Bitcoin’s fourth halving is approaching, which is an important milestone for both investors and Bitcoin itself. In this installment, we continue our deep dive into the significant supply tightness in the Bitcoin market and explain how we should measure investor behavior patterns ahead of the fourth halving.
Summary
Bitcoin’s fourth halving is just around the corner. As this moment approaches, Bitcoin’s market supply tightness has reached an all-time high.
We extensively evaluate various metrics of Bitcoin’s “available supply” in the market and the “supply-to-holding ratio” of long-term investors. These metrics all exceed 200% of new issuance.
By comparing the relationship between market capitalization and realized market capitalization, we estimate that the massive injection of capital into the Bitcoin market due to supply constraints will have a profound impact on the valuation of the entire Bitcoin market.
Evaluating Bitcoin’s Supply Dynamics Ahead of the Fourth Halving in 2024
The halving of mining volume is one of the most important milestones in the development of Bitcoin. It occurs every 210,000 blocks mined, and the subsequent output is halved. According to the operating logic of Bitcoin, the fourth halving should occur when the block height reaches 840,000, but because block generation is affected by certain probabilistic factors, and the block itself is also subject to some natural changes, the specific time of the fourth halving is still unknown.
Taking into account the current average block speed, the best estimate we can make is that the fourth halving should occur on April 23, 2024, which is 158 days from now.
Figure 1: Bitcoin is about 158 days away from the next halving
Given the high cost and high operating expenses of mining, Bitcoin miners need to use most of their gross income to pay for mining costs. So far, the value of newly mined Bitcoins by miners per month throughout 2023 can reach up to $1 billion. This high cost has a very obvious deterrent effect on the inflow of capital into the Bitcoin market (because miners tend to hold the Bitcoins they mined rather than sell them to the market at the current price).
After the halving, this figure will be cut to $500 million per month, roughly equivalent to the $450 million in monthly selling pressure seen at FTX’s point a year ago.
Figure 2: Number of newly mined Bitcoins per month and their market value (in USD)
In addition to the fascinating technical charm of Bitcoin halving, its far-reaching impact on the market is also a point of interest to investors. The market performance in the one-year cycle after all previous halvings can be described as impressive.
The market's reaction to Bitcoin's halving has raised people's curiosity as to whether the halving is the main factor that kicks off the price increase cycle, or whether it is just one of many factors driving the price increase. In this article, we will explore this question from two perspectives: Bitcoin's market supply and investor behavior patterns, and hope to provide more circumstantial evidence from an on-chain perspective.
In this paper, we divide our analysis of this issue into three different levels:
Assessing the “available and active” supply of Bitcoin in the market
Discussing Bitcoin’s “Storage Supply and Savings Rate”
Analyzing the impact of capital flows on Bitcoin market valuation
Figure 3: Market changes over a 365-day period after Bitcoin halving
An assessment of the available supply of Bitcoin
Our first goal is to develop an estimate of the amount of Bitcoin that is liquid, active, and freely floating. In other words, what is the available supply that investors can reasonably expect to trade in the near term?
In the chart below, we can see several heuristics about Bitcoin supply that use "Bitcoin age" as the main parameter, which is calculated by calculating the time since the last transaction on the chain. The supply from short-holding investors is currently 2.33 million Bitcoins, which is a historical low in many years. It should be noted that the "short-holding supply of Bitcoin" in this statistical caliber refers to Bitcoin that has been traded for up to 155 days so far.
Another statistic that depicts these "hot supplies" (i.e., the recently spent bitcoins mentioned above) is the number of bitcoins that are less than one month old, which is 1.39 million bitcoins. In this context, we can also consider those futures open interest contracts (about 410,000 bitcoins) as part of the bitcoin supply in the derivatives market.
All in all, this “hot supply” amounts to 5% to 10% of the circulating supply participating in daily transactions.
