The Great Bitcoin Supply Squeeze: Only 9 Months of Bitcoin Left on Exchanges

The highly anticipated Bitcoin halving, set to occur in April 2024, is poised to usher in a new era of scarcity for the world’s largest cryptocurrency.

As the block reward is reduced from 6.25 to 3.125 BTC, the supply dynamics of Bitcoin are expected to undergo a significant shift, with far-reaching implications for investors, miners, and the broader crypto ecosystem.

TLDR

• The Bitcoin halving in April 2024 will reduce the block reward to 3.125 BTC, making Bitcoin twice as scarce as gold based on the Stock-to-Flow (S2F) ratio.
• Bitcoin reserves on centralized exchanges are depleting rapidly, with only 9 months of supply left at current inflow rates to Bitcoin Spot ETFs.
• Investors, especially institutions, have been positioning for the halving in advance, allocating more to Bitcoin since September 2023.
• Post-halving, the supply squeeze is expected to intensify as mining rewards are cut in half and unprofitable miners sell reserves.
• Volatility may increase around the halving, and investors should consider strategies like straddles and using Bybit’s Unified Trading Account to manage risk.

A recent report by Bybit, a leading crypto exchange, sheds light on the current state of Bitcoin supply and the potential impact of the upcoming halving.

According to the report, Bitcoin reserves on centralized exchanges are dwindling rapidly, with only nine months of supply left at the current inflow rates to Bitcoin Spot ETFs.

This suggests that the halving could trigger a supply squeeze, as the rate at which new Bitcoins enter the market is effectively cut in half.

The scarcity of Bitcoin post-halving can be gauged using the Stock-to-Flow (S2F) ratio, which compares the circulating supply of a commodity to its annual production.

Before the halving, Bitcoin’s S2F ratio stands at around 56, slightly lower than gold’s ratio of 60. However, after the halving, Bitcoin’s S2F ratio is projected to double to 112, making it twice as scarce as gold.

Institutional investors have been quick to recognize the potential implications of the halving and have been positioning themselves accordingly.

The Bybit report notes that institutions have been allocating more of their assets to Bitcoin since September 2023, with an average of 40% of their total assets invested in the cryptocurrency as of January 31, 2024.

This increased institutional interest can be attributed, in part, to the approval of Bitcoin Spot ETFs in the United States, which has made Bitcoin a more accessible and attractive investment option.

As the halving approaches, the supply squeeze is expected to intensify. With mining rewards being cut in half, unprofitable miners may be forced to sell their Bitcoin reserves to support their operations.

However, once these reserves are depleted, the overall sell-side supply to centralized exchanges is likely to shrink, further exacerbating the supply crunch.

The halving is also expected to have a significant impact on the mining industry. As the block reward decreases, the cost of producing a single Bitcoin is projected to rise to between $28,000 and $42,000, according to estimates from CoinShares and JPMorgan Chase & Co.

This could lead to a consolidation in the mining industry, with only the most efficient miners with advanced rigs and lower costs being able to survive if the Bitcoin price falls below $40,000.

Investor behavior is another key factor to consider in the context of the halving. If Bitcoin continues to test new all-time highs post-halving, as it has done in previous cycles, investors may be tempted to take profits.

However, the Bybit report suggests that the current cycle may be different, with more investors having positioned themselves earlier in anticipation of the halving. This could potentially limit the room for gains post-halving.

As the halving date approaches, market volatility is expected to increase. Investors should consider employing diverse investment strategies to protect their positions, such as using straddles to capture gains from large upside or downside volatility.

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