Tuesday, April 9, 2024

the halving impact, CPI outlook, spending and more...

“The leader of the past was a person who knew how to tell. The leader of the future will be a person who knows how to ask.” – Peter Drucker  ||  

Hello everyone! Did anyone get to see the total eclipse last night? The whole concept is quite mind-blowing, improbable even though predictable. I was watching it via the screen – the NASA commentator was crying, I was crying, I didn’t expect it to feel so emotional. Magnificent and humbling at the same time.

I guest-hosted Scott Melker’s Macro Monday shows yesterday, with Dave Weisberger, Mike McGlone and James Lavish. It was a lot of fun, great discussion, you can see it here.

IN THIS NEWSLETTER:

• Is the Bitcoin halving priced in? No.

• The halving is about more than BTC supply

• Tomorrow’s CPI outlook

• Spend, spend, spend

• Bitcoin utility

• The gold vs BTC debate

If you’re not a subscriber to the premium daily, I hope you’ll consider becoming one! You’ll get ~daily insight into the growing overlap between the crypto and macro landscapes, as well as some useful links, and (usually!) access to an audio read of the content. And there’s a free trial!

WHAT I’M WATCHING:

Is the Bitcoin halving priced in? No.

With less than two weeks to go, it’s time to take a quick look at the potential impact of the upcoming Bitcoin halving.

If you’re new to the ecosystem, here’s a quick explainer:

• The security of the Bitcoin network is maintained by “miners” who validate transactions, group them into blocks and compete to add them to the blockchain.

• As a reward for their work, each block contains a number of newly issued BTC. These are put there by the miners themselves when they prepare the blocks, as a “base” transaction (i.e., a transaction with no seller counterparty) into the miner’s address.

• Miners compete to be the first to find the random variable that gives the block a hash within the protocol’s established parameters.

• The successful block joins the blockchain, and those new BTC become valid. (The new BTC assigned in other miners’ blocks are not valid and therefore do not join the BTC supply.)

• To ensure a gradual decline in new BTC issuance toward the hard cap of 21 million, every four years the reward is reduced by 50% – this is known as the “halvening”, or “halving” (I generally prefer the shorter version).   

One curious feature is that the halving does not happen at a specific time; rather it is pre-programmed to happen at a certain block height. When block number 840,000 is added to the blockchain, it will have a native reward of 3.125 BTC, rather than the current payout of 6.25.

Since we know that Bitcoin blocks get processed roughly every 10 minutes, we can estimate the date and time, adjusting as we go. This morning, I’m seeing estimates of either April 19 or early on April 20.  

Many crypto investors are gleefully anticipating the price run-up that traditionally accompanies and follows halving events.

(chart via TradingView)

Before looking at some historical performance numbers, let’s touch on the accompanying narrative: why should the halving be good for BTC’s price?

The simple reason is because there will be fewer new BTC entering the market, which can mean less sell pressure. Essentially, the rate of production drops, which should boost the price unless demand drops at a corresponding rate.

Many insist that the halving won’t have any effect on the price this time around because the event is known. It’s priced in. Investors have taken positions, and we could see a sell-the-news slump afterwards. (This isn’t new, there are people who say this every cycle.)

This assumes that 1) markets are efficient, and 2) everyone knows about the halving. Both are obviously not true – crypto assets may trade 24/7 and blockchains carry transparent information, but that information is unevenly distributed. Market participants probably know the halving is approaching; but they are only a small subset of total potential investors, and what they don’t know is just how BTC will react since market structure is changing so fast. Crypto investors don’t know what marketing impact halving coverage will have, especially at a time when runaway currency dilution is rapidly becoming a standard. Crypto investors also don’t know what impact the launch of the first spot BTC ETFs in the US will have on demand and flows, nor how much the likely launch of spot ETFs in other jurisdictions might influence demand.

All crypto investors know for sure is the supply side of the halving impact: there will be fewer new BTC entering the market.

So, no, the halving is not “priced in”.

With that established, what has the BTC price done in previous iterations? There are two ways to look at this: the short term and the longer-term.