Figure 4: Bitcoin’s “Active Supply”
In order to study the supply of Bitcoin, we will focus on Bitcoin wallets. By considering the spending behavior of Bitcoin wallets, we divide them into "non-liquid buckets", "liquid buckets" and "high-liquid buckets" according to spending. The latter two represent wallets that have a large amount of income and spending at the same time, and their approximate activity is shown in the figure below.
It is worth noting that these indicators have been declining year after year since March 2020, mainly due to the impact of the special period and the resulting widespread social impact on the Bitcoin market.
Figure 5: Liquid and illiquid supply of Bitcoin
We can see that there is significant overlap between liquidity, high-liquidity supply, and trading platform balances. The reappearance of this overlapping multi-year sequential downward trend suggests that Bitcoin is moving away from exchange wallets and into more illiquid wallets with little to no trading history.
Figure 6: Bitcoin transaction balance (overlay)
One nuance we need to point out is the role of institutional-grade custodians and ETF-type products such as GBTC (a useful reference tool for future spot ETF products). The chart below shows our best estimate of total on-chain volume for the Coinbase exchange, Coinbase Custody, and GBTC clusters.
We should note the turning point in the chart below that occurred in March 2020, when there was a significant increase in demand for GBTC and custody products, both of which are generally classified as Bitcoin’s illiquid supply.
Figure 7: GBTC and custody product trading
If we compare the amount of Bitcoin held by short investors and the balances on exchanges, we can see that they are similar in amount, around 2.3 million Bitcoins. Together, these two “available supplies” are equivalent to 23.8% of the circulating supply, currently at an all-time low.
It can be said that the available supply of Bitcoin is at an all-time low relatively speaking.
Figure 8: Bitcoin short-term investors’ supply and total balance on trading platforms
Analysis of Savings and Preservation Supply
One thing we can be sure of is that in the Bitcoin market, various indicators of "available supply" are in a downward trend. In fact, this downward trend has been going on for several years, but since the massive sell-off caused by the collapse of 3AC and LUNA-UST in June 2022, this trend has clearly accelerated.
Figure 9: Differences in Bitcoin’s illiquid supply and long-term investor supply
In contrast, when we overlay the inverse indicators of "savings and preservation" and observe the situation, we can find that a significant gap is forming. Here, we focus on "storage supply":
Supply from long-term investors (Bitcoin supply with an “age” of more than 155 days, dark blue line)
Illiquid supply (wallets with extremely limited spending history, light blue line)
Vault supply (ultra-long-term held and lost Bitcoin supply, green line)
This divergence is significant: because it shows that Bitcoin is moving away from exchanges, speculators, and active trading, and toward cold storage, custody products, and wallets of long-term investors.
Figure 10: Differences in Bitcoin’s illiquid supply and long-term investor supply
To understand the size of this portion of Bitcoin supply, we can compare the storage and savings rate of Bitcoin relative to the newly mined portion. Currently, about 81,000 Bitcoins are mined each quarter, and after the halving, this number will be reduced to 40,500.
Figure 11: Cyclic supply changes of Bitcoin over a 90-day period
If we use the overlay method to analyze the changes in illiquid supply over a 90-day period, we can see that Bitcoin illiquid balances have continued to rise in all previous halving events. This shows that the number of buy-side investors tends to increase significantly before and during halvings, and the increase rate is far greater than the issuance rate before and after Bitcoin halvings.
Illiquid supply is currently growing at a rate of 180k BTC per quarter, 2.2x the rate of issuance.
Figure 12: Comparison of illiquid supply and mined volume over a 90-day period
By looking at this from the perspective of “investor holding time”, we see similar accumulation patterns for long-term investors (blue) and vault supply (green). Interestingly, this investor behavior seems to occur in three waves:
The first wave of behavior occurs in the middle of a bear market, when prices have fallen sharply from their all-time highs.
The second wave of behavior occurs in the late bear market, when the market has basically completed the bottoming out.
