Bitcoin halving in depth: a comprehensive assessment of its impact on investors

1. Introduction

Bitcoin and its unique properties

Bitcoin, the first and most famous cryptocurrency, has attracted widespread attention around the world since it was created by the mysterious figure Satoshi Nakamoto in 2009. The core feature of Bitcoin is its decentralized nature, which does not rely on any central authority, but records transactions through a public ledger - the blockchain. This design not only ensures the transparency of the system, but also enhances security, because the modification of any recorded information requires the consent of the majority of the network's computing power. In addition, the global nature of Bitcoin makes it not directly affected by specific countries or policies, making it a unique international currency.

Bitcoin Halving

Bitcoin halving refers to the event in which the reward for generating Bitcoin in the Bitcoin network is halved every four years. This is a pre-set rule in the Bitcoin protocol that aims to control the supply of Bitcoin and mimic the scarcity of gold. Every 210,000 blocks generated, the number of new Bitcoins miners receive is halved. From the initial reward of 50 Bitcoins per block, it will now be 3.125 Bitcoins in 2024. This periodic reduction in supply will theoretically push up prices while demand remains unchanged, thus having an important impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Definition and Historical Review of Bitcoin Halving

Bitcoin halving refers to the event in which the Bitcoin reward for newly generated blocks in the Bitcoin network is reduced by half every 210,000 blocks, approximately every four years. This is a core part of the Bitcoin algorithm, designed to control inflation and mimic the gradual slowdown in the mining of scarce resources such as gold. Since the Bitcoin network was launched in 2009, the initial reward per block has been 50 Bitcoins, and now it is 3.125 Bitcoins in 2024. After each halving, the mining reward is reduced by 50%, which directly affects the income of miners and the entire Bitcoin economy.

The role of miners and their response to the halving

In the Bitcoin network, miners play a key role in maintaining blockchain security and processing transactions. Whenever a halving occurs, miners' rewards are reduced, and many less efficient mining farms may be forced to exit the market due to declining profits. In response to the halving, miners usually seek more efficient mining equipment and lower-cost electricity supply to remain competitive and profitable.

Analysis of the impact of halving on mining economics

Halving events usually lead to a major reassessment between mining costs and market value. The profitability of mining is directly affected, as the reduction in rewards means that the same mining effort will generate less revenue if the price of Bitcoin does not rise. This prompts mining companies to evaluate the efficiency of their operations, invest in more advanced technologies, or look for cost-effective energy solutions around the world.

Adjustments in mining strategies, such as equipment upgrades and changes in geographic distribution

In order to adapt to the challenges brought by halving, miners usually adopt a variety of strategies including upgrading hardware, optimizing mining algorithms, and moving to regions with cheaper electricity. For example, many miners have moved from China to Central Asia, Northern Europe, and even North America to take advantage of lower energy costs and a more stable policy environment.

3. Impact of halving on Bitcoin supply

Halving directly affects the rate of new supply of Bitcoin, and in the long run, this reduction in supply may drive prices up while keeping demand stable. In this way, the halving event affects the economic model of Bitcoin, making it more like a "digital gold".

Source: https://www.tradingview.com/chart/BTCUSD/zDs32rdu-BTC-Halving-Cycle-Top-Analysis-2021-2022/

Bitcoin price performance before and after halving:

• 2012 Halving: Bitcoin price increased from $12 to $1,300, an increase of more than 100 times, in 357 days.

• 2016 Halving: Bitcoin price increased from $650 to $18,000, an increase of more than 27 times, in 511 days.

• 2020 Halving: Bitcoin price increased more than 7 times from $9,000 to $69,000, which took 546 days.

Short-term volatility: After the past three halvings, the price of Bitcoin fluctuated within a month after the halving, but then rose sharply within the next year. This phenomenon shows that the market needs time to digest the impact of the halving, but will eventually respond to the reduction in supply brought about by the halving.

Long-term gains: Although there may be short-term fluctuations, historical data shows that Bitcoin halving will bring significant gains in the long run. This is because the halving mechanism will continue to reduce the supply of Bitcoin, and the total supply of Bitcoin is only 21 million, which makes Bitcoin a scarce asset.

