The Breakdown - Bitcoin’s Halving Cycle Isn’t What You Think | The Breakdown

Starting point is 00:00:00 The next Bitcoin halving is now about two years away. Meanwhile, the whole discourse around the four-year cycle is only getting worse, not better. There was always some version of either the halving cycle is still intact and as bullish as ever, just zoom out, or the cycle is broken, ETFs changed everything, which means Bitcoin is going up forever and bubbles are mathematically impossible in this new paradigm. This year, given the US being so pro-cryptial and every other country is kind of following, we will probably break the four-year cycle.

Starting point is 00:00:26 No surprise that we're not seeing as much of the latter take anymore, considering Bitcoin has drawn down by nearly half since its all-time high late last year. So Bitcoin's four-year cycle anchored in the halving really does seem to be as relevant as ever, at least going by the timing of the bear market and even if functionally speaking the halvings these days are more of a rhythmic echo than an actual supply shock. Given the block reward is already so low going into every halving. The reality is that a broad chunk of the Bitcoin market is now mediated by spot ETFs in the US and treasury companies like Strategy Metaplanetan 21, which means if the four-year cycle still exists, even though the slash block reward matters less overall. Why? Why does

Starting point is 00:01:06 Bitcoin still feel so tied to a pattern that was only really relevant 10 years ago? Let's see if we can figure it out. I'm your host David Canellas and this is The Breakdown. Let's get to it. This episode is brought to you by Nexto. Step into a new era of digital wealth. Earn interest on your digital assets, borrow against them without selling and trade all in one platform. Get started at nexo.com slash breakdown. Nothing said on the breakdown is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only and any views expressed by anyone on the show are opinions, not financial advice. Host and guests may hold positions in the company's funds or projects discussed. The first few times around, the halving was brutal. Bitcoin was smaller.

Starting point is 00:01:49 Liquidity was thinner and a cut in issuance was enough to directly impact how the market was balanced in terms of supply and demand, often resulting in bankruptcies and major consolidations within the Bitcoin space. It's really the turbulence of those early years that created what we traditionally think of as the halving cycle, first the block reward gets cut, and usually the market doesn't immediately budge. But over the next year or so, the price slowly starts drifting upwards as reduced supply sets in, before a huge blow off top as the rest of the crypto market rallies alongside Bitcoin. Then the reset, or the bear market, which has historically spanned about a year on average before the next halving invigorates the same cycle all over again.

Starting point is 00:02:27 Considering how much money is to be made by timing markets properly, it's no wonder that the Bitcoin space has internalized this pattern. Miners plan around the harving, funds raise around it, traders position around it, and both traditional and crypto-native media cluster around it. So the harving becomes something else. Outside of the handful of individual firms directly impacted by the harvings like small to medium-sized mining operations and so on, harvings these days are more like a coordination event, with the discourse around it arguably much more impactful than the actual effects. In 2024, the block reward was slashed from a meter 6 BTC, would change to an also meter 3 BTC would change and will now shrink to a little over 1.5

Starting point is 00:03:06 Bitcoin in the next halving in 2028. The effects of the halving can be totally mitigated as long as the price goes up enough, doubling would do. But if the cycle is partly self-referential, it means that when the market structure gets disrupted in a major way, say as new entrants like spot ETFs and digital asset treasuries join the mix, their participation doesn't suddenly put the kibosh on the halving cycle, as was the theory before everything broke down over the past couple months. It's actually the opposite. ETFs and treasury buyers have had no choice but to plug into the same rhythm as all the other market participants that have come before them. It's just that sometimes they've acted as a stabilizer for the market by adding deeper capital during consolidation phases. Treasury companies,

Starting point is 00:03:46 mostly strategy, had this effect throughout December and January as Bitcoin was hovering around 90K. Spot ETF saw major outflows while treasury companies were buying. Had they not, it's possible we would have seen 60K and the start of the bare market much sooner, or at least least that's consistent with the idea that Treasury buying absorbed some selling pressure during that consolidation. Other times, institutions have either indirectly or directly destabilized the halving rhythm by front-running it, thereby changing the shape of the pattern that everyone expects. We saw this when the market front-run SEC approval of spot ETFs to trigger an all-time high before the halving for the first time ever, which is really the genesis of the theory that the four-year

Starting point is 00:04:25 cycle was officially over. But as Bitcoin has always done, it still went on to make fresh short-time highs again in the post-harving period. So even if the direct supply shock from each halving is proportionally less important over time, the behavioral and institutional response to the halving calendar still resulted in a four-year rhythm this time around. Step into a new era of digital wealth with Nexo, the premier digital assets wealth platform. Earn interest on your digital assets, borrow against them without selling. Trade a wide range of cryptocurrencies, all in one place. Nexo is now available again in the US with an evolved product suite tailored to today's market. new US clients can unlock 30 days of exclusive Wealth Club Premier benefits, including enhanced

