[Bitcoin Ecology] What should investors who want to profit from the Bitcoin halving think?

The clock is ticking on Bitcoin’s halving, and the ETF craze appears to be hastening its arrival. In fact, the big event is just weeks away. So it’s no surprise that the halving is now something that cryptocurrency investors and media can talk about. However, while we can still expect some predictable trading behavior after the big day, we are now in a very different market that requires different trading strategies.

In the past three cycles, halvings have been triggered by large spikes in volatility. We typically expect a 30%-40% sell-off on average 480 days after the halving, followed by a sharp rally to all-time highs. But this time, a spot Bitcoin ETF changes everything.

In order to understand where Bitcoin's price will go in the future, we need to look more closely at the asset's volatility. In recent months, as excitement built ahead of the halving, we have seen an anticipated pullback. However, by the standards of previous cycles, these retracements have been weak. This time around, Bitcoin’s correction was much smaller, not exceeding 25%. In fact, the latest drop was only around 15% before BTC rallied again towards the $70,000 mark.

This more modest sell-off portends a weaker rebound once we get past the halving. There is no doubt that Bitcoin will experience routine sell-offs after the halving, and it will definitely hit all-time highs after the halving. Likewise, for traditional investors, the returns will still look more exciting. But don’t expect the over 600% price increase we saw after the last halving in 2020. Those days are over.

So why does this happen? There are two factors at play here. First, the proportion of long-term Bitcoin holders has reached a record high of approximately 14 million Bitcoins – accounting for more than 70% of the total circulating supply of 19,670,043 Bitcoins. In recent months, a record number of Bitcoins have been withdrawn from exchanges to cold storage as more and more holders take the "diamond hand" approach.

Percentage of total Bitcoin supply held by long-term holders, 2009-2024.

But what really caused the situation to shift dramatically was the arrival of spot Bitcoin ETFs. Today, ETFs are sucking more BTC supply from the market than miners can supply. Since its launch, the spot BTC ETF has taken in around 10,000 BTC per day on average, while miners only generate 900 BTC per day. This increases scarcity and causes prices to rise.

But crucially, it also means a significant reduction in long-term volatility, as ETF investors have a longer-term view than the average cryptocurrency trader. Although volatility has surged recently as the halving event approaches, it is still well below the levels seen during previous halvings. CoinGlass data shows that BTC/USD 30-day historical volatility has fallen from a high of nearly 18% in April 2013 to around 4% at the time of writing. You expect to see this percentage on a U.S. stock fund prospectus, not on a cryptocurrency price chart.

Bitcoin price (yellow) and Bitcoin volatility (green) from April 2013 to April 2024.

That’s because the investors now entering spot Bitcoin ETFs are the same retail investors and institutions that poured trillions of dollars into the S&P 500 ETF. They are long-term holders, with a minimum investment horizon of three years, and their decisions to buy or sell investments depend on long-term drivers such as macroeconomic conditions, structural market changes and long-term return potential.

So what does this mean for investors looking to profit from the halving? They have to think more like traditional equity investors than cryptocurrency investors. They had to swap Messari for Morningstar, a global provider of traditional fund data, to measure the rise and fall of the spot Bitcoin ETF assets under management. They must pay close attention to the behavior of long-term holders because they are now the ones in charge.

If they want a 600% return, they have to look elsewhere. This is not what we will see after the Bitcoin halving. The trade-off, though, would be more stable, reliable returns that don't unduly distort the volatility of a typical balanced portfolio. For most investors, this is more attractive than an asset that has a 50/50 chance of skyrocketing in value or disappearing entirely.