for all the new folks, we’ll do a customary update on the answers to some of the most common questions we see out there:

There simply won’t be enough time to cover all of these in detail in a single post, so we’ll answer the latter two in utmost brevity (with some sources suggested for those wanting more depth) and focus on the first one — which is the most interesting question anyway.

So is the halving priced in? No. And it can’t be. For a thorough and necessary savaging of the Efficient Markets Hypothesis we direct interested readers to Chapter 2 of the excellently erudite Bitcoin is Venice, by Allen Farrington and Sasha Meyers. As for the miners, they will be fine!

The Halving does Impact the Price

But it might not impact it in the way that seems most obvious — at least not immediately. Our view is that the halving impacts price in two ways, one slow and consistent, the other one immediate and transitory:

Let’s look at them both in some more detail.

The Halving as a Supply Shock

The ‘obvious’ impact of the halving is its effect as a supply shock. Literally overnight, the supply is cut in half, lowering Bitcoin’s monetary inflation rate by 50%. However, this is not really as impactful in the short term as one might think. It mostly works its magic over time.

As a thought experiment, let’s consider the size of the bitcoin issuance relative to the current ETF flows from the US. On a daily basis at current prices, the ETFs have been eating up somewhere on the order of 9,000 btc per day. The mining network produces around 900 coins per day. That means that even if miners sold every coin they mined every day, the ETF flows would still eat up 10x that amount.

After the halving it would be 20x. Ok, that’s double, but it wouldn’t change the fact that the only way the ETFs can source that amount of coins is by upwards repricing causing existing holders to add dormant coins back into the market.

But this doesn’t mean there is no effect. Let’s imagine prices were 10x higher than here. At these levels, the same ETF flows would be eating up only 900 coins a day, exactly balancing ongoing supply (assuming no other buying and selling in the market). At that price level, the halving would be much more impactful on an immediate basis.

Over the long term, the halvings effectively allow price levels to be sustained at higher and higher levels, given constant flows, or alternatively, at similar levels if flows were to fall at the same rate as issuance. This definitely is an important effect, but in the short term, it is so completely drowned out by speculation that it is pointless to look for any immediate effects.

The Halving as a Marketing Event

This is where the immediate effect is felt. Every single time the halving approaches, the media picks it up in undying fascination, shining renewed light on Bitcoin in traditional media. At this point, people who first heard of bitcoin in the previous bull run, but assumed it was dead, will discover that it is in fact fine, and tending to be doing much better than they had imagined. This is certainly the case this time around, with prices already closing in on all-time-highs, even well in advance of the halving itself.

Even if the coverage doesn’t always tend to be technically accurate (see the above screenshot for an example) we think this type of renewed media attention is one of the critical trigger points for reigniting the cyclical speculative mania that tends to hit bitcoin approximately every 4 years. At this point, momentum becomes a driving force and the classic bull market run ups commence. The outcome seems to be the same every time: Prices at some point go parabolic, get ahead of themselves, and a brutal correction follows.

We do not recommend attempting to time these cycles. In our opinion, bitcoin is about time in the market not timing the market. The fundamental investment case is clear, and a little bitcoin goes a long way.