A significant decrease in the inactive supply of bitcoin that has not moved in over a year is indicative of long-term holders either continuing to trim their holdings or moving their assets off exchange, according to this week's Bitfinex Alpha report.

"Fundamental to bitcoin price dynamics is this week’s halving, which as it approaches, has seen a notable surge in bitcoin leaving centralized exchanges, and a decrease in the inactive supply of bitcoin that has not moved in over a year, to an 18-month low," Bitfinex analysts said.

The report added that the current actions of bitcoin holders mirror those seen in December 2020, just before a significant rise in the bitcoin market. "This pattern suggests we may be entering a similar growth phase," the analysts added.

Bitcoin exchange reserves at multi-year low

The reduction in long-term holder supply on exchanges observed by Bitfinex corresponds with data from CryptoQuant. Charts show bitcoin exchange reserves have reached their lowest levels ever recorded by CryptoQuant data, which spans back to early 2021.

In July 2021, bitcoin exchange reserves hovered around the 2.8 million mark, but have now fallen to around 1.94 million, indicating a decrease of approximately 862,000 bitcoin since CryptoQuant started recording this metric.

Bitcoin BTC -0.95% exchange reserves have dropped to their lowest level on CryptoQuant charts. Image: CryptoQuant.

Market turns attention to halving

After the sell-off on Monday, the approaching halving event has put the bitcoin market at a crossroad. The Bitfinex report said that after the large liquidation event over the past two days, which pushed prices sharply lower, there are now indicators, including funding rates stabilizing, that suggest traders’ attention has returned to the upcoming halving.

Some caution is now necessary though as the halving event contains some forward-looking pricing from markets, which might now pull back, according to Swarm Markets co-founder Timo Lehes.

"There is still price discovery potential particularly with the addition of geopolitical volatility which has unexpectedly softened prices in the short term," Lehes said in an email sent to The Block.

The upcoming bitcoin halving event

Every four years, a mechanism coded into bitcoin’s blockchain cuts the block reward miners earn in half. This time around, that means 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.

According to The Block's Bitcoin Halving Countdown Page, based on current estimates, the halving will take place on April 20, 2024 at 03:48 UK time, once the network reaches a block height of 840000.

Historically, many of bitcoin’s gains have come 12 to 18 months after a halving, when newly diminishing supply accompanied surging demand. At the time of 2020’s halving, for instance, one bitcoin cost less than $10,000. By the peak in 2022, prices had climbed to more than $67,000.

Although this is the first time a halving is coming off the back of the arrival of spot bitcoin ETFs and a strong wave of inflows.