Liquidity vs The Halving

Bitcoin Data Newsletter

Hello everyone!

Welcome back to The Bitcoin Data Newsletter!

Typically, the way I structure this newsletter is with a short-term analysis, market comments, a long-term analysis, and then come investor psychology.

But today I wanted to change it up to talk about a special topic. Liquidity.

This is a hot word in the Bitcoin and crypto community, thrown around pretty aimlessly I might add.

So today I’m going to tell you all about it, what it means, why it matters, and then of course compare it to the Bitcoin halving to settle the debate.

It’s time to answer the question: What drives Bitcoin’s cycles and price, Liquidity or the Halving?

This Newsletter Will Cover…

• Liquidity vs Halving - What’s All This About?

• Halving vs Bitcoin - The Halving’s Real Effect

• Liquidity vs Bitcoin - How Much Does it Matter?

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Liquidity vs Halving

What’s All This About?

At the risk of sounding like one of those recipe pages online where you have to read about the history of the cookies and their entire life’s story before you get to the actual recipe, we’re going to talk about what these two things are.

What is Liquidity?

Liquidity

This term refers to the total amount of money in the financial system at any given time.

Here are some things that liquidity affects:

• The Number of Buyers and Sellers. When more money is in the system, more people are there to buy and sell. If you’re looking to trade something, you want to make sure there’s someone to sell to or buy from. High liquidity increases those chances.

• Interest Rates. Lots of money in the system means lower borrowing costs (lower interest rates), which means more people borrowing money to do business.

• Price Impact. More buyers and sellers mean that prices of assets don’t move as much when liquidity is high. When it’s low, price becomes much easier to move.

• Transaction Speeds. Of course, more money and more people means faster transactions! Which is great for growth.

• Investor Confidence. More money, more confidence in the market. Simple.

So, in order to have thriving market conditions, you do want liquidity to be up, that’s just the facts.

Now most of us crypto guys will understand the Bitcoin halving, but let’s go over it quickly for those that don’t.

The Bitcoin Halving

Bitcoin miners run programs to solve complex problems on computers (now highly advanced and specific).

These problems are chunked into sequences called blocks. When the computer successfully solves the block, the miner is granted a reward in Bitcoin. This began at 50 Bitcoin.

To simulate scarcity, the reward is cut in half every 210,000 blocks mined. This takes place around every four years, but not exactly. It all depends on how long it takes to solve those blocks.

The first halving took place on November 28th, 2012, and reduced the reward to 25 Bitcoins.

The second, July 9th, 2016, to 12.5 Bitcoins.

The third, May 11th, 2020, to 6.25 Bitcoins.

Like a finite resource, the more you scavenge, the less there is.

Amount of Bitcoin Mined

92% of all the Bitcoin that can be mined, now have been.

21 million Bitcoin exist, almost 19 and a half million have been mined.

This will be important for our next section.

Halving vs Bitcoin

The Halving’s Real Effect

Many people have it ingrained in them that the halving drives up Bitcoin’s price. Why? Well bull runs tend to be launched after the halving takes place which has been true to this day.

But let’s think a bit deeper…

In only about 14 years of existence, 92% of the supply has already been put into the world. That leaves only 8% left for Bitcoin’s entire existence.

At this point, how much do you think that a halving of the supply miners receive has an effect on price? The logical answer is… very little.

Which means there must be some other force at play.

But wait a minute, at one point this mattered, earlier in Bitcoin’s existence. We can’t forget that. This is where my Halving Cycles Theory Model comes into play:

The Halving Cycles Theory

As I have observed it, there is a distinct pattern around the date of the Halving. Two of them specifically.

If you want to read more about how this theory works you can check out my post on X. Here we will cover some highlights around the halving.

Each year we can determine what Bitcoin will do, and when it will top and bottom centered around two different dates.

Primary: First halving (November 28th, 2012)

Secondary: Second halving (July 9th, 2016)

What happens in a given year, tops and bottoms are all centered around the date of the first halving. Since this halving had the strongest effect on price, this makes sense that it would be more important.

In certain years, Bitcoin also makes early tops around the dates of the second halving. Two to be exact. These are characterized by the purple and yellow dots. While still an important event, Bitcoin is not centered around it like the first halving.

This is not a coincidence; the pattern is way to precise. There haven’t been any flukes, flubs, or exceptions to the rules set by this model.

Using this information, it seems there is a combination of things at work to keep the cycles in balance:

1. The original pattern around true supply shock

2. Market manipulation

3. Liquidity

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Now let’s shift to liquidity:

Liquidity vs Bitcoin

How Much Does it Matter?

Earlier, we talked about the importance of liquidity on the market. There’s no denying it.

But we need a way to measure it…

This is actually much more difficult than people think, because it’s almost impossible to tell how liquid the entire world’s market is at any given point.

But I’ve found a metric that can give us a good idea:

Liquidity vs Bitcoin

This measures 8 different categories of assets, mostly the balance sheets of major governments. This gives us an idea of how much money governments are printing, and in turn, global liquidity.

Some may be quick to say, “you can’t to technical analysis on liquidity!” Sure you can, and here it is.

How closely does liquidity line up with Bitcoin tops and bottoms? As I have measured here, tops it is roughly, and bottoms it is more precise.

Take a look at the ranges I have boxed where global liquidity takes a pause for while. These line up with the bottom range of 2015, and 2019.

Early 2019 was able to go on a parabolic run even during low liquidity then, but of course took quite a long pause alongside the 2020 black swan.

You can see that most recently, it looks like liquidity is bottomed in the range, just like the instances that came before.

People act as if this is a new occurrence, and high liquidity was only a character trait of last year, but globally, run ups have continued to occur throughout all of Bitcoin’s history. Though true, much money was printed during last cycle.

Liquidity bottoming here does not equate to a Bitcoin local bottom, as I have arrowed before.

But with how long we’ve already spent inside the range (54 weeks since the Bitcoin bottom) It’s likely not much longer before the printer fires back up.

So, is it liquidity or the halving?

Here’s what I think.

Liquidity drives up confidence in Bitcoin, and the halving gives it a pattern to operate around on its own. The halving almost definitely does not create a supply shock at this point.

Both liquidity, and the halving play their own important roles in the Bitcoin cycles.

Thanks for reading this edition of the Bitcoin Data Newsletter! If you enjoyed, be sure to leave a like to let others know you did!

I hope you all have an amazing week, and I will see you next time!

Best wishes,

CryptoCon