Bitcoin Halving's Impact Depends on Fiat Money Supply

Bitcoin Halving's Impact Depends on Fiat Money Supply

In the cryptocurrency world, anticipation is building for the fourth mining reward halving event on the Bitcoin (BTC) blockchain, scheduled for April 2024. Many hope that this event will reignite a significant upward surge in Bitcoin's price, as previous halvings have often been associated with bullish trends. However, it's essential for traders to understand that historical halvings alone did not trigger bull runs. The broader macroeconomic context, particularly the availability of fiat liquidity, played a crucial role, as indicated by data from MacroMicro.

Understanding Reward Halvings

A reward halving is a programmed feature in the Bitcoin code that slashes the rate of Bitcoin supply growth by 50% approximately every four years. The upcoming halving will reduce the per-block reward for miners from 6.25 BTC to 3.125 BTC.

Historical Context

The previous three halvings occurred in November 2012, July 2016, and May 2020. After each of these events, Bitcoin experienced triple-digit price rallies, ultimately reaching new all-time highs within 12-18 months. However, it's noteworthy that these bull markets began to lose momentum around 15 to 16 months before the subsequent halving. This aligns with Bitcoin's year-to-date gain of 56% in 2023, which indicates a recovery from the depths of the previous bear market and follows the historical timing of price bottoms.

Fiat Money Supply Growth Matters

The magnitude of the potential uptrend following the halving is closely tied to the actions of major central banks, including the U.S. Federal Reserve, European Central Bank, Bank of Japan, and People's Bank of China. Specifically, it hinges on their year-on-year M2 money supply growth rates.

The M2 money supply represents the total value of a country's fiat currency in circulation. Historical data indicates that post-halving bull runs in Bitcoin coincided with a 6% or higher aggregate M2 money supply growth rate from these central banks. Conversely, bear markets correlated with a deceleration in the money supply growth rate.

This pattern underscores the argument that Bitcoin's price movement is intrinsically linked to fiat liquidity conditions. When the M2 money supply growth rate is robust, Bitcoin tends to thrive, and when it decelerates, the cryptocurrency faces headwinds.

Current M2 Money Supply Growth

While the M2 money supply growth rate has turned positive in recent times, it remains below the crucial 6% threshold. Many central banks, including the Fed, have raised interest rates over the past year to combat inflation, making the prospect of renewed liquidity easing in the near future appear unlikely.

In summary, the upcoming Bitcoin halving holds the potential for significant price movements, but its impact is intricately connected to the actions of major central banks and the growth of fiat money supply. Traders should remain vigilant and consider the broader macroeconomic landscape when assessing Bitcoin's prospects in the post-halving period.
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