Analysis of the Impact of Bitcoin Halving on Investors

1. Introduction

The unique properties of Bitcoin

Bitcoin, as the first and most well-known cryptocurrency, has attracted global attention since its inception in 2009. Its core feature is decentralization, relying on a public ledger known as blockchain to record transactions instead of any central authority. 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 less susceptible to direct influence from specific countries or policies, establishing it as a unique international currency.

Bitcoin Halving mechanism

Bitcoin Halving refers to the event where the Bitcoin reward generated in the network is halved every four years. This is a predefined rule in the Bitcoin protocol aimed at controlling supply and mimicking the scarcity of gold. Every 210,000 blocks, the number of new Bitcoins received by miners is halved. From the initial reward of 50 Bitcoins per block to 3.125 Bitcoins in 2024. This periodic reduction in supply theoretically increases prices under constant demand, having a significant impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Halving Definition and Historical Review

Bitcoin Halving refers to the process where the Bitcoin reward for newly generated blocks is halved every 210,000 blocks, occurring approximately every four years. This is a core part of the Bitcoin algorithm, aimed at controlling inflation and mimicking the gradually slowing rate of rare resource extraction. Since the network started in 2009, the reward has decreased from an initial 50 Bitcoin per block to 3.125 Bitcoin in 2024. After each Halving, the mining reward is reduced by 50%, directly impacting miner profitability and the overall Bitcoin economy.

The role of miners and their response to Halving

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

Halving对矿业经济性的影响

Halving events usually lead to a significant reassessment between mining costs and market value. Mining profitability is directly affected, as the reduction in rewards means that the same mining effort generates less income (if the price of Bitcoin does not rise). This drives mining companies to evaluate operational efficiency, invest in advanced technologies, or seek cost-effective energy solutions.

miner strategy adjustment

To adapt to the Halving challenge, miners are adopting various strategies, including upgrading hardware, optimizing mining algorithms, and relocating to areas with cheaper electricity costs. Many miners have moved from China to Central Asia, Northern Europe, and even North America, taking advantage of the lower energy costs and more stable policy environments there.

3. The Impact of Halving on Bitcoin Supply

Halving directly affects the new supply rate of Bitcoin. In the long term, a reduction in supply under stable demand conditions may drive prices up. 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: Price rose from 12 dollars to 1,300 dollars, an increase of over 100 times, taking 357 days.
• 2016 Halving: Price rose from 650 dollars to 18,000 dollars, an increase of over 27 times, taking 511 days.
• 2020 Halving: Price rose from 9,000 USD to 69,000 USD, 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, but then rose significantly over the following year. This indicates that the market needs time to digest the impact of the Halving, but will ultimately respond to the reduced supply.

Long-term Rise: Although there may be fluctuations in the short term, historical data shows that Halving leads to significant increases in the long term. This is because the Halving mechanism continuously reduces the supply, while the total supply is only 21 million, making Bitcoin a scarce asset.

Halving前后具体价格表现

• First Halving in 2012: Price increased by 9% one month after Halving, and by 8,839% within a year.
• Second Halving in 2016: Prices fell by 9% in the month following the Halving, and rose by 285% within a year.
• Third Halving in 2020: Increased by 6% one month after the Halving, and 548% within a year.

Selling Pressure from Miners: After the Halving, miners may sell Bitcoin, putting pressure on prices in the short term. However, the selling behavior of miners is often influenced by market demand. If demand is strong, the selling may be absorbed, and it will not significantly affect prices.

Spot ETF launch impact

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

4. The Advantages of Bitcoin as an Investment Asset

compared to traditional assets

Bitcoin is referred to as "digital gold" and possesses characteristics of non-government control and scarcity, but it shows advantages different from traditional assets in many aspects. First, its global and easily tradable nature provides advantages beyond geographical limitations, making storage and transfer more convenient and cost-effective than gold. Secondly, the Bitcoin market operates almost around the clock, offering higher liquidity and trading flexibility. Moreover, Bitcoin's price is not directly affected by company performance or economic policies, providing investors with a potential hedge tool, which may exhibit characteristics of decoupling from traditional markets in times of increasing 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 supporting Bitcoin transactions or accepting payments. The entry of international payment giants has made Bitcoin more mainstream, providing ordinary investors with convenient investment and usage options. With the development of blockchain technology and the improvement of the regulatory environment for digital currencies, the long-term growth potential of Bitcoin is widely recognized. As a borderless currency, its potential role in the global economy is 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 market acceptance and optimism about growth potential. Large asset management institutions have a spot Bitcoin ETF position of hundreds of thousands of units, with total assets under management exceeding $50 billion. This shows a positive attitude from institutional investors, suggesting that Bitcoin as an emerging asset class is gaining recognition among traditional financial market participants.

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

Overall, whether in the asset management industry or among publicly listed companies, large-scale Bitcoin holdings highlight deep market confidence, as well as the potential importance of Bitcoin as an investment tool and a store of value in global asset allocation. This trend indicates an increase in the maturity of the cryptocurrency market and a broader market acceptance in the future.

V. Future Outlook and Investment Opportunities

Bitcoin investment and the diversification effect of traditional investment portfolios

Incorporating Bitcoin into a traditional investment portfolio can provide significant diversification benefits. Due to its low correlation with 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 performance under different market conditions, investors can better understand how to utilize this digital asset to optimize the risk-return ratio of their portfolios.

Bitcoin has maintained low correlation with traditional assets, except for a higher correlation with Ethereum, while the correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index is generally low. This low correlation demonstrates the advantage of Bitcoin as a diversification tool in asset portfolios, helping to mitigate systemic risk in investment portfolios. Especially during periods of turmoil in traditional markets or when facing downward pressure, this characteristic may provide investors with a certain degree of protection, 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, a comparison of the standardized cumulative returns of the traditional 60/40 investment portfolio (60% stocks, 40% bonds) with investment portfolios consisting of varying proportions of Bitcoin shows that as the proportion of Bitcoin increases, the portfolio return volatility increases. During periods of rising Bitcoin prices, portfolios that include Bitcoin significantly outperform the traditional 60/40 portfolio. Especially after 2020, as Bitcoin prices rose significantly, portfolios containing Bitcoin exhibited stronger growth momentum. However, this also came with higher volatility, particularly during peak and retracement periods of Bitcoin prices. This indicates that while including Bitcoin in a portfolio may enhance returns, it also increases the portfolio's risk exposure.

The rolling 12-month Sharpe ratio comparison of Bitcoin against various assets shows that Bitcoin's Sharpe ratio was significantly higher than that of other assets during certain periods, indicating that it provided the greatest excess return per unit of risk taken. Notably, during 2017 and 2021, Bitcoin's Sharpe ratio peaked, reflecting an excellent ratio of investment returns to risk during those time frames. However, Bitcoin's Sharpe ratio exhibited extreme volatility, corresponding with its price fluctuations. In contrast, traditional stock indices like the S&P 500 and Nasdaq had lower but more stable Sharpe ratios, reflecting a more stable risk-adjusted return performance.