Please Sir, Can I Halve Some More?

Dan Morehead and his Pantera Capital are well-respected names across digital and traditional markets. In the wake of FTX’s collapse last year, he wrote a letter that reasserted his commitment to building “a more efficient, decentralized, and open financial ecosystem.” In the same note, Dan explained why he believes that the next bull market would begin around December 2022 with “a rally into early 2024 and then a strong rally after the actual halving.” So far, the price predictions have proven accurate, but what does he mean by halving?

Imagine you have a magical goose that lays golden eggs. Every day, it lays 10 golden eggs. But every four years, something magical happens — the goose starts laying half as many golden eggs each day. So, after four years, it only lays 5 golden eggs a day. This is kind of what happens with Bitcoin. It's like the magical goose, and the "golden eggs" are new Bitcoins. Every 10 minutes, it used to give out 50 new Bitcoins, but every four years, the number of new Bitcoins it gives out gets cut in half. This event is called the "Bitcoin halving". In a world of steady or increasing demand for BTC, the halving is like codified scarcity, which has positive implications for price.

Dan Morehead acknowledges that each passing halving event will have less of an effect on price, which makes sense since the supply impact tapers. I think there’s more at play. Bitcoin is emerging as a non-sovereign global asset like gold and as such its price is increasingly related to the ebbs and flows of the world’s capital markets. Interestingly, halving events have tended to coincide with significant episodes of monetary stimulus from central banks around the world.

This kind of behaviour from currency issuers has the effect of increasing interest in assets which provide insulation against FX debasement, like real estate, infrastructure, and gold. While Bitcoin doesn’t have anywhere near the historical relevance of the yellow metal, it was borne out of the Great Financial Crisis and maintains a similar profile of a scarce, non-sovereign store of value. BTC has the added benefits of having the innovative capacity of digital technology. We can see how both assets have moved with monetary stimulus below.

While the halving may have the effect of reducing supply growth and driving traders to speculate on higher future prices, I believe that changes in macroeconomic conditions and higher adoption rates will be more important drivers of BTC price action. That said, given the recent trends, I share Dan Morehead’s belief that higher prices are likely ahead. For the record, he estimates that BTC will rise to $36K before the halving and $149K afterwards.

After a year and a half of restrictive monetary policy, it seems that the tide is set to turn. Recent economic data have demonstrated moderating rates of change and while the labour market remains resilient, inflation has fallen precipitously. As a result, the market now anticipates a more meaningful slowdown in 2024 with Federal Reserve rate cuts starting as early as January. As we’ve seen, a pivot towards more accommodative monetary policy should result in higher gold and Bitcoin prices.

Implied Overnight Rate & Number of Hikes/Cuts

While the developed economies certainly have their issues, many other countries are grappling with considerably more difficult circumstances. In markets gripped by hyperinflation, Bitcoin is trading at or near all-time highs. As developers and designers continue to improve the user experiences of digital assets, higher adoption rates should be expected, specifically in regions where the local currency is subject to debasement against the U.S. Dollar.

BTC Price in Hyperinflationary Currencies

One of the most promising innovations in the Bitcoin landscape is the continued expansion of the Lightning Network (LN). This second layer payment protocol enhances the scalability of the Bitcoin network, allowing it to process more transactions more quickly and at lower cost. These features make micropayments* economically viable (even fractions of a cent), which is particularly attractive in less affluent areas of the world. Overall, Lightning enhances the user experience by making BTC a more practical medium for everyday transactions, while maintaining the decentralized nature and security of the Bitcoin network. What might be even more interesting is that several groups are looking to develop stablecoins for LN.

*If you’re interested the online applications of this idea, then checkout what Mash, our portfolio company, is doing. They just released a sleek and easy-to-use mobile wallet, too.

Total BTC Locked in Lightning Network Nodes

Technically, BTC can already be used as a common medium of exchange in developed markets as well, but the underlying fiat system, despite its shortcomings, works pretty well. However, Bitcoin is likely to get a boost in adoption in wealthier nations as well through the introduction of spot ETFs. We previously discussed the importance of this topic, but it bears repeating in the context of this discussion as well. Bitcoin’s emergence as a non-sovereign store of value with digital capabilities make it particularly interesting for inclusion in portfolios.

Relative Performance of Balanced Portfolio With and Without BTC

While gold has been considered a store of value for millennia, Bitcoin has the advantage of network effects – its value grows with increased adoption. If you’re reading this, then you probably spend more time thinking about digital assets than the average person and for many, BTC is still an abject product that should be regulated into oblivion. Despite this negativity, the ecosystem continues to onboard new users.

Bitcoin Daily Active Users (50-day Moving Avg., in thousands)

Furthermore, users are finding increasing ways to use the underlying technology. While many Bitcoiners don’t approve of innovations like Inscriptions or Ordinals, there’s certainly a subset of the community who sees value there and BTC miner economics have improved considerably due to the surge in network activity.

Bitcoin Daily Transactions (50-day Moving Avg., in thousands)

Typically, it’s important to see a robust developer community driving innovation for a network, but simplicity is one of Bitcoin’s best features. It’s true that only a handful of engineers can merge proposed changes into the central Bitcoin code, but the figure below is somewhat misleading. CoinShares estimates that there are around 300 active developers/contributors in the Bitcoin Github, which doesn’t include the teams who are focused on the Lightning Network and other peripheral projects.

Bitcoin Core Developers (50-day Moving Avg.)

In sum, while halving events are integral to the original cryptocurrency's design, their direct impact on price is likely to be eclipsed by broader macroeconomic trends, accelerated rates of adoption, and technological innovations. As monetary policy around the globe becomes more accommodative, and as digital asset user experiences improve, we should anticipate higher Bitcoin prices and user counts.

At Aquanow, we help institutions unlock the potential of digital assets, so if you or anyone you know is considering this functionality, then please get in touch. We’d be glad to leverage our expertise to help you outperform.

If you want to contribute to the web3 movement, Aquanow is on the look for curious and motivated folks to join our team. Feel free to reach out directly or check out the current openings here.