Bitcoin Halving Depth Analysis: A Comprehensive Assessment of Its Impact on Investors

1. Introduction

Bitcoin and its characteristics

Bitcoin, as the first and most well-known cryptocurrency, has attracted significant attention since its inception in 2009. Its core feature is decentralization, relying not on any central authority but on blockchain, a public ledger that records transactions. This design not only ensures system transparency but also enhances security, as modifying recorded information requires the consensus of the majority of the network's computing power. Furthermore, Bitcoin's global nature makes it not directly affected by specific national policies, making it a unique international currency.

Bitcoin Halving

Bitcoin Halving refers to the event in the Bitcoin network where the reward for newly generated Bitcoins is halved every four years. This is a pre-set rule in the Bitcoin protocol, aimed at controlling the supply of Bitcoin and mimicking the scarcity of gold. For every 210,000 blocks, the number of new Bitcoins received by miners is halved. From the initial reward of 50 Bitcoins per block to now 3.125 Bitcoins in 2024. This periodic supply reduction is theoretically expected to increase prices in the case of constant demand, thereby having a significant impact on the market.

2. Bitcoin Halving Mechanism Analysis

Halving Definition and Historical Review

Bitcoin Halving refers to the event in the Bitcoin network where the Bitcoin reward for newly generated blocks is cut in 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 gradually slowing pace of rare resource extraction. Since the Bitcoin network began operations in 2009, the initial reward of 50 Bitcoin per block has been reduced to 3.125 Bitcoin by 2024. After each Halving, the mining reward is reduced by 50%, directly impacting miners' earnings and the overall Bitcoin economy.

Role of Miners and Response to Halving

Miners play a key role in maintaining the security of the blockchain and processing transactions in the Bitcoin network. Whenever a Halving occurs, miner rewards decrease, and less efficient mining operations may be forced to exit the market due to declining profits. In response to the Halving, miners typically seek more efficient mining equipment and lower-cost electricity supplies to maintain their competitiveness and profitability.

Halving impact analysis on mining economics

The halving event usually leads to a significant reassessment of the mining costs versus market value. Mining profitability is directly affected, as the reduction in rewards means that the same mining efforts generate less income unless the Bitcoin price increases. This prompts mining companies to evaluate operational efficiency, invest in more advanced technologies, or seek cost-effective energy solutions globally.

Miner Strategy Adjustment

To adapt to the challenges brought by the Halving, miners usually adopt various strategies such as upgrading hardware, optimizing mining algorithms, and relocating to areas with cheaper electricity costs. For example, many miners have migrated from China to Central Asia, Northern Europe, and even North America to take advantage of the lower energy costs and more stable policy environment.

3. The Impact of Halving on Bitcoin Supply

Halving directly affects the new supply rate of Bitcoin. In the long run, this reduction in supply may drive up prices, provided that demand remains stable. The halving event influences the Bitcoin economic model in this way, making it more like "digital gold."

Halving前后Bitcoin价格表现

• 2012 Halving: Bitcoin price rose from $12 to $1,300, an increase of over 100 times, taking 357 days.
• 2016 Halving: Bitcoin price rose from $650 to $18,000, an increase of over 27 times, taking 511 days.
• 2020 Halving: Bitcoin price rose from $9,000 to $69,000, an increase of over 7 times, taking 546 days.

Short-term volatility: After the last three halvings, the price of Bitcoin experienced fluctuations within a month after the halving, but then surged significantly within the following year. This indicates that the market needs time to digest the effects of the halving, but will ultimately respond to the reduced supply.

Long-term increase: Although there may be fluctuations in the short term, historical data shows that Bitcoin tends to experience significant price increases in the long term after a halving. This is because the halving mechanism continuously reduces the supply of Bitcoin, while the total supply of Bitcoin is only 21 million, making it a scarce asset.

Halving前后Bitcoin价格具体表现

• First Halving in 2012: One month after the Halving, Bitcoin price increased by 9%. In the following year, the price skyrocketed by 8,839%.
• Second Halving in 2016: One month after the Halving, Bitcoin price fell by 9%. In the following year, the price soared by 285%.
• Third Halving in 2020: One month after the Halving, Bitcoin price increased by 6%. Over the next year, the price skyrocketed by 548%.

Miner Sell-off Pressure: Miners may sell Bitcoin after the Halving, which could put pressure on prices in the short term. However, miner sell-off behavior is often influenced by market demand. If market demand is strong, miner sell-offs may be absorbed and not have a significant impact on prices.

The impact of the spot ETF launch

In January 2024, the first Bitcoin spot ETF will be listed in the United States, marking the recognition of digital assets by traditional financial markets. This will further drive institutional investors into the cryptocurrency market, increasing Bitcoin liquidity and market depth, thereby having a positive impact on prices.

