2024 halving + S2F + Bank of America multiplier = $0.7M bitcoin

Here is my thought process around why halvings are critical inflection points. First you must understand that most bitcoin does not move. In the last month, even given the crazy price action, 89% of all coins have not moved. And this is relatively low compared to where it has been for the last 24 months. So most coins do not move and the price of bitcoin is set by the marginal buyer and marginal seller. If most coins don’t move, then which coins are being sold?

Miners. Miners play a critical role in the distribution of new bitcoin. Mining is a hypercompetitive industry where the cost of production trends toward the price of bitcoin. There are no (or very little) long term profits to be made mining bitcoin and miners almost always sell to at least cover their operating expenses which ultimately trends to the price. So in a hypercompetitive market, which is what the mining industry is today in early 2024, $20B worth of new bitcoin is mined and sold per year. Maybe there’s some margin there for the mining companies, but for rough estimates, let’s say $20B is mined and $20B is sold per year at today’s price and today’s block subsidy. For the price to be at equilibrium, this means that there must be $20B in buyers annually as well. So $20B demand flow matches $20B supply flow.

People like to say the S2F model is not useful because it doesn’t model demand, but I don’t think that’s the right way to think about it.

When a halving occurs, the amount of new bitcoin mined and sold drops to $10B. But does that change demand? Why would the $20B worth of annual demand flow drop as well? If anything, net new demand for bitcoin is likely to increase. Halving brings additional attention, more people understand bitcoin over time, and the dollar continues to get debased. But let’s keep it simple and assume demand flow remains the same at $20B and supply flow remains the same at $10B. This now leaves $10B worth of demand trying to buy coins, not from miners who are forced to sell to cover their operating expenses, but from the existing holders which rarely ever move any coins. This is where we get the idea of a multiplier effect, the research that Bank of America posted a few years ago. The concept is for every $1 of new flows into bitcoin, the market cap will increase by 118x due to the extreme inelasticity of bitcoin’s supply. For this example, let’s round this multiplier effect down to 100x and see what happens with our $10B of net buying. Well $10 billion times 100 would lead to a $1T increase in the market cap of bitcoin! Practically doubling the price of bitcoin to $140,000. Again, this assumes no change in demand!

But I think it gets even more interesting than that. That’s the default scenario holding all things equal. That’s demand flow remaining the same and supply flow programmatically and predictably getting cut in half. But reality usually plays out a little differently. This concept is sound at first, but it usually has second order effects. As the halving occurs and price begins drifting up, that begins to attract attention. Bitcoin’s not actually dead, and the 99% that thought it was begin questioning why they still own zero bitcoin. Bitcoin is the apex property, and over time more people start to realize they need it in their portfolio. And nothing makes that more clear than the price going up! So it’s irrational to expect net annual demand flow to remain at $20B . More likely it goes to $40B, $80B, or even $100B. Some people even speculate that ETF flows will bring $150B in the first year. But let’s just say the annual demand flow increases to $110B from $20B. Again this demand flow increased because the price began drifting up and now everyone is realizing bitcoin is the world’s best money and they need a serious allocation.

But as demand flow rises relatively quickly, supply flow does not! Supply flow can remain around $10B because miners are only selling to cover their operating expenses. As the price rises, their expenses don’t change. Now as profits get bigger it will attract more competition and more mining farms will be built out, but it takes time to build out a 100MW mining farm. This doesn’t happen overnight, so the 12 months after halving mining difficulty can’t rise nearly as fast as the price and supply flow from miners can remain close to $10B.

This means $110B in demand flow minus $10B in supply flow leaves $100B worth of net demand forced to buy from existing holders of an asset with a severely inelastic supply. Keeping the 100x Bank of America multiple, this results in a market cap increase of $10T, putting bitcoin close to gold parity at around $700,000 per coin 12-18 months after the 2024 halving.

So I think this is fairly realistic. It’s why I’ve admired the S2F model over the years, even if it’s certainly not perfect. I think there is real logic around halvings and miners playing a pretty key role in enabling bitcoin’s historical and likely future parabolic bull runs.