Starting point is 00:05:06 interest rates, reduce borrowing costs and up to 0.5% crypto cashback on trades. Get started today at nexo.com slash breakdown. Quick break before we continue, Blockworks''s flagship institutional conference, Digital Asset Summit is back in New York City this March 24 through 26th. Das brings together allocators, asset managers, policymakers and the builders actually shaping crypto's next phase. Not the hype cycle, but the infrastructure and capital behind it. This year's summit represents over $4 trillion in assets under management, with more than 150 speakers and 750 institutions in attendance. Speakers include leaders from firms like BlackRock and Franklin Templeton, senior policy makers and regulators. Don Wilson of DRW will be there, alongside core crypto infrastructure teams across

Starting point is 00:05:46 Bitcoin, Ethereum and Stablecoins. If you're looking for a serious institutional grade view of where digital assets are headed in 2026, this is where that conversation happens. Use code breakdown 200 for $200 off. Learn more at blockworks.com slash events. Now back to the show. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Even with all of this in mind, all this really does is prove that Bitcoin markets are cyclical, just like most other markets, crypto or otherwise. But what's especially interesting is that this is the first complete halving epoch with both

Starting point is 00:06:17 ETFs and Treasury companies participating in the market alongside each other over the entire period. So instead of wondering whether the Bitcoin four-year cycle is over, I would instead be thinking how much of this is because of the already small block reward being shrunk even further and how much is a weird combination of memory, momentum and narrative? Well, there's two clear ways it could play out. The first way is the most optimistic that the halving really is a big deal and not just as a social event to coordinate around, but as an event so structurally important to the dynamics of the Bitcoin market that it does trigger a surge in prices due to a clear supply shock. That would also mean that issuance really did get cut in a

Starting point is 00:06:55 meaningful way of the most recent halving, and it will be meaningfully cut again in the halving in That would mean that during the most recent cycle, the supply shock was in fact transmitted into price, but only after being filtered through ETFs and treasury companies via their net flows, rather than directly through Bitcoin miners and retail investors, as was the case in past cycles. We can clearly see that in the data. We touched on these numbers earlier, but since January 24, ETFs and Dats, the institutions that we can easily track, have accumulated roughly 1.3 million BTC,

Starting point is 00:07:26 which is about three and a quarter times how many new coins were mined during that period. That means that institutions had to absorb not just Bitcoin's potentially being sold by miners, but also a much bitter amount of liquidations from existing holders as well. That is a measurable shock and it's arguable that the shock is actually on the demand side and not the supply side, with spot ETFs not existing at all within the US context before 2024. And even if the harving had not happened, there still would have been more demand from institutions than there was supply. Reed B, the more bearish of the two, would go that the harving is not mechanically relevant to the market. The halving may still matter to some degree for individual participants, but if you compare

Starting point is 00:08:04 this period to prior cycles, the sequence looks messy enough that you should at least consider the possibility that the old timing model is less reliable, and that institutionalization may be amplifying fragility, not reducing it. We can see this in ETF flows. Spot ETFs in the US have acted as momentum capital, not a stable floor, whereas it's actually treasury companies like strategy that have stepped into serve as a bedrock for the buyside. flows show a strong positive relationship with price direction and multiple drawdown phases featured net outflows as price weakened and it's not just that ETF flows correlate with price

Starting point is 00:08:36 direction they follow it and then amplify it the bidest inflows came during Bitcoin's best-performing months and the bidest outflows also came in the bidest down months. ETF flows and price moved in the same direction for 80% of the 25 months since they first rolled out in the US. All that makes Bitcoin ETFs more resemble flow-sensitive capital rather than unconditional demand. So the same ETFs that help compress supply on the way up can create a vacuum when flows reversed. Contrast that with sailors effectively constant buying with the spoken intent to never sell, and it's clear that institutional participation can create support and fragility at the same time. So it really matters how ETF investors and Treasury companies view the importance of the halving, and whether

Starting point is 00:09:21 they can trust the cycle timeline that spawns around it. And that's really the worst part. If we are to to believe that the four-year halving cycle is still very real and still very intact, at least to some degree, then we know that the effects of it are best handled by the biggest forces in the market today, treasury companies, older whales and spot ETFs. In the best case, that would probably convert to the harving no longer being a dominant marginal driver of Bitcoin's price, drowned out by flows into ETFs and treasury companies. What we don't know yet is whether that institutional demand will last, nor whether it has durably raised Bitcoin's flaw. And if the next halving, the network's fifth is meant to be as bullish as ever, then both Treasury companies and

