Factors that may affect Bitcoin’s long-term price

A. Halving Events

Source: Bloomberg

What is a halving event?

Bitcoin miners “mine” Bitcoin by validating and storing transactions within a block. Every time a block of transactions is confirmed, miners that participated in the validation process are rewarded with Bitcoin, while the block is added to the blockchain.

In the beginning, miners were rewarded with 50 Bitcoin per block mined. After the first halving event in 2012, the reward was halved to 25 Bitcoin per block mined. Since May 2020, the reward has been reduced to 6.25 Bitcoin per block mined.

How does it affect the price?

Halving the Bitcoin mining rewards has the effect of deliberately reducing Bitcoin’s rate of inflation, driving its price up. Put simply, by reducing the amount of Bitcoin flowing into the overall supply, Bitcoin’s Stock-to-Flow Ratio increases. (take a look at the stock-to-flow model of Bitcoin valuation here)

If we look at Bitcoin’s history, all three halving events have met these expectations, with the resulting Bitcoin rally always breaking past previous all-time highs.

B. US Dollar Weakness
 Source: Bloomberg

Bitcoin has generally had an inverse relationship with the US Dollar. An appreciating US Dollar generally corresponds with declines in Bitcoin’s price, while the reverse is generally true as well – a depreciating US Dollar tends to correspond with an increase in Bitcoin’s price.

Interestingly however, in 2016, while there was an appreciation in the Dollar Index, upward pressure on Bitcoin’s price from the halving event seemed to have overcome downward pressure from the bullish Dollar, suggesting that the halving event may be a stronger determinant of Bitcoin’s price trajectory than movements in the US Dollar.

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