Key Points
- The upcoming Bitcoin halving is causing a stir in the crypto market, with changing trading strategies required.
- The introduction of the spot Bitcoin ETF has significantly altered the volatility and trading behavior around Bitcoin.
The countdown to Bitcoin’s halving is on, and the ETF frenzy seems to have sped up its arrival. With just a few weeks to go, it’s no wonder that this event is the talk of the town in the crypto investment and media circles. However, the current market conditions are quite different, necessitating a shift in trading strategies.
Impact of Bitcoin Halving on Market Volatility
In the past three cycles, the halving was marked by a significant increase in volatility, usually a 30%-40% sell-off, followed by a substantial rise to a new all-time high within approximately 480 days of the halving date. However, the introduction of the spot Bitcoin ETF has turned the tables.
To predict Bitcoin’s price trajectory, it’s essential to closely monitor the asset’s volatility. In recent months, we’ve seen the expected drawdowns as the halving approaches. However, these drawdowns have been weaker compared to previous cycles, with Bitcoin’s corrections not exceeding 25%. The most recent drawdown was only around 15% before Bitcoin bounced back towards the $70,000 mark.
The Role of Bitcoin ETFs
This subdued sell-off suggests a milder rally post-halving. While Bitcoin is expected to experience the usual post-halving sell-off and eventually reach a new all-time high, the price increases are unlikely to match the 600% surge seen after the 2020 halving.
Two factors contribute to this change. First, the proportion of long-term Bitcoin holders has hit a record high of around 14 million BTC, representing over 70% of the total circulating supply. In recent months, record amounts of Bitcoin have been moved from exchanges to cold wallets as more holders adopt a long-term holding strategy.
The second factor is the introduction of the spot Bitcoin ETF. These ETFs are currently absorbing more Bitcoin supply from the market than miners can produce. On average, spot Bitcoin ETFs have been taking in about 10,000 BTC per day since their inception, while miners are only generating 900 new BTC daily. This is heightening scarcity and driving up prices.
However, this also means a significant reduction in long-term volatility because ETF investors tend to have a longer-term perspective than the average crypto trader. Even though volatility has spiked as the halving approaches, it remains well below levels seen during previous halvings. Data shows that the 30-day historical BTC/USD volatility has dropped from nearly 18% in April 2013 to around 4% now.
The investors now entering the spot Bitcoin ETFs are the same retail investors and institutions that have invested trillions into S&P 500 ETFs. These investors have a minimum investment term of three years, and their investment decisions are guided by long-term factors like macroeconomic conditions, structural market changes, and long-term return potential.
For investors hoping to profit from the halving, they’ll need to adopt strategies more akin to traditional equity investors. They’ll need to monitor the activities of long-term holders closely, as they are now the ones driving the market. If they’re seeking 600% returns, they’ll need to look elsewhere, as this is unlikely to happen after this Bitcoin halving. However, the trade-off will be more consistent, more reliable returns that won’t drastically alter the volatility profile of a balanced portfolio.
Lucas Kiely is the chief investment officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He was also the head of exotic derivatives at UBS in Australia.