Bitcoin price performance before and after halving

• First halving in 2012: A month after the halving, the price of Bitcoin increased by 9%. In the following year, the price of Bitcoin soared by 8,839%.

• Second halving in 2016: One month after the halving, the price of Bitcoin fell by 9%. In the following year, the price of Bitcoin soared by 285%.

• The third halving in 2020: A month after the halving, the price of Bitcoin rose by 6%. In the following year, the price of Bitcoin soared by 548%.

Miner selling pressure: Miners may sell Bitcoin after the halving, which may cause price pressure in the short term. However, it is important to consider that miners' selling behavior is often affected by market demand. If market demand is strong, miners' selling behavior may be absorbed and will not have a significant impact on prices.

Major Bitcoin Events and Price Impacts (2018 – 2024)

The launch of BTC spot ETF

In January 2024, the first Bitcoin spot ETF was listed in the United States, marking the recognition of digital assets by the traditional financial market. It will further promote institutional investors to enter the cryptocurrency market, increase the liquidity and market depth of Bitcoin, and thus have a positive impact on prices.

4. Advantages of Bitcoin as an investment asset

Comparison of Bitcoin with traditional assets (such as gold and stocks)

Bitcoin is often referred to as "digital gold" and has similar non-government control and scarcity characteristics as gold, but it shows advantages over traditional assets such as gold and stocks in many aspects. First, the global nature and ease of trading of Bitcoin provide advantages that transcend geographical restrictions. Compared with gold, the storage and transfer of Bitcoin are more convenient and low-cost. Second, compared with the stock market, the Bitcoin market operates almost around the clock, providing higher liquidity and trading flexibility. In addition, the price of Bitcoin is not directly affected by company performance or economic policies, which provides investors with a potential hedging tool. When global economic uncertainty increases, Bitcoin may show characteristics that are out of sync with traditional markets.

As shown in the figure, over the past year, the cumulative return rate of Bitcoin has shown a significant difference compared with other traditional assets. The figure clearly shows the performance of Bitcoin relative to gold, the Dow Jones Industrial Average, the Nasdaq Composite Index, the S&P 500 Index, and the S&P 500 Bond Index. It can be seen that Bitcoin experienced a period of rapid growth in October 2023, and its cumulative return rate rose rapidly in a short period of time, far exceeding other assets.

This dramatic growth highlights the potential and volatility of Bitcoin as an investment tool, while traditional assets such as stocks and bond indices have seen relatively flat growth. In addition, gold, a traditional safe-haven asset, has seen relatively modest growth and volatility, in line with the performance of stock and bond indices. When analyzing the returns of these different assets, Bitcoin's uniqueness and high volatility offer a different path for investors seeking non-traditional growth opportunities.

As shown in the figure, there is a significant correlation between the price of Bitcoin and its 30-day rolling volatility. For most of the time period, we can see that the rise in Bitcoin price is accompanied by an increase in volatility. In particular, in early 2024, as marked in the figure, the price of Bitcoin reached a peak, and at the same time, volatility also increased significantly, indicating that large price fluctuations and investor uncertainty have increased market volatility. However, in March 2024, the price of Bitcoin fell sharply, which is also reflected in the sharp increase in volatility, indicating that when prices change rapidly, the volatility index is an important indicator that reflects market uncertainty and changes in investor sentiment.

In the cryptocurrency market, volatility, as a measure of risk, is closely linked to price and should be taken into account when making asset allocation decisions.

Bitcoin’s Market Acceptance and Growth Potential

In recent years, the market acceptance of Bitcoin has increased significantly, and more and more financial institutions and technology companies have begun to support Bitcoin transactions or accept Bitcoin as a payment method. In the early years, the participation of international payment giants such as PayPal and Square made Bitcoin more mainstream, providing ordinary investors with convenient investment and use channels. In addition, with the development of blockchain technology and the gradual improvement of the regulatory environment for digital currencies, the long-term growth potential of Bitcoin is widely optimistic. As a borderless currency, Bitcoin's potential role in the global economy is gradually expanding, and its growth potential has been recognized by many investors.

