Bitcoin Halving: Supply and Demand Analysis and Future Outlook

The fourth Bitcoin Halving is approaching. Although studying past Halving cycles can provide references for price trends, the sample size is small, making it difficult to accurately predict the impact of this Halving. The launch of the Bitcoin ETF in the US has completely changed the market landscape, creating a new support point for Bitcoin demand.

Since the beginning of 2020, the supply of tradable Bitcoin has continued to decline, which is in stark contrast to previous cycles. However, recent data shows that the active supply of Bitcoin has significantly increased since the fourth quarter of last year, far exceeding the number of newly mined Bitcoins. Although the market has a stronger absorption capacity, we should still be cautious about these complex market dynamics.

Every 210,000 blocks mined, the Bitcoin miner reward will be halved, approximately every four years. This halving is expected to occur in mid-April, at which time the annual issuance rate of Bitcoin will drop from 1.8% to 0.9%. The halving mechanism will continue until around 2140, when all 21 million Bitcoins will have been mined. This mechanism highlights the unique fixed and deflationary supply characteristics of Bitcoin.

Historical data shows that Bitcoin's performance varies greatly across different Halving cycles, which may be closely related to the macroeconomic environment at the time. For example, the quantitative easing policy at the beginning of 2013, the financial concerns triggered by Brexit in 2016, and the stimulus measures taken by global central banks in response to the pandemic in 2020 all had a significant impact on Bitcoin's price.

The launch of the Bitcoin spot ETF in the United States has brought stable demand to the market. These ETFs currently have an average daily trading volume of about $4-5 billion, accounting for 15-20% of the total trading volume on global centralized exchanges. In just the first two months after launch, the ETF attracted $9.6 billion in net inflows, bringing total assets under management to $55 billion. All Bitcoin spot ETFs globally currently hold about 1.1 million Bitcoins, accounting for 5.8% of the total circulating supply.

However, we should not overlook the factors that may affect selling pressure: long-term holders may realize profits when prices rise; some holders may use Bitcoin as collateral; miners may sell reserves to expand their business or cover costs; there are still about 3 million BTC in short-term holdings, and speculators may exit to take profits.

Since the fourth quarter of last year, the active Bitcoin supply has increased by 1.3 million coins, far exceeding the 150,000 coins mined during the same period. This increase may come from miners selling reserves or from long-term holders starting to sell. The inactive supply (Bitcoin that has not moved for more than a year) has declined for three consecutive months, which is typically seen as a signal in the mid-cycle.

Despite the significant increase in the trading volume of Bitcoin entering exchanges, the balance of Bitcoin on exchanges shows a net downward trend. This indicates that, aside from ETFs, there are other pools of funds absorbing market supply. Additionally, the size of the Bitcoin derivatives market far exceeds that of the spot market, and analyzing only spot trading data may not fully reflect the true liquidity and adoption of Bitcoin.

Overall, this Halving cycle may be different from previous ones. The continuous inflow of the U.S. spot Bitcoin ETF will provide strong support for the market. Although the supply of newly mined Bitcoin is about to be halved, this does not necessarily mean that the market will immediately enter a supply contraction state. The launch of the Bitcoin spot ETF marks an important milestone for it as a mainstream asset class. We believe that the current price trend may just be the beginning of a long-term bull market, and further increases will be needed in the future to drive supply and demand to a new balance.