Bitcoin Halving Supply Shock: What Happens When Supply Cuts in Half?

• The Bitcoin Halving is set to occur on April 19.
• It is expected to have a huge impact on the overall crypto market.
• Halving cycles may break away from previous trends of dips and bull runs this year.
• Bitcoin mining activity is the largest contributor to the dynamics of a halving cycle.

With another historical Bitcoin Halving set to take place in a matter of days, we thought it would be the perfect time to explain what causes supply shock in markets, how this influences supply and demand dynamics, and what it could mean for the fourth Bitcoin Halving.

With more factors at play than ever before, this year’s halving could market trends shift in a new, unknown direction.

What is Supply Shock?

In traditional stock markets, supply shock refers to a sudden and significant disruption to the total supply of a particular stock or security. They can occur as a result of numerous factors. These include

• Unexpected changes in production.
• Geopolitics.
• Adverse conditions.
• Regulatory actions.

In short, anything that could affect the supply of a product.

Supply shocks can lead to rapid price movements. Therefore, they can make a market volatile, as traders react to a sudden imbalance of supply and demand.

In the context of Bitcoin, a supply shock can happen as the result of the Bitcoin Halving event which occurs approximately every four years. It is set to happen again on April 19, 2024.

During a halving, the number of new BTC created and distributed to miners for validating transactions is cut in half. This results in a decreased supply of fresh BTC tokens entering the market.

As it is designed from the outset to be a deflationary asset, supply shocks in Bitcoin have a profound effect on its supply and demand dynamics, which can potentially lead to upward pressure on the price thanks to the increased scarcity of the token. Indeed, the capped total supply of 21 million coins is a fundamental part of Bitcoin’s design.

Bitcoin Supply and Demand Explained

To be brief, supply and demand is a fundamental concept of economics that outlines the availability of a product/service (supply) and the desire for it (demand). In markets, this can determine the price of an asset as well as the buy and sell volumes of said asset.

With the Bitcoin Halving, the freshly minted BTC miners receive for solving blocks and adding new ones to the blockchain are halved, thus increasing the scarcity of BTC. This slows the supply growth, although it doesn’t always convert into increased demand.

Investor interest and adoption spur demand almost more than anything else. Regulatory developments, technological advances, credit interest rates, global events, and other macroeconomic conditions can influence demand for Bitcoin.

The Bitcoin Halving has historically resulted in supply shocks to the market. This is because the new supply of BTC tokens entering the market decreases significantly. This interplay between the fixed supply of BTC, the halving event, and the fluctuation of demand from investors sets the market’s conditions.

A Brief History of Bitcoin Halvings

There is certainly some truth to there being such thing as a ‘Bitcoin Halving cycle’, which is largely characterized by a price dip before or after the event, which is then followed by a rally in the market, and quite often new all-time-highs (ATH) for BTC.

Bitcoin Halving 2012

On November 28, 2012, the first Bitcoin Halving took place, reducing the block reward from 50 BTC to 25 BTC. In August that year, BTC peaked at $13.50 before dropping to $8. By the beginning of the halving, BTC was trading at approximately $12. This became $42 after 100 days, and over $1,000 by the end of 2013.

Bitcoin Halving 2016

The second Halving occurred on July 9, 2016. Then, the block reward fell to 12.5 BTC. It was around this time that BTC and crypto had begun to enter the mainstream. Prior to this Halving, BTC peaked at around $766 in the middle of June 2016, and dropped to around $666 on the day of the Halving. It then surged to $2,500 a year later, followed by an unprecedented bull run in late 2017 which saw BTC skirt the $20,000 price tag later that year.

Bitcoin Halving 2020

The third Halving took place on May 11, 2020, reducing the block reward to a mere 6.25 BTC. Bitcoin’s value had been climbing steadily throughout 2019 where it floated around the $10,000 mark. However, following the “crypto winter”, and the market crash on March 11, 2020, BTC took a huge hit and traded at around $5,200. Despite this, BTC closed 2020 at just under $30,000 per coin, an increase of over 300% for the year.

This historical trend has given many investors reason to purchase BTC at a discount – if it dips – ahead of the Halving. Things are slightly different this time around. This is because BTC has already rallied from $42,000 at the beginning of the year to a new ATH of over $73,000 on March 13, 2024. Although a 20% to 40% dip could still be on the cards, the market dynamics in play are rather different this time around.

Miners First to Feel Supply Shock

Naturally, being at the front end of the Bitcoin network means miners are among the first to feel the impact of a Bitcoin Halving. Mining is a resource-intensive process requiring a great deal of computational power. This requires a lot of expensive hardware, space to store the mining rigs, and ever-increasing energy prices.

Supply shock may have an acute effect on miners as they rely on a steady stream of block rewards. However, when the reward halves, they must adapt to the reduced income in order to stay competitive.

Miners unable to adjust to the increased difficulty by upgrading their equipment, or who cannot cover the costs of their operations may have to shut down. This could be a driver behind pre-halving price dips, as miners unload their BTC to purchase necessary pre-Halving upgrades.

This can lead to temporary declines in the hash rate supplied to the Bitcoin network as inefficient miners go offline. It can also contribute to fluctuations in Bitcoin’s price.

A Very Different Halving

This year’s Halving event is considerably different to those of years gone by. This is because both Bitcoin and crypto in general have become a major part of the global financial system. The evolution is best reflected by the ever-growing, and newly approved, institutional-grade BTC products, such as spot Bitcoin exchange-traded funds (ETFs). These, potentially, help legitimize Bitcoin as a financial asset.

As mentioned earlier, the recent rally around BTC and the overall crypto market has been significant. Although the price of BTC has retraced from the all-time high of over $73,000 to around $64,000 at time of writing (April 15), there appears to be no hint of a major decline in price ahead of the halving. This is in contrast to previous cycles.

Holders and speculators are likely to trade on these recurring narratives. Despite some volatility in the overall crypto market, BTC is remaining particularly resilient in the lead-up to the fourth Halving.

That said, supply shock can set in after the fact, and will likely reverberate across the entire market and its many participants. Optimistically, the resilience of BTC’s price ahead of the Halving suggests that supply shock may no longer be as impactful as it once was, especially for miners. Nevertheless, as is often the case with crypto, this could change at a moment’s notice.