The third wave of behavior runs through the entire halving period, during which investors will expect to buy in large quantities
Figure 13: Storage supplied by long-term investors compared to mining
The accumulation rate can also be evaluated using wallet size as an entry point. The following figure includes all users with less than 100 bitcoins in their wallets. The owners of these shrimp (<1BTC), crab (1-10BTC) and fish (10-100BTC) accounts include a wide range of investors from small retail investors to high net worth individuals.
Overall, the accumulation rate of these users has exceeded the new issuance of Bitcoin since February 2022. The duration of this period has set a record for the longest time in history and continues to break this record as time goes by.
Figure 14: Comparison between account balance changes from “shrimp” to “fish” and Bitcoin issuance
To summarize, the chart below shows the net balance change of these various “storage” supply metrics since January 1, 2022. Using the change in circulating supply (orange) as a benchmark, we find that investor accumulation rates range from 1.1x to nearly 2.5x new issuance.
Not only is our “available supply” metric at historically low levels, the rate at which investors are “storing supply” is significantly higher than the issuance rate in the pre-halving environment. The cyclical nature of Bitcoin’s market cycles during bear markets and halving events can be described by these investor accumulation patterns, which reminds us of a saying in the markets: bear markets create subsequent bull markets (and vice versa).
Figure 15: Storage supply by various indicators since January 1, 2022
Analysis of the changes in capital waves
In some recent analysis reports, we have focused on capital rotation in the entire digital asset ecosystem. In previous reports, we used realized market capitalization as a proxy for capital inflows, outflows, and rotation.
From a behavioral perspective, long-term Bitcoin investors tend to buy low and sell high, and this profit-making process revalues Bitcoin's low cost basis to a higher cost basis. For example, Bitcoin purchased at $6,000 in 2018 can be sold at $60,000 in 2021. For the buyer, the purchase behavior in 2021 requires 900% additional capital inflow compared to the previous one.
Another important conclusion is that although the current storage supply is increasing, the opposite situation will also occur. As shown in the figure below: when investors complete their trading behavior of making profits by buying low and selling high, their storage supply will be reactivated and put into the liquidity cycle.
Figure 16: Components of realized market value - realized profits
This framework allows us to analyze the amount of capital inflow/outflow required to move the Bitcoin market cap by $1.
The last indicator we will discuss today, the liquidity indicator, or volatility indicator, was also mentioned in our recent analysis. It describes how much change in realized market value needs to occur to cause a $1 change in the total market value of the Bitcoin market. Under this indicator, we notice some interesting details:
In the late stages of a bull market (the orange area in the chart below), capital inflows of more than $0.75 (and in fact often more than $1.0) were required to achieve a $1.0 change in market cap. This has proven to be an unsustainable situation.
During a bear market, that price could drop to between $0.10 and $0.30 as capital and investor attention drain away. This can lead to more volatile prices, as small inflows or outflows of capital can have a huge impact.
The median of this metric (red line in the figure below) has long been close to $0.25, indicating that both Bitcoin supply and liquidity are quite tight - because most of the time, just $0.25 of capital inflow/outflow will result in a $1.0 change in market capitalization. In many ways, this is consistent with the supply dynamics discussed above, where "available supply" is at a historical low, and the rising storage rate causes the market liquidity to continue to deteriorate.
Figure 17: The ratio of capital inflow and outflow to the total market value fluctuation caused by it
Summarize
The fourth Bitcoin halving is approaching, which is a major fundamental, technical and conceptual milestone for the cryptocurrency. Given the well-established ROI in previous cycles, this will continue to be an exciting area for investors.
In this article, we discuss the tight conditions experienced by the supply side of the Bitcoin market using various indicators of the supply side. There is remarkable consistency between these indicators, proving that the current market's "available supply" is still at historically low levels, and that the "supply storage rate" is well over 2.4 times the current Bitcoin mining volume.
