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The 2024 Bitcoin Halving
The Blockchain Sector 2023-06-03
The 4th Bitcoin halving is currently expected to take place in late April 2024. At the same time we are expected to emerge from a period of quantitative tightening.
These factors combine to create strong upside potential for digital assets which we will explore in this newsletter. We will also look at the downside and what happens if Bitcoin doesn’t make a new all time high in the next few years.
Bitcoin halvings take place every 4~ years where the supply distributed to miners is cut in half.
Market Influence Of Bitcoin Halvings
Whenever we talk about historical data it is important to bare in mind that we do not have many data points to model. People will peg their careers on long term log charts showing Bitcoin’s 4 year market cycles but the markets today are significantly different to 2012, 2016 & 2020.
Perhaps there is a self-fulfilling prophecy about the 4 year market cycle and I expect it will influence crypto markets in the future. As we can see from the chart above halvings (aka halvenings) generally take place around the middle of a market recovery. Price is always in or around the long-term support band (green curve) and from that point on price goes into up only mode culminating in a bull market peak a year or so later.
This is based on 3 previous data points and in the last cycle we didn’t get the blow off top everyone was expecting. There are no guarantees that Bitcoin will continue to follow this cycle but let’s look at the possible scenarios with a foreword about the economic environment.
The Macro Cauldron
The current macro economic scenario evolved out of a long period of low inflation and interest rates. During covid there was a massive increase in the M2 money supply, a lot more dollars were printed, this caused high inflation (dubbed cost of living crisis in the UK) and rates needed to be raised to combat inflation.
The FED has been implementing quantitative tightening initiatives to reduce the supply and slow down inflation. Now higher interest rates are having a negative impact on the economy as debt becomes more expensive to service.
This will lead to a period of relatively high inflation, higher rates and ever expanding levels of public and private sector debt. Wealth inequality is expanding and in democratic regions there is little appetite among voters and politicians for austerity.
At some point in the coming months or years the Fed will slow down, eventually reversing interest rate increases and money supply will expand again. It is impossible for the Fed to continue quantitative tightening and the continued success of the economy relies on a devaluing dollar.
As more dollars are created their real value depreciates. Prices aren’t going up, the value of the currency is going down
There are other challenges to the economy at home and abroad. Technology is evolving to disrupt our traditional industries as AI and automation replaces human work forces around the world. This could lead to higher unemployment or a shift in how we work and where our skills are most useful.
There is potential for geopolitical impact stemming from the invasion of Ukraine and growth of BRICs as a world power. The economic challenges and growing wealth inequality facing many western countries could lead to a rise in nationalism and social unrest.
The Bullish Scenario
Bitcoin is currently sitting just below the long-term support band. If we zoom in on the chart above we can see that this support curve extrapolates to $40,000 by April 2024.
This aligns with my own thesis that crypto markets grind up slowly as the industry recovers from the Luna/FTX drama. With Bitcoin currently at $27k the potential for a 50% run up over the next 9 months is significant in itself.
The long-term support band recently acted as resistance and a reclaim would be encouraging to this thesis. The continued upside potential at that point is significant and compelling. The long-term resistance line (red line) a year later in April 2025 sits just below $200,000 USD.
If market participants assign a 20%+ chance of the market cycle playing out one more time this becomes an attractive buy
There is a good chance the macro environment improves over the next 12-24 months as quantitative tightening comes to an end and money supply expands. If inflation cools and rates start to drop it will make risk assets such as Bitcoin attractive to investors.
From the halving Bitcoin could appreciate steadily to a point where it approaches it’s previous all time high. I think this would feel very similar to late 2020 when it broke $20k. If Bitcoin can make a new high then all focus shifts to the $100k psychological level. At that point mainstream media interest could create a new bull market and things get euphoric again before an eventual sell-off around $200k and the cycle repeats.
The Bearish Scenario
So where could this plan go wrong? The downside is significant as well and I think the biggest risk is if Bitcoin doesn’t make a new all time high over the next few years. This would break a bunch of long term indicators and models and perhaps suggest a saturation of the markets.
The problem is that most people working in the crypto industry are in it for the money. I work in this industry because it’s where I see the most potential for wealth creation over the next decade.
If the markets go sideways or down over the next few years I think a lot of people will lose hope in the upside potential. I know I will question myself if I’m wasting precious time on something that isn’t making a significant impact. This could potentially usher in a longer term crypto winter where projects fail, developers leave, investment dries up and gaining traction becomes impossible.
The secondary market impact of this decline would be significant as well. As long term holders lose hope it would create a capitulation to lows not believed possible. This would in turn cause further problems, collapses and market contagion.
This scenario could be caused by a economic recession which would have a significant impact on risk assets. If inflation gets out of hand, unemployment rises, China invades Taiwan or we simply have a period of low economic activity it could provide a catalyst for recession. In this scenario it is hard to see risk assets like Bitcoin performing well as investors flock to safety.
Positioning For The Next Cycle
I think the potential for a bullish continuation of the market cycle is most likely and have positioned accordingly with a significant allocation of my net worth to digital assets.
I believe Ethereum will outperform Bitcoin over the coming years and eventually become the largest digital asset by market cap due to the utility of the EVM application layer.
Governance tokens on emerging protocols provide the best opportunities for short term 10-100x returns for those willing to put in the research and allocate capital to high risk early stage projects.
Perhaps the 4 year market cycle will have a self fulfilling prophecy and continue to influence crypto markets for some time. Volatility will likely continue to decrease over time as markets mature.
One thing we know for sure is that Bitcoin supply will be cut in half around April next year and then again every four years. The supply is declining against a US dollar with accelerating supply expansion. Perhaps it’s inevitable.
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