4. Advantages of Bitcoin as an Investment Asset

compared to traditional assets

Bitcoin is often referred to as "digital gold," possessing characteristics of non-government control and scarcity similar to gold, but it demonstrates different advantages in several aspects. First, Bitcoin's global nature and ease of trading provide advantages that transcend geographical limitations, making it easier to store and transfer than gold. Second, compared to the stock market, the Bitcoin market operates almost around the clock, offering higher liquidity and trading flexibility. Furthermore, Bitcoin's price is not directly affected by company performance or economic policies, providing investors with a potential hedging tool that may exhibit characteristics of decoupling from traditional markets during times of global economic uncertainty.

Market Acceptance and Growth Potential

In recent years, the acceptance of Bitcoin in the market has significantly increased, with more and more financial institutions and technology companies beginning to support Bitcoin transactions or accept Bitcoin payments. In the early years, international payment giants like PayPal and Square joined, making Bitcoin more mainstream and providing ordinary investors with convenient investment and usage options. 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 recognized. As a borderless currency, Bitcoin's potential role in the global economy is gradually expanding, and its growth potential is acknowledged by many investors.

As of April 6, 2024, several well-known ETFs and listed companies hold a large amount of Bitcoin, reflecting the market's acceptance of Bitcoin and optimism about its growth potential. The Bitcoin spot ETF holdings of large asset management institutions such as Grayscale, BlackRock, and Fidelity have reached hundreds of thousands of units, with a total managed asset value exceeding $50 billion. This not only demonstrates the positive attitude of institutional investors towards Bitcoin investment but also suggests that Bitcoin, as an emerging asset class, is increasingly being recognized by traditional financial market participants.

At the same time, publicly traded companies such as MicroStrategy, Galaxy Digital Holdings, and Marathon Digital Holdings also hold a considerable amount of Bitcoin, totaling over 250,000, worth more than $17 billion. The participation of multinational tech companies like Tesla further indicates the mainstream business sector's affirmation and expectations of Bitcoin's future value.

Overall, whether in the asset management industry or among major publicly listed companies, the large-scale holding of Bitcoin highlights the market's deep confidence in it, as well as the potential importance of Bitcoin as an investment tool and a means of value storage in global asset allocation. This trend indicates an increase in the maturity of the cryptocurrency market and a future broader market acceptance.

5. Future Outlook and Investment Opportunities

The diversification effect of Bitcoin investment and traditional investment portfolios

Incorporating Bitcoin into a traditional investment portfolio can provide significant diversification benefits. Due to the low correlation between Bitcoin and traditional financial assets, it offers a means of risk dispersion for the portfolio. In times of global economic instability or inflationary environments, Bitcoin even demonstrates characteristics of a safe-haven asset. By analyzing Bitcoin's performance under different market conditions, investors can better understand how to utilize this digital asset to optimize the risk-return profile of their portfolios.

The low correlation characteristics between Bitcoin and traditional assets, apart from maintaining a high correlation with Ethereum, generally have low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index. This low correlation demonstrates Bitcoin's advantage as a diversification tool in an asset portfolio, helping to mitigate systematic risks in the investment portfolio. Especially during turbulent times in traditional markets or when facing downward pressure, this characteristic of Bitcoin may provide a certain degree of protection for investors, thereby reducing overall portfolio volatility. Therefore, the inclusion of Bitcoin can be seen as a strategic allocation aimed at improving the risk-adjusted return of the portfolio.

Over the past decade, comparisons of the standardized cumulative returns of traditional 60/40 investment portfolios (60% stocks, 40% bonds) with various proportions of Bitcoin allocations show that as the proportion of Bitcoin increases, the volatility of portfolio returns also increases. During periods of rising Bitcoin prices, portfolios with Bitcoin allocations significantly outperformed traditional 60/40 portfolios. Especially after 2020, with the significant rise in Bitcoin prices, portfolios containing Bitcoin exhibited stronger growth momentum. However, this also came with higher volatility, particularly during peaks and declines in Bitcoin prices. This indicates that while including Bitcoin in a portfolio may enhance returns, it also increases the portfolio's risk exposure.

The comparison of the rolling 12-month Sharpe ratios of Bitcoin against various assets shows that Bitcoin's Sharpe ratio is significantly higher than that of other assets during certain periods, indicating that it provides the maximum excess return for each unit of risk taken. Notably, during the years 2017 and 2021, Bitcoin's Sharpe ratio peaked, reflecting its excellent ratio of investment returns to risk during these timeframes. However, Bitcoin's Sharpe ratio exhibits extreme volatility, corresponding to its price fluctuations. In contrast, traditional stock indices such as the S&P 500 and Nasdaq have lower Sharpe ratios but exhibit less volatility, reflecting a more stable risk-adjusted return performance.