Starting point is 00:10:00 ETF buyers would really need to buy into the narrative, literally, and that narrative should pick up over the next 18 months or so ahead of the 2028 halving. And well, so far so good, at least as of the start of March, with strategies still intact and spot ETFs retaining most of their coins overall, as Bitcoin maintains in the mid-60s. But in any case, I guess we're going to find out pretty soon, considering the past three harvings all arrived on the other side of a bear market, not inside one. The bear always ended first, having lasted for about a year, but it's still technically possible that 2028 becomes the first halving to occur while the market is still searching for a flaw in the same way that it broke price records ahead of the

Starting point is 00:10:38 halving for the first time in 2024. I put all of this to my guest, Blockworth's research analyst and host of the new Inflection Point podcast Mark Arjun, who had this to say. Let's take a moment to talk about Nexo. Nexo delivers a premier digital assets wealth platform designed to help clients build, manage and preserve their wealth, earn interests on your digital assets, access crypto-backed credit without selling your holdings, trade with advanced tools, all supported by 24-7 client care. Now back in the US, NXO offers new clients 30 days of exclusive World Club Premier Access, that means enhanced interest rates, reduce borrowing costs, and up to 0.5% crypto cashback on trades. Benefits typically reserve for wealth club members

Starting point is 00:11:19 and private clients. Nexo is also expanding its global presence, becoming the official crypto partner of Tennis Australia, the organization behind the Australian Open, and the digital asset partner of the Audi Revolut Formula One team. If you're ready to approach digital assets with a more structured wealth strategy, visit nexus.com slash breakdown to get started. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. With me is my special guest, Blockworths research analyst and host of the new Inflection Point podcast, Mark Aujon. Thanks for joining us today. Thanks for having me. Excited to be here. Yeah, I kind of wanted to jump off straight

Starting point is 00:11:52 way into this whole thing about whether the Bitcoin halvings are really mechanically relevant to supply and demand dynamics because to me I feel like that ship has like sailed a long time ago because there's like a lot of things in the Bitcoin space and the Bitcoin market that outweigh how many Bitcoins are mined every day and like a lot of people like to bring it up that oh we're buying more Bitcoin than can be mined and all that kind of thing and then well if you look even just the top the top volume on exchanges that even the buying pressure on exchanges

Starting point is 00:12:28 outweighs how much how much Bitcoin supply has been released. So I'm just wondering like your take there. Like am I way off base there in thinking that the amount of Bitcoin mined every day it doesn't really matter anymore in terms of the market or am I kind of underplaying it there? It's kind of like a two-sided coin

Starting point is 00:12:46 because in one sense it never it should have never really mattered because everybody knew what this supply would be and for the next until the year 2100 and something so you know and that's one of the brilliant points about bitcoin is that it's very transparent and programmatic and because of that you should have you know whatever valuation model that you use it should have all already been priced in but it but on the other side it never seems to be the case every time it comes around after the happening i think the narrative picks up and because

Starting point is 00:13:22 Bitcoin is one of those instruments that had a retail base before the institutional base. I think that the attention around it is what really matters for near-term price action. So in one sense, yeah, I agree that it shouldn't matter, especially because the changes from an absolute perspective are smaller and smaller each time. But because historically it has mattered and for many investors looking at the passes, you know, the best way to look at the future and, you know, we've seen this Bitcoin having upside surge play out many times before. There's still some level of relevancy to it. Yeah, it's interesting because I mean, I checked, I checked this morning just before we jumped on, like the supply that is still being held by Bitcoin miners and it has been going down and down and down,

Starting point is 00:14:14 but it is still around 10% of the supply is being held by Bitcoin miners. So, you know, To me, it just feels like that whatever the miners are doing, and maybe we're going to talk about AI, you know, later on in the conversation, but it feels like Bitcoin miners themselves might be more relevant to the supply dynamics than even the halvings. Are you paying attention to how much Bitcoin miners are holding, or is that not really a big deal? Yeah, I definitely pay attention to that. I write about those dynamics in our Bitcoin monthly newsletter.

