The long-awaited day of the 4th phase of Bitcoin’s halving is looming in the cryptocurrency sector. The
countdown to this event shows that it could happen around the final hours of Friday evening if
you are located in the Americas or Saturday morning if you are in Asia or
Europe.

According to the market metrics, the event is much anticipated and should be discounted well in advance of its actual occurrence. In contrast to unpredictable overnight barrages of rockets in the heat of the Middle East, the halving event has a clear outcome—the amount of BTC rewards
that miners get for completing a block will be reduced in half to 3.125 BTC
from the current 6.25.

This will inevitably lead to less supply from miners, but
does it change the liquidity of the overall market? We will attempt to answer that question in the coming paragraphs, and while at it, we
will also highlight some challenges related to the current geopolitical
landscape and the resulting jittery market conditions we have recently observed.

Every time 210,000 blocks are mined, the Bitcoin network’s protocol cuts in half the amount of new rewards. As highlighted by the institutional research team at Coinbase, this means that the newly
minted supply will drop from 900 Bitcoins per day to 450 Bitcoins per day. At
current market prices ($65,000 per BTC), this equates to roughly $30,000,000
worth of new supply per day or $900,000,000 per month.

These figures are rather low compared to the average daily trading volumes across crypto exchanges, especially since the launch of BTC ETF trading, which triggered increased interest in the asset
class.

Source: The Block

The amount of tradable Bitcoin has also been on the rise
during the recent bull run that accelerated since early Q4 2023. According to
the team at Coinbase Institutional Research, active BTC supply, defined as Bitcoin moved in the past three months, rose to 1.3 million. This figure is in comparison to 150,000, which was
mined during that time.

In a statement shared with Finance Magnates, Coinbase’s Research
Analyst, David Han, mentioned that the decline in BTC mining issuance
could create new supply-side dynamics that are constructive in the longer term.

Han expressed his doubts as to whether that can result in
an imminent supply crunch: “We find that the largest contributors to increased
BTC supply during bull markets come from long-term wallets beginning to
activate instead of from newly mined BTC.”

Crypto and Fiat Liquidity Cycles – the Signal and the Noise

A widely held belief in the cryptocurrency community is that
halving events are usually followed by a significant rally in the value of
their digital assets. While there is some historical correlation to corroborate
this notion, science has long established – correlation does not imply
causation.

The logical fallacy where two events that occur at a similar
time have a cause-effect relationship is at the center of spurious
relationships – two events can be correlated, but that connection may not be
causal.

With only three halving events behind us and a fourth one
brewing, one can observe correlations, but not necessarily cause-effect
relationships. Halving events don’t perfectly coincide with central bank
liquifying cycles, but as the chart below shows, there is some food for thought
for risk-management teams and traders alike.

Around the first halving in 2012, the Fed launched the third
chapter of its post-financial crisis quantitative easing program (QE3), shortly
followed by the first US debt ceiling crisis and the loss of the reserve
currency issuer’s AAA rating.

The second one, in 2016, was followed by the Bank of England’s post-Brexit ramp-up of bond buying in tandem with the ECB’s asset purchase program. Fast-forward to 2020, and we all remember the central bank and fiscal policy bazookas firing left and right with fiat liquidity so ample that it ultimately caused the sharpest spike in inflationary pressures globally since the 1970s.

Geopolitical Blocks

It was an early morning in the Middle East, as a
well-telegraphed attack by Iran had been unleashed upon Israel. With all other
financial markets closed, it was up to crypto to reflect the current state of
mind (or compute).

The old Wall Street saying, “up the stairs, down the
elevator,” came to mind as BTC and ETH dropped in tandem in rapidly dwindling liquidity conditions. That night, Coinbase registered about $2 billion worth of liquidations, the company’s institutional research team
highlighted in a recent weekly market call.

In contrast to the rather gradual price action that unfolded in the aftermath of the October 7th attack on Israel by Hamas, the Iranian attack, despite being well-telegraphed before the weekend, did result in material price action across the crypto market.

At one point, Pax Gold, a crypto token supposed to be fully backed by gold, spiked about $1000 at a time when the physical gold market, which is underpinning the coin’s value, wasn’t open. The magnitude
of the attack certainly surprised market participants, while some automatic
“stop trading” commands must have been unleashed across algorithmic trading
strategies.

Source: TradingView

Events centered around geopolitical stress have certainly caused some leveraged players to rethink, not only in the crypto market. Fed chair Powell’s higher rates for a longer period re-pivot raise questions about a widely expected easing of monetary policy.

To Bid, or Not to Bid

As the halving cycles come and go, the impact of these
events could lessen in time. Since most bitcoins have already been mined, the current market liquidity state is much more about the existing supply of BTC on the market than newly mined coins.

A supply crunch overnight is the least likely event, and if
very recent history is any guide, geopolitical tensions can create more
volatility or liquidity waves on cryptocurrency and traditional financial
markets.

Guided by risk-on and risk-off flows, cryptocurrencies have
been defying the trend occasionally, but at their core they remain a high-risk
asset with a digital store of value component behind it. Only time will tell whether or not that narrative has become a well-established characteristic, but so
far, so good.

As the halving event comes and passes us by, it is the
central banks that will have the ball in their court – ready to do whatever it
takes to address inflationary challenges or supply more fiat liquidity to the
monetary system.

With Bitcoin ETFs breaking new ground, the liquidity
situation for the king of crypto has significantly improved. As David Han outlines: “Net US spot ETFs inflows to date approximately offset the BTC that was
mined in the previous six months.”

