Delphi Digital: Comprehensive analysis of the market, mining and technical status of Bitcoin's three halvings

Written by: Delphi Digital

Translation: Lu Jiangfei

Source: Lianwen

The halving of Bitcoin block rewards has always been one of the most important events in the crypto industry. Given the current sluggish global economic environment, the recent "halving" is particularly noteworthy.

The COVID-19 pandemic has made us realize that Western politics and economy are extremely fragile in the face of crisis. Global policymakers are under tremendous pressure and are doing everything they can to avoid economic disasters. Therefore, they have chosen incredible quantitative easing policies, which have led to global debt increasing to historic levels.

In our view, the value of Bitcoin is mainly supported by its non-sovereign, censorship-resistant, and hard-capped supply characteristics. Compared with traditional "safe haven assets", the current geopolitical tensions, economic depression, and global isolation have further highlighted the value of Bitcoin, and it can also further promote the popularization and application of digital assets.

Why Bitcoin? Why now?

As of this writing, the total monetary and fiscal aid pledged globally exceeds $10 trillion, with the bulk of the stimulus coming from the United States, and the Fed’s balance sheet has increased by $2.5 trillion in the last two months alone. This “on-balance sheet expansion” is almost double that of the 2008 financial crisis. Before the coronavirus pandemic, it took the Fed nearly five years to grow their balance sheet by $2.5 trillion, and it is well known that policymakers are not going to change course anytime soon.

History always repeats itself surprisingly well.

After Federal Reserve Chairman Jerome Powell announced that it had unlimited "ammunition" to purchase various assets, market participants were skeptical about whether the Fed could prevent the economic downturn and whether it had the ability to pay, as the current economic environment limited the effectiveness of quantitative easing monetary policy.

Not only that, U.S. Treasury Secretary Steven Mnuchin soon announced that the United States will increase its borrowing to $3 trillion in the second quarter to cope with the economic impact of the new coronavirus epidemic. Such spending is enough to push the ratio of U.S. debt to GDP to a record high, and may even hit a high of "120%" during World War II.

Now, as the world's largest economy, the United States is burdened with a debt of $25 trillion, which is 125 times the total market value of Bitcoin. It is expected that the US federal deficit will reach 16% of GDP in 2020, and the "trillion-dollar" deficit era has finally arrived.

But it’s worth noting that historical experience (albeit limited) shows that Bitcoin tends to peak once major central bank asset growth begins to slow as policymakers are forced to step up rescue efforts.

So, what are the advantages of Bitcoin?

Bitcoin is an attractive option in a multi-asset portfolio that maximizes risk-adjusted returns. Ironically, the most criticized feature of Bitcoin is also its most attractive feature, such as volatility. As we all know, Bitcoin's volatility is often criticized and is much higher than most asset classes, but now crude oil price volatility has long exceeded Bitcoin.

Additionally, as an alternative safe-haven asset, Bitcoin is also superior to gold and other precious metals in many ways, advantages that are becoming increasingly important in a world dominated by digital assets.

Many experienced investors are well aware of the risks of fiat currency inflation and other traditional fiscal situations, but few have taken the time to fully understand the value proposition that Bitcoin offers. As more and more influential investors begin to explore the potential of Bitcoin, its importance as a non-sovereign asset and inflation hedge will only grow.

Even well-known traditional investor Paul Tudor Jones has become the latest advocate of Bitcoin. In a letter to his investment clients, he mentioned that cryptocurrency assets can resist inflation caused by central bank money printing and said that Bitcoin is like gold in 1970.

Bitcoin adoption and distribution

From the beginning of 2012 to the end of 2014, the number of wallets holding less than 10 BTC increased from 2% to 6%. In fact, based on the data comparison in May 2020, except for the number of wallets holding 10-100 BTC, the number of wallets at all levels of holdings has increased. It is worth mentioning that more than 14% of the Bitcoin supply is owned by those with less than 10 BTC in their wallets.

The following figure shows the correlation between the number of Bitcoin whales and Bitcoin prices, where the blue line represents the number of whales (holding 1,000 BTC+), and the red line represents the price trend of Bitcoin. In the two red circles, one occurred around January 2014 and the other occurred around January 2018, you will find that the rise in Bitcoin prices led to a decrease in the number of whales; while in the two green circles, one occurred around March 2015 and the other occurred around January 2019, the number of whales began to increase when the Bitcoin price fell.

There are three other points worth noting:

1. Institutional lending continues to hit new highs;

2. Institutional investor interest has surged; (Grayscale, for example, saw its assets under management increase by $500 million, according to its first quarter report, and currently manages $3.7 billion worth of crypto assets on behalf of clients, a new high.)

