The Bitcoin Supply Shock

If you follow Bitcoin’s price you might have noticed that more or less every four years its price shoots up before correcting back down. This is due to a supply shock.

Supply and Demand

To understand what a supply shock is let’s first refresh our understanding of supply and demand mechanism. The principle of supply and demand is a fundamental concept in economics that explains how the price of a good or service is determined in a market. In a competitive market, the price of a good or asset will tend to adjust to the point where the quantity supplied equals the quantity demanded. This is known as the equilibrium price. If the demand for a good or service increases, but the supply remains constant, the equilibrium price will rise. Conversely, if the supply of a good or service increases, but the demand remains constant, the equilibrium price will fall.

Bitcoin’s Halving

Bitcoin price is directly correlated to changes in its supply and demand. One factor that has a significant impact on the supply of Bitcoin is the halving event that occurs approximately every four years. During a halving event, the reward that Bitcoin miners receive for adding a new block to the blockchain is cut in half, reducing the rate at which new Bitcoins are created. The haling mechanism is one of Bitcoin’s fundamental governance principles and it’s coded in its core code.

The halvings are set to happen after a pre determined amounts of blocks (210,000 to be exact) are added to the Bitcoin blockchain. A block is simply a series of Bitcoin transfers bundled and validate together. Considering it takes about 10 minutes to add a new block of transactions to the blockchain it then takes more or less 4 years to go from one halving to another.  (2,100,000mins = 35,000hours = 1459 days = 4 years)

Bitcoin’s Demand

We now know the supply of Bitcoin is cut by 50% every four years. Now, let’s look at the demand side of the equation.  Since the blockchain records everything on a public ledger it’s quite easy to check.  Therefore, a good metric would be to look at the number of wallets that hold Bitcoins.  The below chart shows exactly that. The number of wallets that holds Bitcoin smallest denomination, 1 Satoshi. Source intothecryptoverse.com.

The Supply Shock

The trend (red line) is pretty clear. Demand for Bitcoin increases steadily. Therefore when the demand for an asset keeps growing. And every four years its supply it cut in half it create a supply shock. The consequence of that supply shock is the price of Bitcoin rallies creating a new all time high and the correcting back down to a more faire value.

At the time of this article the next Bitcoin halving is one year away. Specifically, it should happen in April 2024. It will be interesting to watch if once again this causes a new price all time high.

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