The Bitcoin Halving: The Real Change No One Is Talking About

The bitcoin halving will occur on Friday, April 19. Based on current prices, it will reduce the amount of new bitcoin being produced each year by $11.5 billion.

This sounds bullish, and on one level it is. All else equal, a reduction in new supply should translate to higher prices.

History supports the idea that halvings are good for prices. In each of the three prior bitcoin halvings, the price of bitcoin has risen sharply in the year following the event:

• 2012: 8,839%

• 2016: 285% 

• 2020: 548%

But the halving is one of the most anticipated events in capital markets. It’s literally written into the code of bitcoin. We knew this upcoming halving was on deck 15 years ago! Efficient markets theory tells us that it should be priced in. 

So is it?

Forced Sellers vs. Willing Sellers

Here’s how I think about the halving.

There are two types of sellers in any market: forced sellers and willing sellers.

For instance, imagine someone has to sell his home this month because he’s lost his job. He is a forced seller. Chances are, he will accept a price that is lower—and perhaps much lower—than the price he’d insist on if he were selling the home at his leisure (i.e., if he were a “willing seller”).

In bitcoin, the bulk of forced selling comes from miners. Bitcon mining involves significant direct costs: buying mining chips, installing them, paying for electricity, and so on. Miners need to recoup these costs, and so they are forced to sell most of the bitcoin they mine to generate cash to cover expenses.

By and large, everyone else falls into the “willing seller” bucket.

Unlike forced sellers, who are largely price insensitive, willing sellers will sell at different price points: Some will sell at current prices around $70,000, some at $100,000, some at $1 million, and some at every point in between.

Also—critically—these prices can change based on both personal and market conditions. If there is a lot of good news in the market, for instance, willing sellers may decide they are not willing to sell until the price moves substantially higher.

Why Does This Matter?

Here’s what many people are missing: One key impact of the halving is changing the ratio of forced vs. willing sellers in the market.

For instance, let’s imagine that new investors coming into the bitcoin market want to buy, on average, 1,000 bitcoin per day. Currently, bitcoin miners produce roughly 900 bitcoin per day. These investors can acquire 90% of their bitcoin from forced sellers and 10% of their bitcoin from willing sellers.

After the halving, however, miners will only produce roughly 450 bitcoin per day. With the same demand, new investors will only be able to acquire 45% of their bitcoin from forced sellers, while the remaining 55% must come from willing sellers.

Because the clearing price of bitcoin depends in part on just how willing those willing sellers are, we should expect the market post-halving to respond differently to changing market conditions than it did pre-halving.

So Is It Priced In?

Let’s return to the original question: Is the halving priced in?

On one level, the answer is yes. Everything I’ve written above is publicly available knowledge and is therefore likely to be factored into the price of bitcoin today. But that price is based on the market’s current estimate of future bitcoin demand.

What if the estimate is wrong? That’s where you see the real impact of the halving.

If there is more demand for bitcoin in the future than the market currently expects, buyers will have to chase bitcoin in a different market than the one they encountered pre-halving—a market with half as many forced sellers as before. That could lead to significant run-ups in price, as unanticipated future demand tries to shake bitcoin loose from a higher ratio of willing sellers.

That’s why I find the halving bullish. I think the market has underestimated the long-term demand for bitcoin, for a number of reasons. For instance, I don’t think the market fully appreciates the size of the opportunity in the ETF market once wirehouses and the rest of the roughly $60 trillion U.S. wealth management industry are able to allocate to bitcoin ETFs, which could start to happen as early as Q3. I also don’t believe the market has fully factored in the extent to which rising concerns about inflation will drive significant allocations.

If I’m right, I’m excited to see what happens in a market where this excess demand increasingly has to chase down bitcoin from people who don’t want to—and don’t have to—sell.

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