Digital gold has been among the strongest narratives explaining Bitcoin’s value proposition. Bitcoin’s capped supply and deflationary model mimic the physical characteristics of gold, which has historically served as a store of value and a hedge against market shocks and volatility. As economies trembled under the pressure of Covid-19 and traditional markets began to collapse, many advocates of the digital gold narrative were looking for validation — the ‘decoupling’ of Bitcoin from other assets such as stocks and bonds, with Bitcoin moving in the opposite direction of stocks and bonds and in line with other “risk-off” assets, such as gold.

For most of the last two months, this has not happened. Instead, Bitcoin has performed like a ‘risk-on’ asset that moves in tandem with benchmark indices like the S&P 500, even if its price fluctuations are more pronounced.

Yet, last week saw the price of Bitcoin gain 14% even as the S&P 500 ended in the red. This took place against the backdrop of the approaching Bitcoin halving, which is less than 10 days away. With the halving set to slow down the rate at which new bitcoins enter the market, is this recent price action simply to “price in” the halving, or the beginning of a larger rally?

How the halving influences bitcoin’s price

Historically the halving has led to significant price growth over the subsequent years. However, with only a few data points to work from and an increasing amount of attention to the asset, there are lively debates on whether the anticipated supply drop is already factored into the price of Bitcoin this time. Or is the halving a truly novel event that will have a noticeable impact on prices in the coming year(s).

The ‘halving is priced in camp’ includes commentators such as Nic Carter, who argues that Bitcoin is mature enough a market for there to be enough sophisticated investors devoted to unearthing all the relevant information necessary to make investment decisions. One of the most prominent voices in the opposing camp is PlanB, whose stock-to-flow ratio has been used to predict huge gains for Bitcoin. This model measures the commodity’s outstanding stock against fresh market inflows, and has accurately mapped to sharp price increases in the past.

In the two months leading up to the last halving, which took place on July 9th, 2016, the price of Bitcoin rose 44% to around $650 dollars. It then proceeded to drop to around $630, a price it hovered at for four months before kicking off the mega-bull rally that would see the previous all-time high smashed as Bitcoin made its way to $20,000. This time around, bulls will be looking for encouraging signs from the spot markets as they seek a repeat of the post-halving successes enjoyed in the past.

Spot rising, leverage falling

One clear trend has emerged heading into the halving and traditional markets tumbling — leverage has been leaking out of the market. The data suggest the most recent rally was largely driven by the spot markets. According to data from Skew.com below, Bitmex saw open interest drop below 50,000 BTC, which is only a third of the open interest on the exchange a year ago.

Since Bitmex is mainly used for speculation, a growing number of new entrants to the markets are purchasing less leveraged Bitcoin, potentially holding for longer, and taking more actual Bitcoin out of the available supply. Combined with the new Bitcoin supply getting sliced in half, the halving has the potential to increase the number of investors in it for the long haul.

Over half of all Bitcoin in circulation has not moved in the last 2 years, demonstrating that a sizable portion of the market is holding long-term even as trading volumes, particularly in derivatives markets, have skyrocketed. The Bitcoin bull run on April 29 likely signified an acceleration in the shift towards investors buying Bitcoin to hold.

King Satoshi

Not only is Bitcoin making its presence felt next to traditional asset classes, it is also firmly entrenched as the unquestioned market leader in crypto. During April 29’s rally, Bitcoin’s dominance briefly touched it’s 2017 highs of near 75% as Satoshi’s creation continued to attract most of the capital flowing into the crypto space.

While the upcoming halving reinforces Bitcoin’s deflationary characteristics, especially when compared to the unprecedented combination of fiscal and monetary stimulus taking place across the globe, only time will tell if it is enough to kick off another BTC bull run.

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