3. Retail investors are paying attention to Bitcoin. (For example, Square's Cash App had $306.1 million in Bitcoin revenue in the first quarter of 2020. Of that, the company's gross profit from Bitcoin sales reached a new high of nearly $7 million.)

Flow of Bitcoin held by exchanges

The figure below shows the proportion of Bitcoin held by well-known cryptocurrency exchanges such as Binance, Huobi, OKEx, and Coinbase from May 2019 to April 2020.

In terms of Bitcoin futures trading volume, BitMEX had a very high Bitcoin futures trading volume in September 2019 and was also the market leader in this field, when Binance had just started to get involved in the Bitcoin futures field. But since then, Binance's Bitcoin futures business has developed rapidly and has firmly grasped the market share lost by BitMEX. In May 2020, Binance's Bitcoin futures trading volume was 50% higher than BitMEX.

At this stage, the Bitcoin futures market is still dominated by Huobi, OKEx, Binance and BitMEX, which account for 80% of the market share. Although CME's Bitcoin futures products are popular, its market share in terms of trading volume is only a little more than 2.5%.

Bitcoin’s upcoming major upgrade

Previously, Bitcoin core developer Pieter Wuille announced the final version of the Schnorr/Taproot improvement proposal. The Schnorr/Taproot proposal has been released as BIP 340: Schnorr signature, BIP 341: Taproot, and BIP 342: Tapscript. The Schnorr/Taproot proposal will have a significant impact on Bitcoin's scalability, substitutability, and script innovation. In addition, Braiins, the company behind Slush Pool, also announced the second-generation Stratum protocol (Stratum V2) plan, which allows miners to choose to send block templates to mining pool operators.

Other upgrades include:

1. OP_CHECKTEMPLATEVERIFY;

2. THE GREAT CONSENSUS CLEAN UP;

3. SIGHASH NOINPUT

Lightning Network

It is worth noting that many private channels are deployed on the Lightning Network today. Private channels are channels that do not publicly broadcast transactions to the entire network. From the beginning of 2020 to May 6, the number of public channels on the Lightning Network was about 32,000, an increase of 2.5%. At the same time, the number of nodes in active channels has increased by more than 13% compared to January this year.

Since January 1, 2020, Lightning Network Bitcoin capacity has increased by 8%, and as the Bitcoin price has risen 35% since the beginning of the year, the total value of the Lightning Network has also increased by nearly 40%.

Analysis of Bitcoin Mining Profitability

The following chart shows how Bitcoin mining equipment has changed over time:

The following chart shows the trend of Bitcoin network computing power. In general, the Bitcoin network computing power has been on an upward trend, with only a few short-term declines in history. In the last few months of 2018, we saw a sharp drop in Bitcoin computing power, as the price of Bitcoin plummeted from $20,000 in 2017 to $3,500, resulting in a significant reduction in mining activities and the bankruptcy of many miners.

The most recent drop in Bitcoin network computing power occurred from late March to early April 2020. This was because the new coronavirus epidemic hit the global economy hard, resulting in a sharp drop in Bitcoin prices. However, this time the Bitcoin network computing power quickly recovered.

The impact of the three "halvings" in Bitcoin's history on mining costs:

First halving: 2012

The first "halving" in Bitcoin's history occurred on November 28, 2012, when Bitcoin's computing power hit a high of 27 TH/s.

As can be seen from the above table, after the first Bitcoin block reward halving, the network computing power increased to 25 TH/s, the block reward decreased from 50 BTC to 25 BTC, and the break-even cost increased from US$4.45 to US$12.68. Although the Bitcoin price increased from US$9.5 to US$13.5, the miners’ gross profit margin plummeted from 53% to 6%.

Second halving: 2016

The second "halving" in Bitcoin's history occurred on July 9, 2016, when Bitcoin's computing power hit a high of 1,580,000 TH/s.

As can be seen from the above table, after the second Bitcoin block reward halving, the network computing power increased to 1,580,000 TH/s, the block reward decreased from 25 BTC to 12.5 BTC, and the break-even cost increased from US$217 to US$453. Although the Bitcoin price increased from US$420 to US$680, the miners’ gross profit margin decreased from 48% to 33%.

Third halving: 2020

The third "halving" in Bitcoin's history occurred on May 12, 2020. According to our forecast, the break-even cost of Bitcoin will rise to $12,000-15,000, and the network computing power will gradually increase. If the "script" after the 2020 halving is the same as the previous two times, then the Bitcoin market price will exceed the break-even price (that is, more than $12,000-15,000).

However, if the Bitcoin price does not rise, then the network hashrate will most likely fall.

It is also important to note that the Bitcoin network was not mature during the previous two "halvings", and we also need to consider the impact of the new coronavirus epidemic on the economic environment, so this Bitcoin block reward halving should be different from the previous two times.

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