In an appearance on CNBC’s “Squawk Box” earlier today, Matt Hougan, Chief Investment Officer at Bitwise Asset Management, discussed the much-anticipated Bitcoin halving (expected later today or tomorrow) and its potential impact on the cryptocurrency’s value. According to Hougan, the event could signal a significant rally for Bitcoin over the next year.

He believes that while the immediate effects may be muted, the historical trend suggests substantial gains post-halving:

If you look historically at halving events, the price rally over the next year has been substantial after each of the past three.

Addressing the ongoing debate about Bitcoin’s role as a store of value, especially in light of recent geopolitical tensions, Hougan pointed out the complexities influencing Bitcoin’s price. These include ETF demand, tax-related selling, and geopolitical events. While it may be tempting to scrutinize short-term fluctuations, Hougan recommends a broader perspective, emphasizing Bitcoin’s effectiveness against inflation and its potential as a hedge against geopolitical disruptions as it matures.

Hougan highlighted the transformative impact of the US-listed spot Bitcoin ETFs in opening Bitcoin to institutional investors. He noted that professional investors—such as endowments, advisors, and family offices—have found it easier to invest through ETFs rather than direct purchases on trading platforms. This accessibility, he believes, has introduced a significant influx of institutional money into Bitcoin, coinciding with both a demand shock from the ETF launches and a supply shock from the halving.

Looking forward, Hougan expressed optimism about the approval of a spot Ethereum ETF in the U.S., potentially within a year. However, he underscored that the immediate future holds considerable promise for Bitcoin, particularly as major wirehouses are expected to begin offering Bitcoin access in the coming quarters. This development, he said, could unlock further institutional demand, providing additional support for Bitcoin’s price.

In the research paper “The Bitcoin Halving: A Programmatic Monetary Policy,” Juan Leon and Matt Hougan of Bitwise Asset Management examine the effects of Bitcoin’s halving events on its price dynamics and mining ecosystem. The paper discusses the designed halving of Bitcoin block rewards, which occurs approximately every four years, aimed at decreasing the rate of new Bitcoin creation to induce scarcity and potentially enhance its value.

Leon and Hougan explore the halving’s role as a fundamental aspect of Bitcoin’s monetary policy, likening it to the supply dynamics of precious metals such as gold, where reduced supply under constant demand can drive price appreciation. They provide an in-depth analysis of previous halvings, projecting possible market reactions. Although halvings are scheduled and known in advance, they elucidate that market reactions blend rational and speculative behaviors, often deviating from expectations.

Their findings reveal a pattern where anticipatory price surges leading to a halving often culminate in short-term market corrections post-event. However, in the long run, halvings tend to significantly boost Bitcoin’s price, evidencing pronounced gains in the year following these events.

The paper also critically evaluates how halvings impact the economics of Bitcoin mining. Post-halving, the profitability of mining operations decreases due to the halved rewards, posing challenges that compel miners to optimize operations and innovate technologically, thus potentially enhancing the overall network’s efficiency.

Further, Leon and Hougan discuss halvings’ broader market implications, including shifts in liquidity, trading behaviors, and the increasing presence of institutional investors. They argue that each halving marks an evolutionary step in Bitcoin’s market maturity, gradually transitioning from speculative to more investment-focused dynamics.

The research additionally considers the psychological and speculative narratives that surround halvings, suggesting that while these events can trigger speculative bubbles, distinguishing between hype and genuine market growth drivers—like adoption rates and technological progress—is crucial.

Lastly, the interaction between halvings and regulatory frameworks is analyzed, with a call for regulations that nurture innovation while safeguarding against market abuses. This balanced approach is deemed essential for the healthy evolution of Bitcoin’s market in response to halving events.

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