Outlier Ventures: The four-year cycle driven by Bitcoin halving is no longer valid
As the digital asset market matures, it's time for founders and investors to move beyond the concept of a four-year cycle.Original Title: Bitcoin Halving. The Four Year Cycle Is Dead
Author: Jasper De Maere, Head of Research at Outlier Ventures
Translation: 0xjs@Golden Finance
Four months after the Bitcoin halving, we are witnessing the worst price performance post-halving to date. In this article, we will explain why halving no longer has a fundamental impact on the prices of BTC and other digital assets, with the last significant impact of halving dating back to 2016. As the digital asset market matures, it is time for founders and investors to move away from the concept of a four-year cycle.
Key Points of This Article:
The 2024 halving marks the 5th period of Bitcoin halving, and BTC's price has performed the worst in the 125 days following the halving. The price has dropped by -8% compared to the halving day, while the average increase in previous periods was +22%.
We believe that the 2016 halving was the last time that halving had a significant fundamental impact on BTC's price movement. Since then, against the backdrop of a maturing and increasingly diversified crypto market, the size of miners' BTC block rewards has become negligible.
The strong performance of BTC and the cryptocurrency market after the 2020 halving was purely coincidental, as the 2020 halving occurred during an unprecedented capital injection period following the COVID-19 pandemic, with the money supply (M2) in the U.S. increasing by 25.3% that year.
Some believe that the halving-driven four-year cycle still holds in 2024, but the early approval of the BTC ETF in January 2024 has pulled demand forward, leading to a strong rise in BTC before the halving. This claim is incorrect. The approval of the BTC ETF is a demand-driven catalyst, while halving is a supply-driven catalyst, so they do not mutually exclude each other.
The price of Bitcoin has a significant impact on the broader market, which also affects the ability of founders to raise funds through equity, SAFT, and private or public token sales. Given the liquidity that cryptocurrencies bring to venture capital, founders must understand top-down market drivers to better predict funding opportunities and forecast their development trajectories. In this article, we will dismantle the concept of the four-year market cycle and lay the groundwork for exploring the true drivers of future work. Debunking the truth of the four-year cycle does not mean we hold a pessimistic view of the overall market.
Let’s first look at the price performance of BTC before and after previous halvings. It is clear that in the 125 days following the halving, the 5th cycle (2024) is the worst-performing period since the halving, and it is the only cycle where the BTC price has dropped compared to the halving day.
Figure 1: BTC price performance before and after different cycles of halving, Source: Outlier Ventures
So what impact does halving have on price? In short, there are two main reasons.
Fundamentals: Bitcoin halving reduces the new supply, creating scarcity, and when demand exceeds limited supply, prices may rise. This new dynamic also changes the economic situation for miners.
Psychological Aspect: Bitcoin halving enhances the perception of scarcity, reinforces expectations of price surges based on historical patterns, and attracts media attention, which can increase demand and drive up prices.
In this article, we argue that the fundamental driver behind BTC's price movement, "halving," has been exaggerated and has been irrelevant in the last two cycles. We will combine these numbers to demonstrate that the net effect of halving is insufficient to have a significant impact on BTC prices or the broader digital asset space.
Initial Observations ------ Daily BTC Block Incentives
If you learn one thing from this article, it is:
The most compelling argument for halving's impact on the market is that, in addition to reducing BTC inflation, it also affects miners' economic situations, leading to changes in their capital management.
Now, let’s consider an extreme case where all mining block rewards are immediately sold on the market. How significant would the selling pressure be? Below, we will divide the total daily block rewards received by all miners (in USD) by the total trading volume in the market (in USD) to assess the impact.
Until mid-2017, miners had an impact on the market of over 1%. Today, if miners sell their entire BTC block rewards, it accounts for only 0.17% of the market trading volume. While this does not include the BTC accumulated by miners previously, it indicates that as block rewards decrease and the market matures, the impact of BTC block rewards has become negligible compared to the entire market.
Figure 2: Potential market impact if all miners sell their daily BTC block rewards, Source: Outlier Ventures
Review ------ Impact of Halving
Before we continue, let’s quickly review. Bitcoin halving is an event that occurs approximately every four years, reducing miners' block rewards by half. This slows the rate at which new BTC is generated, thereby reducing the new supply entering the market. The total supply cap of BTC is 21 million, and with each halving, the speed at which this cap is reached slows down. The period between each halving is referred to as a cycle, and historically, each halving has affected the price of Bitcoin due to reduced supply and increased scarcity. All of this is illustrated in Figure 3.
Figure 3: Dynamics of Bitcoin halving, block rewards, total supply, and cycles, Source: Outlier Ventures
Bitcoin Halving Performance
Starting with what matters most to many of us, the impact on price performance, we find that the performance after the 2024 halving is the worst since BTC's inception. As of today (September 2, 2024), BTC is trading at approximately 8% lower than the halving day price of $63,800 on April 20, 2024.
Figure 4: BTC price performance after each halving, Source: Outlier Ventures
" What about the situation before the 2024 halving?" Indeed, we experienced an exceptionally strong trend before the halving. Looking back at the performance 200 days before the 2024 halving, we find that BTC nearly grew by 2.5 times. This is almost on par with the 2nd cycle, when BTC accounted for 99% of the total market cap of digital assets, and halving still mattered.
Figure 5: BTC price performance 200 days before each halving, Source: Outlier Ventures
That said, it is also important to remember what happened during that time. At the beginning of 2024, we received approval for the BTC ETF, and since January 11, 2024, the net inflow of BTC into the BTC ETF reached 299,000 BTC, significantly driving up prices. So to be honest, the rise was not driven by expectations of halving.
