Bitcoin halving events unfold every four years, i.e., every 210,000 blocks, and will continue in this manner until 2140, when all of the 21 million coins will have been mined. The halving reduces the issuance rate of tokens by half – it’s pre-programmed by the Bitcoin algorithm. A certain number of new coins are minted in each block as compensation for those who contribute computing power and energy to the network. The fourth Bitcoin halving, which is expected in April 2024, will affect the market value of the cryptocurrency, not to mention the broader dynamics of the ecosystem.
A tightening in Bitcoin’s supply is slowly but surely developing, reaching extraordinary levels. With 19 million Bitcoins being mined, there are roughly 2 million left to be mined. Nevertheless, the number of tokens available for buying and selling is much lower because increasingly more Bitcoins are moving to wallets controlled by illiquid owners. The market appears to be in a period of accumulation, which indicates an undercurrent of demand. Liquidity is one of the most important factors when it comes to trading cryptocurrencies, apart from market capitalization. If you really want to learn how to buy Bitcoin, be humble because it’s impossible to begin to understand what you think you already know.
In This Article
More Bitcoins Are Being Stored Away in Illiquid Wallets
Liquidity refers to the ease with which Bitcoin can be converted to cash or other assets without impacting market price. It determines how much of a position you can take in the investment, that is, if you can enter and exit trades at the desired positions. A liquid cryptocurrency market is regarded as being more steady and less volatile owing to significant trading activity that aligns buy and sell forces. Ultimately, it depends on you and your risk appetite if you think a liquid or illiquid market is bad. Getting back on topic, illiquid wallets control most of the Bitcoin supply, meaning that HODLers expect an increase in the value of Bitcoin from now on.
Illiquid wallets, as they’re commonly referred to, are wallets under the control of network participants with minimal spending history. Over the past months, illiquid owners have amassed unprecedented amounts of cryptocurrency, a trend that’s never seen before. Simply put, more Bitcoins are moving to private custody. It’s similar to storing cash in a wallet or safe. The real problem is that the tradable supply diminishes by the minute as the number of purchases increases, and Bitcoin becomes a store of value. HODLers take advantage of Bitcoin as a safe haven to store wealth, and if many tokens are illiquid, a supply-side crisis might emerge.
Investors Continue to Move Further Away from Altcoins and Closer to Bitcoin
Bitcoin is held in some form or another by people from all over the world who could possibly become millionaires or billionaires. Interestingly, altcoins are no longer popular in terms of investment, with money moving away from this economic sector. Investing in alternative digital currencies entails some risks, of which mention can be made of market volatility and technological risks. They’re not as widely accepted as Bitcoin, so it’s challenging to buy and sell altcoins at reasonable prices because there are fewer investors and less activity. If you have your mind set on investing in altcoins, research the project’s leadership, whitepaper, and reputation to figure out if you’re comfortable with the risks.
There’s currently a rotation of money out of altcoins and into the largest and most popular cryptocurrency by market capitalization. If the market for Bitcoin is illiquid, it becomes more expensive to transact because there’s a wider bid-ask spread. Platforms don’t have enough cash during a liquidity crisis to meet demand without causing market values to plunge. Low liquidity points to market instability, which in turn causes Bitcoin prices to increase and early investors to make profits. To avoid congestion in the cryptocurrency market, exchanges have cash-to-cash equivalents along the lines of assets to move liquidity into the system.
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The Inflation Rate of Bitcoin Decreases After the Halving, So Fewer Coins Will Enter the Market
The available Bitcoin supply is no doubt declining while the stored supply is increasing. Investors are actively accumulating coins on-chain, holding onto their assets more tightly than ever. More than half of Bitcoin’s supply has been stationary for more than a year. Bitcoin accumulation is consistent with the substantial withdrawals from exchanges as more and more investors transfer their holdings to self-custody. Accumulation addresses have at least two incoming non-dust transfers and have never spent funds. If things go as expected, Bitcoin will reach $100,000 by the end of 2024. Indeed, it might seem a lofty expectation, but it’s a completely reasonable outlook.
As the halvings continue, the Bitcoin network will progressively reach its maximum supply. No additional tokens will be generated when the supply reaches its upper limit, so miners will no longer receive block rewards. The price and purchasing power of the cryptocurrency will have no choice but to adjust to the lack of new supply. Formerly, Bitcoin halvings have brought about increases in price, with considerable upward momentum before. As a rule, the peak occurs 18 months after the halving. The fourth Bitcoin halving happens at or near the same time of the potential approval of a spot Bitcoin ETF in the United States, so it could start a new bull run.
Closing Remarks
To sum up, there’s a substantial reduction in Bitcoin’s supply as we’re getting closer to the halving event. The tightening in the daily supply of new coins goes against the current attempts of the fiat market to control inflation via quantitative tightening (balance sheet normalization). While Bitcoin narrows its supply, real-world economies might need to augment their money supply to maintain economic stability. Long-term Bitcoin investors keep their holdings locked in a self-custody wallet to avoid risk and short-term market volatility, not to mention enjoy long-term price appreciation. Their Bitcoins are basically removed from the liquid portion of the supply in circulation and accessible for trading. There’s a bull case for 2024.