The long-awaited day of the 4th phase of Bitcoin’s halving is looming in the cryptocurrency sector. The
countdown to this event shows that it could happen around the final hours of Friday evening if
you are located in the Americas or Saturday morning if you are in Asia or
Europe.

According to the market metrics, the event is much anticipated and should be discounted well in advance of its actual occurrence. In contrast to unpredictable overnight barrages of rockets in the heat of the Middle East, the halving event has a clear outcome—the amount of BTC rewards
that miners get for completing a block will be reduced in half to 3.125 BTC
from the current 6.25.

This will inevitably lead to less supply from miners, but
does it change the liquidity of the overall market? We will attempt to answer that question in the coming paragraphs, and while at it, we
will also highlight some challenges related to the current geopolitical
landscape and the resulting jittery market conditions we have recently observed.

Every time 210,000 blocks are mined, the Bitcoin network’s protocol cuts in half the amount of new rewards. As highlighted by the institutional research team at Coinbase, this means that the newly
minted supply will drop from 900 Bitcoins per day to 450 Bitcoins per day. At
current market prices ($65,000 per BTC), this equates to roughly $30,000,000
worth of new supply per day or $900,000,000 per month.

These figures are rather low compared to the average daily trading volumes across crypto exchanges, especially since the launch of BTC ETF trading, which triggered increased interest in the asset
class.

Source: The Block

The amount of tradable Bitcoin has also been on the rise
during the recent bull run that accelerated since early Q4 2023. According to
the team at Coinbase Institutional Research, active BTC supply, defined as Bitcoin moved in the past three months, rose to 1.3 million. This figure is in comparison to 150,000, which was
mined during that time.

In a statement shared with Finance Magnates, Coinbase’s Research
Analyst, David Han, mentioned that the decline in BTC mining issuance
could create new supply-side dynamics that are constructive in the longer term.

Han expressed his doubts as to whether that can result in
an imminent supply crunch: “We find that the largest contributors to increased
BTC supply during bull markets come from long-term wallets beginning to
activate instead of from newly mined BTC.”

Crypto and Fiat Liquidity Cycles – the Signal and the Noise

A widely held belief in the cryptocurrency community is that
halving events are usually followed by a significant rally in the value of
their digital assets. While there is some historical correlation to corroborate
this notion, science has long established – correlation does not imply
causation.

The logical fallacy where two events that occur at a similar
time have a cause-effect relationship is at the center of spurious
relationships – two events can be correlated, but that connection may not be
causal.

With only three halving events behind us and a fourth one
brewing, one can observe correlations, but not necessarily cause-effect
relationships. Halving events don’t perfectly coincide with central bank
liquifying cycles, but as the chart below shows, there is some food for thought
for risk-management teams and traders alike.

Around the first halving in 2012, the Fed launched the third
chapter of its post-financial crisis quantitative easing program (QE3), shortly
followed by the first US debt ceiling crisis and the loss of the reserve
currency issuer’s AAA rating.

The second one, in 2016, was followed by the Bank of England’s post-Brexit ramp-up of bond buying in tandem with the ECB’s asset purchase program. Fast-forward to 2020, and we all remember the central bank and fiscal policy bazookas firing left and right with fiat liquidity so ample that it ultimately caused the sharpest spike in inflationary pressures globally since the 1970s.

Geopolitical Blocks

It was an early morning in the Middle East, as a
well-telegraphed attack by Iran had been unleashed upon Israel. With all other
financial markets closed, it was up to crypto to reflect the current state of
mind (or compute).

The old Wall Street saying, “up the stairs, down the
elevator,” came to mind as BTC and ETH dropped in tandem in rapidly dwindling liquidity conditions. That night, Coinbase registered about $2 billion worth of liquidations, the company’s institutional research team
highlighted in a recent weekly market call.

In contrast to the rather gradual price action that unfolded in the aftermath of the October 7th attack on Israel by Hamas, the Iranian attack, despite being well-telegraphed before the weekend, did result in material price action across the crypto market.

At one point, Pax Gold, a crypto token supposed to be fully backed by gold, spiked about $1000 at a time when the physical gold market, which is underpinning the coin’s value, wasn’t open. The magnitude
of the attack certainly surprised market participants, while some automatic
“stop trading” commands must have been unleashed across algorithmic trading
strategies.

Source: TradingView

Events centered around geopolitical stress have certainly caused some leveraged players to rethink, not only in the crypto market. Fed chair Powell’s higher rates for a longer period re-pivot raise questions about a widely expected easing of monetary policy.

To Bid, or Not to Bid

As the halving cycles come and go, the impact of these
events could lessen in time. Since most bitcoins have already been mined, the current market liquidity state is much more about the existing supply of BTC on the market than newly mined coins.

A supply crunch overnight is the least likely event, and if
very recent history is any guide, geopolitical tensions can create more
volatility or liquidity waves on cryptocurrency and traditional financial
markets.

Guided by risk-on and risk-off flows, cryptocurrencies have
been defying the trend occasionally, but at their core they remain a high-risk
asset with a digital store of value component behind it. Only time will tell whether or not that narrative has become a well-established characteristic, but so
far, so good.

As the halving event comes and passes us by, it is the
central banks that will have the ball in their court – ready to do whatever it
takes to address inflationary challenges or supply more fiat liquidity to the
monetary system.

With Bitcoin ETFs breaking new ground, the liquidity
situation for the king of crypto has significantly improved. As David Han outlines: “Net US spot ETFs inflows to date approximately offset the BTC that was
mined in the previous six months.”



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