Starting point is 00:14:51 And I think now one of the other reasons for some of this down pressure, I mean, it's reflexive, but because of this, because of the downward movement in price, obviously some of the larger Bitcoin miners will use hedging instruments like futures to offset some of their risk. But their supply, they're mining at negative economics right now. if, you know, if we take aside any kind of hedging, which we're not privy to those information, they're mining at a loss because right now, you know, the hash rate continues

Starting point is 00:15:25 to climb on a quarterly basis, but the price isn't matching suit and also Bitcoin fees, REV, just from transacting on the network, are a six-month low. And so the miners are becoming more and more reliant on the block subsidy. and with, you know, with the having a year and a half ago, I think, two years ago now, and the reduced fees, I think they're one of the more important haulers to look at, especially now. The influences on the Bitcoin market are just, they're so rapidly changing, especially, you know, and I just sound like a boomer all the time bringing up 2016,

Starting point is 00:16:09 2018 and 2021. But the playing field is just so drastically different. And I think that's really like the genesis of what I was trying to get at with this episode, was that, you know, the old rules of the halving and the four-year cycle, like, they do feel relevant only because, you know, Bitcoin started when it did. So, you know, it's just a fact of the matter that, you know, the first halving was, was when it was. and then the next halving was then. And then over time, we're seeing an increased correlation between Bitcoin and equities.

Starting point is 00:16:46 So, you know, and that kind of goes up and down. And I suppose this is a good opportunity to start unpacking your thesis for inflection point, your new institutional focus podcast. But how much of the halving cycle and the four-year cycle does still come up with institutions? Because it feels like such a boomer thing to bring up that this is like a thing. are they looking at that and going, well, that was nice back then. But for now, we're going to appreciate this asset for what it is and what we think it is right now. Yeah, that's a good question.

Starting point is 00:17:24 And we briefly discussed this in Infliction Point podcast as well. I think when we say investors, let's break it down into three types. So first, let's say the hedge funds, right? the hedge funds, their exposure to BTCs through the ETFs, mostly Ibit because it's the most liquid and it has the highest option volume on it. But their trade on it isn't directional. They use the basis trade to get yield, which is basically when you short the futures contract and go long spot, and the futures contract tends to be in contango, i.e., it's higher than

Starting point is 00:18:05 the Bitcoin spot price because people, believe that Bitcoin will go up in the future, as it always has. And so that's why it's almost always in contango. And so no matter how Bitcoin moves, you're capturing that spread between the spot and the futures. If Bitcoin goes down, you're profiting from the short of the futures and vice versa. And since 10-10, in October, the 10-10 crash, which is ironically around the same time as the four you're having with the bear market was supposed to start, I think that had some deep market structure changes as well as probably reinforced amongst retail the belief in the four-year cycle. And the reason why Bitcoin's always been in contango is because even with ETFs, if we look at 13-filings of the institutions buying it and the different hedge funds, pension funds, endowments,

Starting point is 00:18:58 we're not getting the full picture of it, which probably means a lot of these purchases are happening in retail accounts or SMAs or between individuals. wealth managers and client relationships, which is still technically retail. And so their risk appetite still plays a large part in the basis trade, which has now since and since 1010 collapsed. And because it's collapsed, you know, we're talking about in 2024, 2025, we're talking about double-digit yields on this low-risk trade. And now we're looking at only single-digit yields. And when you go down to low single digits, we're looking at T-bill interest rate numbers here. It just doesn't become attractive anymore. And to unwind this trade, because, you know, you're not just taking futures contract one week out, one month out, you're probably laddering it up one month,

Starting point is 00:19:56 one, two months, three months. And so if we look at CME futures, we see that since October that every single month the CME futures open interest has declined by 20%, 25%, 29%. And so this is a symptom of these hedge funds exiting their BTC basis, their carry trade position, and we're seeing it in ETF flows as well. And so whether that comes back is whether the basis trade starts to expand again and become fat and juicy and everybody wants to leverage up on it again. But I mean, that might in itself be a function of retail or some other catalyst. And then I think the second investor there will also be just be the attention traders, the ones who, you know, love to speculate long-term, these asymmetric bets,

Starting point is 00:20:49 and are probably now putting their money into AI or energy or metals like gold and, you know. But the last point here, the last type of investor would be the long-term allocators. And, you know, if we look at Bitcoin, Bitcoin's at four months of negative net ETF outflows for the first time ever. Three months would be the first time ever. Four months is still the first time. So that's historic. But even though there's net negative outflows, we're still seeing inflows into it because net outflows doesn't mean that there's not positive inflows also coming in. And these tend to come from the longer term allocators. We still have some pension funds.

Starting point is 00:21:33 We still have some asset managers purchasing this. And they're there for the longer term. And they're probably holding up the structural floor, but not enough to get us a quick V-shaped rally. Cool. Bullish. I think we're going to leave it there. Thank you so much for joining us today, Mark.

Starting point is 00:21:51 And please, everybody go out and check out the new Inflection Point podcast for more on the institutional side of the crypto space. Thank you so much, Mark. Yeah, great. Thanks all with me, David. Cool, my pleasure. That's about all the time we have for today. Let me know in the comments what you think about Bitcoin's halving cycle ahead of the next one, and I'll see you next time.

The Breakdown - Bitcoin’s Halving Cycle Isn’t What You Think | The Breakdown

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