How will BTC react to the halving?
Bitcoin’s next halving is expected later this month and will see block rewards reduced from 6.25 BTC to 3.125 BTC. [Javier Zayas via Getty Images]
There’s never a dull moment on the blockchain. Here’s what you need to know this week:
How Bitcoin’s halving could impact crypto markets. And what analysts think might happen next.
Crypto tax basics you should know. A quick review of the crypto activities you need to report this tax season.
This week in numbers. The total value of U.S. Treasuries on blockchains, the size of Taiwan’s new crypto industry association, and more stats to know.
HALVE TIME
The next Bitcoin halving is almost here. What happens next?
One of the most anticipated events of the crypto calendar is now just weeks away: the next Bitcoin halving, which is expected to arrive sometime between April 16 and April 22.
Every four years, a mechanism coded into Bitcoin’s blockchain cuts the block reward earned by miners in half. This time around that means that each new block of Bitcoin that’s mined — roughly every ten minutes — will yield 3.125 BTC, down from the current 6.25 BTC block reward.
For much of the last few weeks, BTC prices have hovered around $70,000 — but at the same time, volatility has begun to spike. Prices dipped to around $65,000 on Tuesday (in part over new economic data showing that U.S. manufacturing activity rose unexpectedly, driving the dollar to levels last seen in November).
So, how might the halving impact crypto markets moving forward? There are a wide range of theories about what could happen. Let’s dig in.
Why is the halving such a big deal?
Bitcoin is designed to be a scarce, inflation-resistant asset. One mechanism it uses to achieve this is the halving. Approximately every four years (or every 210,000 Bitcoin blocks, to be exact) the amount of new BTC created by mining declines by half until all 21 million BTC are mined sometime next century.
Historically, a lot of bitcoin’s gains came in the 12 to 18 months after a halving, when newly diminishing supply accompanied surging demand. At the time of 2020’s halving, for instance, one BTC cost less than $10,000. By the peak in 2022, prices had climbed to more than $67,000. (Remember: Past performance is not indicative of future results.)
What do experts think will happen with bitcoin’s price this time?
Opinions vary widely. On the bullish side, some market watchers believe that simple economics point to post-halving gains, as a newly reduced supply meets 2024’s high demand. The CEO of asset manager Bitwise, which launched a spot BTC ETF in January, suggests that “the April 2024 Bitcoin halving may be the most impactful we’ve seen.”
Similarly, the CEO of hedge fund Morgan Creek Capital predicts that post-halving prices could reach $150,000 this year: “The big move happens post-halving. It starts to become more … parabolic toward the end of the year.”
Other analysts are cautious about applying the lessons of past halvings to this year’s cycle. A recent report from Coinbase Institutional, for example, noted that the small sample size of just three prior halvings makes it hard to definitively predict what to expect.
Instead, as David Duong, head of institutional research at Coinbase, notes, the halving’s main impact could be the flurry of new attention the event brings to bitcoin, as well as other contextual factors like market sentiment and adoption trends.
The current rally, for instance, is largely a result of new phenomena, including spot ETF inflows and rising institutional interest. As a result, Duong notes, bitcoin’s market has been “irrevocably altered,” which could mean that “bitcoin's response to the upcoming halving may not necessarily mirror its performance in prior cycles.”
How will the halving impact bitcoin miners?
Because the halving cuts Bitcoin’s block reward in half, mining firms have been bracing for what could be essentially a 50% reduction in revenue.
This has meant firms like Marathon, CleanSpark, and Riot have been raising new capital, buying new properties for mining operations, and purchasing more efficient mining machines to replace old ones.
Meanwhile, some industry watchers fear that some smaller miners could be forced to leave the network due to the cost increases associated with this year’s halving. Currently, analysts estimate it costs between $10,000 and $15,000 to mine a single bitcoin, with costs rising as high as $40,000 post-halving.
In the long term, transaction fees generated by bitcoin’s growing adoption should eventually make up for the reduction in mining reward, but those fees may be too low for now to sustain some miners.
Will the halving cause a bitcoin “supply shock”?
One sentiment that’s gotten a lot of attention in the cryptosphere recently has been the potential for a bitcoin “supply shock” — where a rise in prices triggered by bitcoin’s ETF-fueled demand meets a reduction in new supply caused by the halving.
While social media posts about BTC’s supply “running low” have become more common, Coinbase Institutional suggests such fears could be unfounded. That’s because:
Of the approximately 20 million BTC that have been mined to date, about 85% are in wallets of long-term holders. But some of these holders are likely to sell at least a portion of their BTC for a profit during rallies like we’ve seen this year.
