Here is the real reason why the price of Bitcoin has fallen dramatically

Before the approval of spot bitcoin ETFs such as iShares Bitcoin Trust NASDAQ: GOtraders would trade Bitcoin miners and cryptocurrency exchanges like Coinbase Global Inc. NASDAQ: MONEY to benefit from the increase in Bitcoin prices. When the price of Bitcoin increased, the shares of Bitcoin miners in the business services sector also increased.

Positive correlation between Bitcoin miners and Bitcoin spot prices

There was a positive correlation between the direction of bitcoin prices and the prices of bitcoin miners Marathon Digital Holdings Inc. NASDAQ: MARA, Riot Platforms Inc. NASDAQ: REVOLT, BitDigital Inc. NASDAQ:BTBT, Cipher Mining Inc. NASDAQ: CIFR AND TeraWulf Inc. NASDAQ:WULF. The totem pole of momentum usually starts with Coinbase, followed by Marathon Digital, Riot Platforms, and so on.

The logic was that if bitcoin spot prices rose, it would mean more revenue for bitcoin miners as the value of the bitcoins they were mining would increase. This is no different than gold mining stocks rising when the spot price of gold rises

As the bitcoin rally accelerated, miners followed along until something strange began to occur.

The negative correlation materializes

Towards the end of February, when bitcoin prices were reaching yearly and all-time highs, miners began to diverge. Indeed, as bitcoin prices rise, bitcoin miners may start the morning with a price gap and then sell off heavily after the markets open. Numerous traders believed that the positive divergence would continue only to get smoked by the divergence. They would increase their long positions in bitcoin miners, thinking they were picking up a bargain as bitcoin prices continued to rise. Unfortunately, as bitcoin continued to hit all-time highs, bitcoin miners continued to sell off without sustained rebounds.

To throw a wrench into the equation, COIN would often continue to rise with bitcoin prices while stocks like MARA, RIOT, BTBT and the rest of the bitcoin miners would sell off.

The day the correlation died

The divergence was so obvious that it can be pinpointed to an exact date when the correlation essentially died: February 28, 2024. While bitcoin and COIN prices rose, bitcoin miners collapsed. It continued until March 2024. Traders attributed the divergence to possible earnings reports, rumors, or large short sales, but there is a logical explanation for the sell-off. This is an event that happens every 4 years called halving.

There are only 21 million Bitcoins

Bitcoin has a limited supply as it will only ever produce 21 million. Once the 21 millionth bitcoin is mined, there will be no more. This limit works against fiat currencies, which can continue to print money, ultimately pushing up inflation and causing purchasing power to collapse. Bitcoin avoids all this by guaranteeing that only 21 million bitcoins will exist. Only about 1.35 million bitcoins remain to be mined.

What is Bitcoin halving?

To further keep inflation in check, the infamous creator of bitcoin, Satoshi Nakamoto, implemented the so-called halving. Every 4 years, or 210,000 blocks, Bitcoin will reduce its payment rewards to miners by half. Initially, the first payment was 50 bitcoins. On November 28, 2012 it was halved to 25 bitcoins. On July 9, 2016 it was halved to 12.5 bitcoin. On May 11, 2020 it was halved to 6.25 bitcoin. On April 17, 2024, it will be halved to 3,125 bitcoin on November 28, 2012. April 20, 2024.

Why is this important to miners?

If you are a gold mining company and were told that even though spot gold prices are at $3,000 an ounce, on April 20, 2024 you will only be paid 50% of that amount from now on, how much would you get angry? It’s the same for bitcoin miners. They will earn 50% less than they earn now by cutting their hair by 50%. For this reason, starting from February 28, 2024, the market began to discount the reality of lower revenues generated by bitcoin miners.

Historically, bitcoin miners have sold after the halving event when investors realized that revenues were being halved. Eventually, miners resumed positive correlation months after the halving. It could happen again, but only time will tell.

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