As the cryptocurrency market consolidates following the recent price rally triggered by the XRP ruling and numerous spot bitcoin (BTC) exchange-traded fund (ETF) applications, traders are now looking for the next catalyst that will generate the momentum needed to revive conditions. bull market.
Many see the next Bitcoin halving – expected to happen in mid-to-late April 2024 – as the only major catalyst on the horizon, with previous market cycles showing bull markets in crypto coinciding with a four-year reduction in new supply that comes as a block bitcoin mining reward is halved.
To get more insight into how the upcoming Bitcoin halving will affect the price of Bitcoin and the broader crypto market, Kitco Crypto spoke with Ahmed Ismail, co-founder and CEO of FluidAI, an AI-driven liquidity aggregator for crypto markets.
In the near term, Ismail said that the price of Bitcoin "will likely continue to consolidate after the major pullback that we saw in 2022," but noted that "a move up to the $40K level is a reasonable expectation as many of the headwinds , facing crypto last year, especially the macro ones, have largely declined for all risk assets, including crypto.”
"Crypto-specific factors such as the possible approval of the spot BTC ETF in the US are headwinds that will likely provide more upside support if approved," he said. "Similarly, other possible headwinds for crypto include the strong performance of US stocks this year and a growing downtrend in the US dollar, a tailwind for all risk assets."
Due to the well-known cycle of the halving event, Ismail said that "the halving event is more likely to have already been priced into the BTC markets than not," and FluidAI "does not see the halving itself as a major catalyst for more BTC upside."
As the BTC emission rate will drop from 6.25 BTC per block to 3.125 BTC per block, Ismail said that miners will be the most affected group. "The reduction in events makes it increasingly difficult to work as a miner because of this negative impact," he said.
"If the price of BTC, in US dollars, does not continue to grow exponentially over time, it would make mining unprofitable for many operations," he warned. “Miners' income is effectively cut in half as they receive 50% less BTC per mined block after the halving event. This impact ensures that miners run the most economically efficient business possible given such a material shock to their earnings. Because electricity costs are such a large input, they therefore optimize those costs.”
The fact that Bitcoin mining difficulty continues to reach new all-time highs only increases the costs incurred by miners as "they have to invest in more powerful hardware to stay at the same level of profitability given the decrease in their income," said Ismail. "Those who don't run efficient operations will leave the market."
Switching to the topic of recent BTC ETF spot applications and whether the halving was factored into their timing, Ismail said: “BlackRock, as a highly sophisticated asset management firm, has probably done their homework on the cyclical nature of BTC and the crypto markets . "
"It makes sense that in anticipation of an upcoming bull market, BlackRock would want to position itself well to offer investment products to clients to capture potential exponential gains," he added. “In light of the events in crypto last year, FTX, Celsius, etc., a huge amount of confidence in crypto has been lost. As a highly reputable financial institution, BlackRock likely sees an opportunity to step into this void and offer a reliable product that the traditional financial world understands well and trusts.”
As for price predictions, Ismail refrained from providing specific price levels, saying, “Crypto markets will most likely hit new all-time highs, but the magnitude of these moves is difficult to gauge in any meaningful way. "
"Historically, post-halving periods have seen the biggest increases in BTC price and exponential gains, especially the 18 months after the halving," he added.
Since each subsequent halving reduces the supply of new BTC, it is possible that as the emission schedule approaches 0, the effect of the halving on the market will decrease as less and less new BTC are minted.
With 19,438,993 BTC currently in circulation, this means that 92,57% of the total Bitcoin supply has already been created, leaving approximately 1.56 million BTC to be mined between now and 2140.
When asked if the declining block reward will result in the 4-year halving cycle starting to have less of an effect on the broader crypto market, Ismail said: “The broader crypto market is still in its infancy within of a multi-decade trend of structural growth. BTC is more likely to remain the leading asset for this space for the foreseeable future, at least until many more crypto applications with stable and sustainable use cases are born.”
"As cash flows enter the space primarily through Bitcoin, BTC will continue to drive the broader crypto cycle," he added. “To a large extent, the four-year and broader crypto cycle is driven by human nature (dynamics of fear and greed). As the market today remains dominated by retail investors, this dynamic is likely to remain the main driver until the nature of the participants changes substantially, i.e. much greater institutional involvement with goals different from those of the average retail investor.
According to a recent survey conducted by CryptoVantage, 70% of Americans who have bought at least some cryptocurrency in the past five years believe that Bitcoin will return to its all-time high of $69,044 in the next five years, and 23% believe that it will happened this year.
The biggest factor cited as driving people to invest in cryptocurrencies is inflation, with 54% of respondents saying inflation is a major concern.
"While respondents are concerned about the implications of the FTX crash and recent SEC legal actions, for example, the survey finds them generally hopeful that the cryptocurrency market will recover, sooner rather than later," CryptoVantage said. "However, post-halving expansionary markets typically arrive a year later (2013, 2017 and 2021), so the next halving event may not help BTC reach new highs until 2025."