On April 20th, Bitcoin experienced a halving event, which led to a short-term rise followed by a downward pressure and a certain level of retracement. So why did Bitcoin experience a major drop recently? What impact does this halving have on the Bitcoin ecosystem? And how will Bitcoin develop in the future?
Why did Bitcoin experience a major drop?
Recently, Bitcoin experienced a significant drop, and many altcoins were almost halved in value, causing panic in the market. So why did Bitcoin experience a major drop?
The US tax season led to a significant selling pressure on Bitcoin as many US holders sold their coins to pay taxes. However, with the end of the US tax season on April 15th, the selling pressure on Bitcoin has weakened. Arthur Hayes, the co-founder of BitMEX, stated that from April 15th to May 1st, the US annual tax season (with April 15th being the deadline) would withdraw market liquidity. In addition, the continuous shrinking of the US Federal Reserve’s balance sheet, as well as the expected overselling in the short term due to the halving event on April 20th, could lead to extreme weakness in the market. With several consecutive days of significant decline, Arthur declared on X platform on April 15th, “The bottom has been reached, let’s go!”
The tense geopolitical situation between Iran and Israel put pressure on Bitcoin. From the perspective of asset attributes, Bitcoin is considered a commodity or alternative asset in many countries, and its risk attributes are relatively high compared to traditional assets such as gold and oil. According to many research reports, although many institutions continue to buy Bitcoin, they do so in small quantities as an alternative asset. This article believes that Bitcoin is still a high-risk asset as long as it has not been widely adopted. In a tense geopolitical situation, risk assets are prone to sell-offs, which has become the main reason for Bitcoin’s continuous sell-off recently.
How will the Bitcoin ecosystem change after the halving?
After the halving, the impact on Bitcoin miners will be the greatest, while for the crypto market, the impact will be relatively small in terms of supply and demand. Moreover, from a deeper perspective, this round of halving has a more profound economic significance for Bitcoin.
The competition pressure in the Bitcoin mining ecosystem will intensify, and BTC mining will become more institutionalized. When miners in the Bitcoin network successfully validate a new block and add it to the blockchain, they receive a certain amount of newly issued Bitcoins as a reward. This reward quantity was initially 50 Bitcoins, and according to the design of the Bitcoin protocol, this quantity will halve every 210,000 blocks (approximately every four years), which is the most famous halving event in the crypto market. During the halving event, the quantity of newly issued Bitcoins in the block reward is halved. This directly leads to a halving of miners’ income even if the Bitcoin price remains unchanged. The Bitcoin network adjusts the mining difficulty based on the total computing power of miners to ensure that new blocks are produced approximately every 10 minutes. After the halving event, due to the halving of rewards, miners’ income will decrease, which may lead to some miners exiting and affecting the overall mining difficulty, further institutionalizing BTC mining.
This round of halving directly affects miners, while its impact on Bitcoin is relatively limited because the supply of Bitcoin mined by miners is already small, and it does not cause significant selling pressure on the market. From a deeper perspective, when Satoshi Nakamoto originally designed Bitcoin, the initial Bitcoin economy mainly relied on the token issuance of the Bitcoin network to incentivize miners. However, as Bitcoin incentives decrease, Bitcoin miners’ income will increasingly rely on transaction fees for block packaging. Since 2023, Bitcoin script and Bitcoin Layer 2 have developed rapidly, and the proportion of transaction fees in Bitcoin miners’ income has continued to rise. Therefore, fundamentally speaking, this round of halving is also a paradigm shift in the Bitcoin economy itself.
How will Bitcoin develop in the future?
Some people summarize this bull market as “a non-reciprocal bull market.” The essence is that institutions take positions, create narratives at the chain level, reach a valuation of 1 billion, list the tokens, and then unlock and sell, while retail investors do not buy. BRC20 tokens are fairly distributed, and retail investors execute high-intensity trades to drive up the targets. There is no time and space to accommodate large sums of money at the bottom, so institutions do not buy. Binance supports tokens that OK does not list, and OK supports tokens that Binance does not list. Everyone has a bunch of projects in their hands, and exchanges do not list each other’s tokens. The East plays with script, the West rushes into DeFi, and now the West is starting to rush into script runes, while the East is forming Layer 2. The East and the West do not buy each other’s tokens. They advocate playing with new projects instead of old ones. The old market cannot sustain itself, and the new market is not mature yet, so the imitation market floods in, and the old and new markets do not interact. From recent market trends, during the recent decline of Bitcoin, many tokens indeed faced significant selling pressure and performed relatively weakly. So how will the future of the crypto market develop?
Chris Burniske, the former head of crypto at ARK Invest and current partner at Placeholder VC, stated, “There is significant panic in the market, but the price has stabilized within a reasonable range, and excessive volatility has been eliminated, which will be the foundation for the eventual price increase.” Burniske later retweeted a post about “clearing out before the halving in the last four days” with a picture of a whale swallowing chips, possibly implying that whales are buying up panic-selling chips from retail investors at low prices.
Matt Hougan, the Chief Investment Officer at Bitwise, stated that during last week’s Bitcoin drop due to the unexpected CPI and delayed interest rate cuts, he believed that “higher-than-expected CPI will not disrupt Bitcoin’s upward trend. The June interest rate cut by the Federal Reserve is not a long-term driving factor for Bitcoin prices; it is only a marginal factor. The flow of ETFs and the growing deficit issue are more important, and all these data are positive for Bitcoin.”
In explaining the logic of clearing out, 10x Research stated that the main reasons are: 1. We are increasingly concerned that risk assets (stocks and cryptocurrencies) are at a critical state and may experience significant price corrections. The main triggering factor is unexpected and sustained inflation. The current bond market forecast shows that the number of interest rate cuts will be fewer than three times, while the yield on the 10-year US Treasury bond has exceeded 4.50%. We may have reached a turning point for risk assets. 2. It must be understood that trading is a continuous game full of opportunities. The key to trading is to continuously analyze the market and identify opportunities at favorable times. Sometimes we advocate strategies that increase risk (to gain more returns), while at other times, preserving capital is the top priority, allowing you to seize opportunities when the risk level is lower.
To summarize, based on recent market trends, the major drop in Bitcoin was mainly influenced by the US tax season and geopolitical tensions. After the halving, market sentiment improved, and signs of wealth creation appeared. Unless the geopolitical situation further deteriorates, the Bitcoin retracement may have already ended.
After the halving, Bitcoin miners will be directly affected, with their income halving if the price remains unchanged. In the future, mining competition will further intensify, but from a supply and demand perspective, the impact of the reduced supply of new Bitcoins on market selling pressure will be relatively small. From a deeper perspective, the Bitcoin economic mechanism will undergo a paradigm shift in this round of halving, with Bitcoin miners’ income shifting from mining rewards to transaction fees. This shift is undoubtedly due to the development of script runes and Bitcoin Layer 2.
Expand your reading:
– Bitcoin After Halving: Witnessing Historic Surges?
– How Low Can Bitcoin Price Drop? Analyzing the Controversial “Black Swan” Events
– Prediction: What Will Happen to the Industry If Bitcoin Is Mined Out After a Hundred Years?
– Halving, Cycles, and Recurrence: A Brief History of Bitcoin Development