Pantera Open Letter: BTC rises to 35,000 before the next halving, and to 148,000 after the halving

Written by: Pantera capital

Compiled by: Deep Tide TechFlow

This article is from Pantera Capital's August letter "A Positive Black Swan."

Bitcoin has experienced the longest period of negative year-on-year returns in history, lasting 15 months (from February 8, 2022, to June 12, 2023). The previous longest period was less than a year (from November 14, 2014, to October 31, 2015).

We believe we have witnessed enough situations—the market cannot keep falling indefinitely.

We believe that combined with recent events—the ruling on XRP and the recognition from institutions like BlackRock—along with the anticipated Bitcoin halving expected in April 2024, this will provide a strong foundation for the next bull market in digital assets.

Bitcoin Halving: Background

The monetary supply function of the Bitcoin protocol is the exact opposite of quantitative easing. The Bitcoin code stipulates that a total of 21 million coins will be issued, and the supply of new coins will decrease over time.

Currently, 6.25 Bitcoins are issued every ten minutes, and every four years, the "block reward" is halved, hence the term "halving." This process will continue until the year 2140, when all 21 million Bitcoins will be fully mined.

The supply and coin distribution rules of Bitcoin are entirely based on mathematics, designed to be predictable and transparent.

"The total circulation will be 21 million. When network nodes generate blocks, coins will be allocated to them, halving every four years. The first four years: 10.5 million coins. The next four years: 5.25 million coins. The following four years: 2.625 million coins. The next four years: 1.3125 million coins. And so on."

------Satoshi Nakamoto, Cryptography Mailing List, January 8, 2009

Next Year's Halving

The next halving is expected to occur on April 20, 2024. The mining reward per block will decrease from 6.25 Bitcoins to 3.125 Bitcoins.

The efficient market theory suggests that if we all know it will happen, then it has already been priced in. To quote Warren Buffet, "The market is almost always efficient, but the differences between markets are, to me, almost always $80 billion." Therefore, even if we think everyone knows something, it does not mean there isn't a lot of profit to be made.

"Investing in a market where people believe in market efficiency is like playing bridge with someone who has been told that there is no benefit to looking at their cards."

------Buffet, 1984, cited in Davis, 1990

If demand for new Bitcoins remains stable while the supply of new Bitcoins is halved, this will force prices to rise. Previously, demand for Bitcoin also increased before halving events as people anticipated price increases.

For years, we have emphasized that halving is a significant event, but it takes years to unfold.

Historically, Bitcoin has bottomed out 477 days before halving, rising before the halving, and then experiencing explosive growth. The rebound from halving to the peak of the next bull market cycle has averaged 480 days.

If history repeats itself, Bitcoin's price should bottom out on December 30, 2022.

The actual low occurred on November 9, 2022, coinciding with the FTX incident, more than a month earlier than expected.

Then we will see a rebound in early 2024, followed by a strong rebound after the actual halving. The following chart shows what might happen if Bitcoin repeats its past halving performance.

Bitcoin's current price is above our predicted $35,500/BTC on the halving date, now exceeding the prediction by 7%.

Price Predictions Based on the Stock-to-Flow Model

The framework we use to analyze the impact of halving is to study the changes in the stock-to-flow ratio at each halving. The first halving reduced the supply of new Bitcoins by 17% of the total circulating Bitcoins. This had a massive impact on new supply and also on price.

As the ratio of supply reduction from one halving to the next decreases, the impact of each halving on price may gradually weaken. The following chart shows the percentage of supply reduction during past halvings relative to the circulating Bitcoins at that time.

The 2016 halving reduced the supply of new Bitcoins to only one-third of the first halving. Interestingly, its impact on price was also only one-third.

The 2020 halving reduced the supply of new Bitcoins by 43% compared to the previous halving. Its impact on price reached 23%.

The next halving is expected to occur on April 20, 2024. Since most Bitcoins are already in circulation, each halving will almost halve the new supply. If history repeats itself, in the next halving, Bitcoin will rise to $35,000 before the halving and $148,000 after the halving.