As of April 6, 2024, many well-known ETFs and listed companies hold a large amount of Bitcoin, reflecting the market's acceptance of Bitcoin and its optimistic growth potential. Large asset management institutions such as Grayscale, BlackRock and Fidelity hold hundreds of thousands of units of Bitcoin spot ETFs, with total assets under management exceeding US$50 billion. This data not only shows the positive attitude of institutional investors towards Bitcoin investment, but also suggests that Bitcoin, as an emerging asset class, is gaining recognition from more and more traditional financial market participants.

At the same time, among listed companies, MicroStrategy, Galaxy Digital Holdings, Marathon Digital Holdings and other companies also hold a considerable amount of Bitcoin, totaling more than 250,000, worth more than $17 billion. The participation of multinational technology companies such as Tesla shows that the mainstream business sector recognizes and expects the future value of Bitcoin.

In general, whether it is the asset management industry or major listed companies, the large-scale Bitcoin holdings highlight the market's deep confidence in it and the potential importance of Bitcoin as an investment tool and a means of value storage in global asset allocation. This trend indicates the increasing maturity of the cryptocurrency market and its wider market acceptance in the future.

V. Future Outlook and Investment Opportunities

Diversification Effect of Bitcoin Investment and Traditional Investment Portfolio

Including Bitcoin in a traditional investment portfolio can provide significant diversification benefits. Due to the low correlation between Bitcoin and traditional financial assets, it provides a means of risk diversification for investment portfolios. In an environment of global economic instability or inflation, Bitcoin even displays the characteristics of a safe-haven asset. By analyzing Bitcoin's performance under different market conditions, investors can better understand how to use this digital asset to optimize the risk-return ratio of their investment portfolio.

This chart reveals the low correlation between Bitcoin and traditional assets. In addition to maintaining a high correlation with Ethereum, BTC's correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq and Hang Seng Index is generally not high. This low correlation shows the advantage of BTC as a diversification tool in the asset portfolio, which helps to diversify the systemic risk of the investment portfolio. Especially when the traditional market is turbulent or facing downward pressure, this feature of BTC may provide investors with a certain degree of protection, thereby reducing the volatility of the overall investment portfolio. Therefore, the addition of BTC can be regarded as a strategic allocation aimed at improving the risk-adjusted return rate of the investment portfolio.

This chart shows the standardized cumulative returns of a traditional 60/40 portfolio (60% stocks, 40% bonds) and portfolios with different proportions of Bitcoin allocations over the past decade, as well as the changing trends of Bitcoin prices. 60/35/5, 55/35/10 and 50/35/15 represent the proportions of stocks, bonds and Bitcoin in the portfolio. As the proportion of Bitcoin increases, the volatility of the portfolio's return rate also increases.

It can be observed that during the period of Bitcoin price increases, the return rate of the portfolio containing Bitcoin allocation is significantly higher than the traditional 60/40 portfolio. Especially after 2020, as the price of Bitcoin has risen significantly, the portfolio containing Bitcoin has shown stronger growth momentum.

However, this is also accompanied by higher volatility, especially during Bitcoin price peaks and pullbacks. This suggests that while including Bitcoin in a portfolio has the potential to increase returns, it also increases the portfolio’s risk exposure.

This chart depicts the rolling 12-month Sharpe Ratio of Bitcoin and various assets. The Sharpe Ratio measures the excess return per unit of risk, and a higher Sharpe Ratio means a higher risk-adjusted return.

As can be seen from the figure, Bitcoin's Sharpe ratio is much higher than other assets in certain periods, indicating that it brings the largest excess return per unit of risk. In particular, during 2017 and 2021, Bitcoin's Sharpe ratio has spiked, reflecting its excellent ratio between investment returns and risks during these time periods. However, it can also be observed that Bitcoin's Sharpe ratio shows great volatility, corresponding to the sharp fluctuations in its price.

In contrast, traditional equity indices such as the S&P 500 and Nasdaq have lower Sharpe ratios but are less volatile, reflecting more stable risk-adjusted return performance.