This Bitcoin halving will be different — the institutions are here
In January 2024, shortly after Bitcoin’s 15th birthday, the digital asset industry reached a long-awaited turning point – the approval of 11 spot Bitcoin ETFs by the U.S. Securities and Exchange Commission.
For many industry participants, this marked the transition of digital assets from a niche curiosity among cypherpunks to an alternative asset class that has gained significant attention from top asset management companies.
Now, the community is preparing for another important milestone in the coming weeks – the fourth Bitcoin halving.
Crypto natives know that the previous three Bitcoin halvings largely followed a predictable pattern, with increased market activity leading to price rallies followed by correction phases.
While we can use past experiences to predict potential market reactions, I believe that the upcoming halving will be different from any previous ones for one key reason: professional investors have entered the cryptocurrency market.
During the Bitcoin halving, private wealth, family offices, and large traditional financial institutions have strategically started incorporating digital assets into their investment portfolios and products. This marks a shift in the way the entire industry operates and implies that the aftermath of this halving will be different from all others.
From a mysterious niche to professionally managed asset class
Each halving of Bitcoin over the past 15 years has marked a milestone in the development of digital assets.
During the first halving in 2012, digital assets were still a mysterious niche primarily driven by the technological curiosity and libertarian spirit of early adopters.
By the time of the second halving in 2016, mainstream awareness had significantly increased, to the point where the leading derivatives market, the Chicago Mercantile Exchange Group (CME Group), launched a Bitcoin price index later that year, laying the foundation for institutional interest that was just beginning to emerge.
By the time of the third halving in 2020, the entire market landscape had undergone significant changes, as digital assets won the hearts and wallets of retail investors. The widespread adoption of user-friendly investment platforms facilitated accessibility, which in turn drove a surge in mainstream investment market acceptance of digital assets.
However, as of 2020, most professional investors still held a wait-and-see attitude towards cryptocurrencies, as they had doubts about the role of this asset class in a reliable investment portfolio and its legal status. Investors looking to enter the cryptocurrency market quickly realized that the lack of trustworthy exchanges, platforms, and custodial institutions in the market prevented them from meeting the regulatory, operational, and security standards expected by professional trading counterparts. The demand for experienced institutional counterparties in the digital asset space, especially in Asia, remained unmet. This was a key driving factor behind the launch of DBS Digital Exchange by DBS Bank in December 2020. Other financial institutions followed suit after recognizing the gap in the market.
Everything changed in 2022 when the industry faced a massive trust crisis due to the collapse of billion-dollar cryptocurrency exchanges and hedge funds. It is worth noting that the trigger for these events was not a failure of blockchain technology, but rather poor risk management and corporate governance. Investors realized that relying on unregulated platforms would expose their digital asset portfolios to significant operational and technological risks, in addition to the need to manage highly volatile asset classes.
To mitigate these risks, investors started self-custodying their portfolios or moving their digital assets to trusted platforms – typically those adhering to regulatory rules followed by traditional financial institutions, especially in the areas of risk management, asset segregation, financial stability, and anti-money laundering. Regulatory authorities in major financial centers like Singapore also began imposing requirements on digital asset platforms to meet these standards.
Digital asset platforms, upon recognizing these structural changes, either adapted accordingly or moved to less stringent jurisdictions or exited the market altogether.
But this did not sound the death knell for the industry; rather, the most severe crisis faced by digital assets led to their transformation into professionally managed asset classes.
Investors no longer in a wait-and-see stance
So, what can we expect from the fourth Bitcoin halving?
Given that each halving signifies a reduction in the newly mined supply of Bitcoin, we are likely to see a period of strong buying demand in anticipation of a Bitcoin rally, just like in previous halvings. This has already begun, as the price of Bitcoin recently broke previous all-time highs.
However, the difference this time around is that previously cautious professional investors have entered a more professionalized market after overcoming their past skepticism. We may also see the participation of asset management companies and funds, such as spot ETFs.
This trend is already underway. A report by Glassnode shows that from 2020 to 2021, the Bitcoin supply held by large entities such as institutions, funds, custodians, and over-the-counter platforms increased by 13.4%, and the number of large entities holding Bitcoin increased by over 27%. Fast forward to 2023: the surge in institution-focused Bitcoin products (and the anticipation of actual ETF approvals) starting from the end of last year can be attributed as one of the reasons for the rebound. According to Coinshares’ research, 2023 saw $2.25 billion flowing into digital asset investment products, making it the third-highest year for such inflows since 2018.
Now is the opportune time for professional investors to expand their market share. Unlike previous halvings, where significant sell pressure was seen in the months following Bitcoin’s historical highs, this time the sell pressure after the halving may be mitigated due to the presence of these new investor demographics.
With these new investors comes a heightened awareness of the risks posed by unlicensed and untested platforms. Therefore, professional investors will place a greater emphasis on partnering with trading platforms that possess the necessary qualifications, allowing them to focus on managing their portfolios without excessive concerns about operational and technological risks.
These qualifications include features such as bankruptcy segregation, regular independent audits, robust cybersecurity, tested risk management processes, and adequate liquidity protection.
Furthermore, as digital assets are increasingly adopted into alternative investment portfolios, platforms that seamlessly integrate with other financial services – such as the ability to manage digital assets alongside traditional assets or access tokenized investment opportunities – will have a competitive edge over purely digital asset platforms.
The platform ecosystem in the market will inevitably evolve in this direction as professional investors become more willing to collaborate with such trading platforms. In conclusion, the fourth Bitcoin halving is expected to be a turning point in the transformation of the digital asset industry – establishing a mature, trusted, professionally operated ecosystem.