Around 3 million BTC belong to short-term holders who are even more likely to take profits in an uptrend.
About 2 million BTC are controlled by miners, who are likely to sell at least some of their reserves to grow their operations or cover costs.
As Coinbase’s Duong notes, “By not accounting for these meaningful sources of supply, the narrative of inevitable scarcity due to reduced mining rewards and steady ETF demand is an oversimplification.”
The bottom line….
While a key narrative around the halving is that it could spark the next big crypto rally, the one thing that can definitely be said is that it’s hard to predict exactly what might happen, particularly because each cycle has its own set of unique circumstances.
For instance, this is the first halving cycle which saw bitcoin breach its all-time high before the halving, which could mean that the effect has already been priced in by savvy traders. On the other hand, the collective belief that the halving might drive prices up could result in behavior that results in a rally. As always, only time will tell.
TAX SEASON
Which crypto transactions are taxable (and which aren’t!)
If you’re one of the 52 million Americans that own crypto and you’re unsure how to report certain transactions on your federal income tax return, now’s the time to learn.
The last thing you want is an “educational” letter from the Internal Revenue Service (IRS) asking for back taxes or interest because of improperly reported crypto transactions.
With our help, you’ll be able to file confidently and set yourself up for success. Here are some key basics you’ll need to know.
Many types of crypto transactions are taxable events, each with its own set of rules and exceptions. If you sold, converted, spent, earned, or staked crypto, for example, you’ll need to report your transactions to the IRS.
Your crypto gains are taxed at different rates, either as capital gains or as ordinary income, depending on how you got your crypto and how long you held on to it, among other factors. The IRS treats selling crypto a lot like selling stock — you’ll generally pay a lower rate if you hold onto it for longer than a year before you sell it.
Converting crypto, like swapping BTC for ETH, is taxable. This is because you’ve technically sold your BTC to buy ETH, “realizing” either a gain or a loss. Same goes for spending: If you bought $10,000 of BTC and, after its value increased to $30,000, used your BTC to buy a car worth $30,000, you’ll have a taxable gain.
Simply buying crypto with cash isn’t taxable, so you won’t have to report it on your federal tax return. You also won’t need to report transferring coins between wallets you own or gifting up to $17,000 (for 2023) in crypto to a friend or family member. And if you’ve donated crypto directly to a 501(c)(3) charitable organization, you might even be able to claim a deduction, according to the latest IRS guidance.
The bottom line….
It’s important (and legally required!) to report your activity and pay the necessary taxes. The penalty for getting this wrong may be steep, so be sure to consider all your crypto transactions.
If you’re a Coinbase customer, check out our tax reports and tools, or use a trusted partner like TurboTax, H&R Block, Crypto Tax Calculator or CoinTracker to organize your taxable crypto activities. And if you’re having trouble navigating your tax situation on your own, please consult a professional.
NUMBERS TO KNOW
$111 billion
Record-setting March trade volume for the new spot BTC ETFs — up from around $42.2 billion in February (according to Yahoo Finance data compiled on The Block Data Dashboard).
$1.15 billion
Value of U.S. Treasury notes that have been tokenized on public blockchains including Ethereum, Polygon, and Stellar. Finance giants like Franklin Templeton and BlackRock have helped tokenized U.S. Treasuries achieve 1,000% growth since January 2023, according to crypto asset manager 21.co. (Tokenization refers to the process of tying real-world assets to blockchain-based tokens.)
$1 billion
Reported valuation of Merkle Manufactory — parent company of buzzy onchain social protocol Farcaster — after a new investment round led by Paradigm. The company, which was founded by a pair of former Coinbase employees, got a major boost in February after it rolled out a new feature called Frames, which allows Farcaster apps to offer a wide range of experiences inside of users’ feeds.
2.27 million
Number of transactions on the Coinbase-incubated L2 blockchain Base on March 29, a new all-time high. As the Block reports, “Decentralized exchanges on Base also set record-high volumes [on March 29] with a total 24-hour volume of $657.19 million, according to data from Defi Llama.”
22
Number of crypto firms that make up Taiwan’s new cryptocurrency “industry association,” which is expected to generate self-supervisory rules based on guidelines from the Financial Supervisory Commission, the country’s financial regulator. Taiwan’s Ministry of the Interior approved the working group last Friday, after crypto firms began laying the groundwork for the association last September.
TOKEN TRIVIA
Approximately how many people use crypto around the world?
A
150 million
B
400 million
C
700 million
D
1 billion
Find the answer below.
Trivia Answer
B
400 million