Figure 6 shows the performance of BTC between the approval of the BTC ETF and the halving. The approval of the BTC ETF in January 2024 increased demand for BTC, leading to a rise of over 17% in the first 100 days of the 5th cycle.
Figure 6: BTC price performance 200 days before each halving, Source: Outlier Ventures, Google
Figure 7 shows the performance of BTC 100 days after the halving and the BTC ETF approval. It is clear that the ETF approval had a more significant impact on price movement than halving, as evidenced by the approximately 29% difference in performance over the 100 days.
Figure 7: BTC performance 100 days after halving and ETF catalyst, Source: Outlier Ventures
" Therefore, the BTC ETF has pulled forward the demand and price trends we typically see at halving! "
This is a weak argument in defense of the four-year cycle. The fact is, both catalysts are independent of each other. The ETF is a demand-driven catalyst, while halving is considered a supply-driven catalyst. They do not mutually exclude each other, and if halving were still important, we should see significant price movements supported by this dual catalyst.
2016 Was the Last Time
I believe that 2016 and the 3rd cycle were the last times that halving had a truly significant impact on the market. As discussed in Figure 2, the following chart illustrates the market impact if all miners sold on the day they received their block rewards. As you can see, around mid-2017, this ratio fell below 1%, and today it is barely above 0.20%, indicating that the impact of halving is minimal.
Figure 8: Potential market impact if all miners sell their daily BTC block rewards, Source: Outlier Ventures
To understand the declining significance of miners' financial decision-making, let’s take a closer look at the different variables at play.
Variables:
Total daily BTC block rewards -- Decreasing with each cycle (↓)
Daily trading volume of BTC -- Increasing as the market matures (↑)
→ Over time, as block rewards decrease and the market matures, the relevance of miners' influence diminishes.
Figure 9 shows the BTC trading volume and the cumulative BTC block rewards held by miners. The sharp increase in trading volume is the real reason why the relevance of miners' block rewards has become negligible.
Figure 9: Daily BTC miner rewards and daily trading volume, Source: Outlier Ventures
For those who were present at the time, it was clear what drove the increase in trading volume during that period. Looking back: after Ethereum launched in 2015 and unlocked smart contract functionality, the ICO boom followed, leading to the creation of many new tokens on the Ethereum platform. The surge in new token issuance led to a decline in BTC's dominance. The influx of exciting new assets (i) drove trading volume across various sectors of the digital asset market, including BTC; (ii) incentivized exchanges to mature faster, allowing them to attract users more easily and handle larger trading volumes.
Figure 10: New ETH token issuance and BTC dominance during the 3rd cycle, Source: Outlier Ventures
So… What About 2020?
A lot happened during the third cycle, logically reducing the impact of mining capital management, thereby diminishing the impact of halving as a BTC catalyst. What about 2020? That time, BTC rose about 6.6 times within a year after the halving. This was not due to halving, but rather due to the unprecedented amount of money printed in response to COVID-19.
While halving is not a fundamental factor, it may have influenced BTC's price movement from a psychological perspective. As BTC became headline news before and after the halving, it provided a target for people to invest excess capital when there were almost no other consumption options.
Figure 11 shows the real reason for the rebound. Just months before the May 2020 halving, the U.S. money supply (M2) surged at an unprecedented rate in modern Western history, triggering speculation and inflation across various asset classes, including real estate, stocks, private equity, and digital assets.
Figure 11: U.S. money supply (M2) and BTC price before and after the 2020 halving, Source: Outlier Ventures, Federal Reserve Bank
In addition to inflows into BTC, it is important to recognize that the money printing activity occurred after the DeFi spring, which subsequently developed into the DeFi summer. Many investors were attracted by enticing on-chain yield opportunities, pouring funds into cryptocurrencies and utility tokens to capture this value. Due to the strong correlation among all digital assets, BTC naturally benefited from this.
Figure 12: U.S. money supply (M2) and DeFi TVL, Source: Outlier Ventures, DeFiLama
At the time of the halving, multiple factors driven by global helicopter money policies triggered the largest cryptocurrency rebound to date, making the changes in block rewards seem to have a fundamental impact on price movements.
Remaining Miner Supply
" What about the remaining BTC supply held by miners in their vaults? This supply was accumulated during previous periods when the hash rate was lower and block rewards were higher. "
Figure 13 examines the miner supply ratio, which is the total amount of BTC held by miners divided by the total BTC supply, effectively showing how much supply miners control. The impact of miners' vault decisions on BTC prices is largely a result of the block rewards they accumulated during earlier periods.
As shown in the figure, the miner supply ratio has been steadily declining and is currently around 9.2%. Recently, there has been an increase in over-the-counter trading activity where miners sell BTC, possibly to avoid having too much impact on market prices. This trend may be due to lower block rewards, higher hardware and energy input costs, and the lack of significant increases in BTC prices—forcing miners to sell their BTC more quickly to maintain profitability.
We understand the impact of halving on mining profitability, and they need to adjust capital management to remain profitable. However, the long-term direction is clear. The impact of halving on Bitcoin prices will continue to diminish over time.
Figure 13: Miner supply ratio and month-on-month change rate, Source: Outlier Ventures, CryptoQuant
Conclusion
While halving may have some psychological effects, reminding holders of their dust-covered BTC wallets, it is clear that its fundamental impact has become irrelevant.
The last meaningful impact of halving was in 2016. In 2020, it was not halving that triggered the bull market, but the response to COVID-19 and the subsequent money printing.
For founders and investors trying to time the market, it is time to focus on more important macroeconomic drivers rather than relying on the four-year cycle.
With this in mind, we will explore the true macro drivers behind market cycles in future token trend lines.
