Bitcoin Halving Cycle Analysis: Supply and Demand Dynamics and Statistical Data

Bitcoin is about to迎来 fourth Halving. Although studying past Halving cycles can provide references for price trends, the sample size of only three times is difficult to support clear predictions. In addition, the emergence of the US spot Bitcoin ETF has fundamentally changed the market landscape. In just two months, billions of dollars in net inflows have completely altered the situation. Mainstream institutions can now invest through these tools, and this Halving's reaction may be difficult to reflect from the performance of the previous three cycles. We believe that analyzing the current technical supply and demand situation is more crucial, as it helps to better understand Bitcoin's potential.

In fact, the new Bitcoin supply limit is just one of many factors. Since the beginning of 2020, the tradable Bitcoin has been decreasing, which marks 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, while the newly mined Bitcoin during the same period was only about 150,000. Although the market has a strong ability to absorb supply, we still believe that these complex market dynamics should not be overly simplified.

Every time 210,000 blocks are mined, Bitcoin miner rewards will be halved, approximately every four years. This halving is expected to occur in mid-April, reducing the daily output from about 900 to 450, and the annual issuance rate from 1.8% to 0.9%. The halving will continue until all 21 million Bitcoins are mined, which is expected around the year 2140. The significance of the halving is to increase attention to Bitcoin's fixed, deflationary supply plan.

Unlike physical goods, the supply of Bitcoin is not sensitive to price. Additionally, Bitcoin is a growth asset, and its network utility increases with the number of users, directly affecting the value of the token. In contrast, there are no such growth expectations when purchasing precious metals.

The analysis of the impact of Halving on Bitcoin's performance is limited, as the experience is only based on three events. Research on the correlation between previous Halvings and prices should be interpreted with caution, as the small sample size makes it difficult to model. In reality, Bitcoin's performance varies greatly across different cycles, likely depending on the context at that time.

The US spot Bitcoin ETF is reshaping market dynamics, establishing a new anchor for demand. The average daily trading volume of the ETF accounts for 15-20% of global centralized exchanges, providing ample liquidity for institutions. In the long run, this stable demand may positively impact prices, creating a more balanced market.

ETF attracted a net inflow of 9.6 billion USD within two months, with total managed assets reaching 55 billion USD. The cumulative net growth is nearly three times higher than newly mined Bitcoins. All global spot Bitcoin ETFs currently hold about 1.1 million Bitcoins, accounting for 5.8% of the total circulation.

In the medium term, ETFs may maintain or even increase liquidity, as large brokerages have not yet offered these products to clients. American money market funds still have over $6 trillion in capital, and with an impending interest rate cut, a significant amount of idle capital may flow into this asset class this year.

It is worth noting that the potential centralization of Bitcoin held by ETFs does not pose a risk to network stability, as merely owning Bitcoin does not affect the decentralized network or control the nodes. Additionally, financial institutions are currently unable to offer derivatives based on these ETFs, which, once available, could change the market structure. However, regulatory approval may still take a few months.

Simple models show that if the US ETF has a net inflow of $1 billion per month, compared to approximately 13,500 BTC mined per month, the average price of Bitcoin should be close to $74,000. However, this model ignores the fact that miners are not the only source of supply. In reality, the imbalance between newly mined Bitcoin and ETF inflows is just a small part of a long-term cyclical supply trend.

One way to measure the tradable Bitcoin supply is the difference between the circulating supply and the illiquid supply. According to Glassnode data, the available Bitcoin supply has been on a downward trend for nearly four years, dropping from 5.3 million coins at the beginning of 2020 to the current 4.6 million coins, marking a significant shift from the steady upward trend observed during the previous three Halving periods.

At first glance, the decline in the usability of Bitcoin transactions seems to be primarily supported by technology, especially considering the new institutional demand brought about by ETFs. However, these supply and demand dynamics suggest that the market may tighten in the short term. Nonetheless, this framework does not fully capture the complexity of the liquidity dynamics in the Bitcoin market.

Investors should not overlook several key factors that may affect selling pressure: not all illiquid Bitcoins are "trapped"; some holders may provide liquidity through staking; miners may sell reserves to expand their business or cover costs; around 3 million in short-term holdings could still lead to speculative profit-taking.

If we do not take these meaningful supply sources into account, then the assertion of inevitable scarcity due to reduced mining rewards and stable ETF demand is overly simplistic. A more comprehensive assessment is needed to determine the real supply and demand dynamics behind the upcoming Halving event.

Even though Bitcoin has been included in ETFs, the growth rate of the actively circulating supply greatly exceeds the cumulative inflow of ETFs. Since the fourth quarter of last year, the active BTC supply has increased by 1.3 million, while only about 150,000 new Bitcoins have been mined.

A portion of the active supply comes from miners selling reserves, both to take advantage of price movements and to establish liquidity in the event of reduced income. However, from October of last year to March of this year, the net balance of miners' wallets decreased by only 20,471 Bitcoins, indicating that the newly active Bitcoin supply primarily comes from elsewhere.

Meanwhile, the inactive supply of Bitcoin has declined for three consecutive months, which may indicate that long-term holders are starting to sell. In previous cycles, it took about a year from the peak of inactive supply to the highest price of that cycle. The number of inactive Bitcoins in the current cycle seems to have peaked last December.

However, it is currently unclear how many of these Bitcoins have been transferred to exchange ( for sale ), locked in cross-chain bridges, or used for other financial transactions. Although the volume of Bitcoin flowing into exchanges has doubled this year, the net balance of Bitcoins on exchanges has decreased by 80,000. This indicates that, aside from ETFs, there are other pools of funds that are offsetting the transfer amounts from long and short-term holders to exchanges.

In fact, the supply and demand dynamics of the spot market only reflect part of the capital flow situation. Bitcoin exhibits a commodity-like derivatives multiplier effect, with the notional value of outstanding derivatives significantly exceeding the market value of physical Bitcoin. As the derivatives market amplifies spot trading volume by several times, merely analyzing data from public exchanges cannot fully reflect the true liquidity and adoption in the Bitcoin economy.

Therefore, although the increase in "dormant" Bitcoin activity aligns with the previous bull market peak, we believe that the exact dynamics of supply and demand interactions in the current environment remain uncertain.

This cycle may indeed be different. Continuous net inflows into ETFs will continue to be a huge benefit for this asset class. The new supply of mined Bitcoin is about to undergo Halving, which will lead to a tighter market dynamic. However, this does not necessarily mean we are about to enter a supply-constrained situation. What is clear is that Bitcoin spot ETFs have officially become a new category of digital assets, and mainstream financial institutions can now incorporate them into traditional portfolios, marking an important milestone for Bitcoin's mainstream adoption. Therefore, we believe that the current price trend is just the beginning of a long-term bull market, and further increases are needed to drive the supply-demand dynamics to achieve balance.