Bitcoin Halving: A Deep Analysis of Future Trends from a Supply and Demand Perspective

As the fourth Bitcoin Halving approaches, we believe it is difficult to accurately predict future trends based solely on the research of previous cycles. The small sample size makes it hard to generalize its patterns to the impending situation. Furthermore, the launch of the US spot Bitcoin ETF has reshaped market dynamics, establishing a new anchor for BTC demand, making this cycle unique.

We believe that the current price trend may just be the beginning of a long-term bull market, and the upward price trend needs further advancement to achieve supply and demand balance. There is just over a month left until the next Halving, when miners' Bitcoin issuance rewards will decrease from 6.25 BTC per block to 3.125 BTC.

Although the new Bitcoin supply limit is an important consideration, it is only one of many variables. Since the beginning of 2020, the available Bitcoin for trading has been on a downward trend, which represents a significant change compared to previous cycles. However, recent data shows that since the beginning of the fourth quarter of last year, the active BTC supply has increased significantly by 1.3 million coins, while only about 150,000 new Bitcoins were mined during the same period. Although the market's ability to absorb supply is stronger than in the past, we still recommend not oversimplifying the interactions between these complex market dynamics.

Halving will continue according to the established mechanism until all 21 million Bitcoins are mined, which is expected to be achieved around the year 2140. The significant meaning of halving lies in highlighting the uniqueness of Bitcoin: a fixed, deflationary supply plan that ultimately forms a supply hard cap. This is often underestimated. Unlike physical commodities, Bitcoin's supply is inelastic and not sensitive to price changes. Furthermore, Bitcoin is a growth story, with its network utility increasing as the number of users expands, directly impacting the value of the token.

Analyzing the impact of Halving cycles on Bitcoin performance has its limitations, as our experience is confined to three Halving events. Studies on the correlation between previous Halving events and Bitcoin prices should be interpreted with caution, as the small sample size makes it difficult to generalize patterns. We believe that more Halving cycles are needed to draw stronger conclusions. Furthermore, correlation does not imply causation; factors such as market sentiment, adoption trends, and macroeconomic conditions may all contribute to price fluctuations.

The US spot Bitcoin ETF is reshaping market dynamics and establishing new demand anchors. Inflows into the ETF are expected to absorb most of the supply in a gradual and sustained manner. Currently, the daily average BTC spot trading volume of the ETF is approximately $4-5 billion, accounting for 15-20% of the total trading volume on global centralized exchanges, providing sufficient liquidity for institutions. In the long term, this stable demand could have a positive impact on Bitcoin prices and create a more balanced market.

The US spot Bitcoin ETF has attracted a net inflow of $9.6 billion in the past two months, bringing total managed assets to $55 billion. The cumulative net increase in BTC held by these ETFs is nearly three times higher than the new supply generated by miners during the same period. All global spot Bitcoin ETFs currently hold about 1.1 million Bitcoins, accounting for 5.8% of the total circulating supply.

In the medium term, ETFs may maintain or even increase the current liquidity, as large brokerages have not yet begun offering these products to clients. Considering that there are still over $6 trillion in U.S. money market funds, along with the upcoming rate cuts, there could be a significant amount of idle capital flowing into this asset class this year.

It is worth noting that the centralization of Bitcoin held by ETFs does not pose a stability risk to the network, as merely owning Bitcoin does not affect the decentralized network or control its nodes. Furthermore, financial institutions currently cannot offer derivatives based on these ETFs, and once these derivatives become available, they may alter the market structure for large participants. However, regulatory approval may still take several months.

One way to measure the supply of Bitcoin available for trading is to take the difference between the circulating supply and the illiquid supply. According to Glassnode, the level of available Bitcoin supply has been on a downward trend over the past four years, dropping from a peak of 5.3 million BTC at the beginning of 2020 to the current 4.6 million. This marks a significant shift compared to the steady upward trend in available supply observed during the previous three Halvings.

At first glance, the decline in Bitcoin's trading availability seems to be one of the main technical supports for its performance, especially considering the new institutional demand from ETFs. However, this framework does not fully capture the complexity of the liquidity dynamics in the Bitcoin market, as "non-liquid supply" does not mean static supply.

Investors should not overlook several key factors that may affect selling pressure:

1. Not all illiquid Bitcoins are "trapped". Long-term holders may realize partial profits when the price rises.
2. Some holders may not intend to sell in the near term, but can still provide liquidity by using Bitcoin as collateral.
3. Miners may sell their Bitcoin reserves to expand their business or cover other costs.
4. A short-term holding of approximately 3 million BTC is not small, and with price fluctuations, speculators may still profit and exit.

If we do not consider these meaningful supply sources, then the assertion that Halving and ETF demand will inevitably lead to scarcity is overly simplistic. A more comprehensive assessment is needed to determine the true supply and demand dynamics behind the upcoming Halving event.

Even though Bitcoin has been incorporated into ETFs, the growth rate of the active circulating supply has greatly exceeded the cumulative inflow of ETFs. Since the fourth quarter of last year, the active BTC supply has increased by 1.3 million coins, while newly mined Bitcoins have only been about 150,000 coins. Part of the active supply comes from miners selling reserves, both to take advantage of price trends and to establish liquidity in the face of reduced income.

However, the net balance of miner wallets has decreased only slightly, indicating that the newly active Bitcoin supply mainly comes from other sources. In previous cycles, the change in active supply volume has also exceeded the growth rate of newly mined Bitcoin by more than five times. At the same time, the inactive supply (Bitcoin that has not been moved for more than a year) has declined for three consecutive months, which may indicate that long-term holders are starting to sell.

However, it is currently unclear how many of these Bitcoins have been transferred to exchanges for sale, locked in cross-chain bridges, or used for other financial transactions. The net decrease in Bitcoin balances on exchanges indicates that, apart from ETFs, there are other pools of funds that help offset the transfer volume from long-term and short-term holders to exchanges.

The supply and demand dynamics of the spot market only reflect part of the capital flow situation. Bitcoin exhibits a derivative multiplier effect similar to that of commodities, with the notional value of outstanding Bitcoin derivatives significantly higher than the market value of physical Bitcoin. Therefore, analyzing only the data from public spot exchanges does not fully reflect the true liquidity and adoption in the Bitcoin economy.

Although the increase in activity of "dormant" Bitcoin coincides with the previous bull market peak, the exact dynamics of supply and demand interaction remain uncertain in the current environment.

This cycle may indeed be different. The ongoing daily net inflows into the US spot Bitcoin ETF will continue to be an important driver for this asset class. The newly mined Bitcoin supply is about to undergo a Halving, which will lead to tighter market dynamics. However, this does not necessarily mean we are about to enter a supply contraction situation.

Bitcoin spot ETFs have become a new category of digital assets, allowing mainstream financial institutions to incorporate them into traditional portfolios, marking an important milestone in the mainstream adoption of Bitcoin. Therefore, we believe that the current price trend may just be the beginning of a long-term bull market, requiring further price increases to drive the supply and demand dynamics to reach equilibrium.