In-depth Analysis of Bitcoin Halving: 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 considerable attention since its inception in 2009. Its core feature is decentralization, not controlled by any central authority, but instead records all transactions through a public ledger known as blockchain. This design not only ensures system transparency but also enhances security, as altering recorded information requires the consensus of the majority of the network's computational power. Furthermore, Bitcoin's global nature means it is not directly affected by specific countries or policies, making it a unique international currency.

Bitcoin Halving mechanism

Bitcoin Halving refers to the event where the reward for generating Bitcoin in the network is halved every four years. This is a pre-set rule in the Bitcoin protocol aimed at controlling the supply of Bitcoin, mimicking the scarcity of gold. Every 210,000 blocks generated, the amount of new Bitcoin received by miners is halved. From the initial reward of 50 Bitcoin per block, it will decrease to 3.125 Bitcoin in 2024. This periodic reduction in supply is theoretically expected to drive up prices in the absence of changes in demand, thereby having a significant impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Definition and Historical Review

Bitcoin Halving refers to the event where the Bitcoin reward for newly generated blocks is reduced by half for every 210,000 blocks, which occurs approximately every four years. This is a core part of the Bitcoin algorithm, aimed at controlling inflation and mimicking the gradual slowdown of resource mining. Since the Bitcoin 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 affecting miner profits and the entire Bitcoin economy.

The Role and Response of Miners

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

The impact of ### on the economics of mining

Halving events typically lead to a significant reassessment between mining costs and market value. Mining profitability is directly affected because the reduction in rewards means that the same mining effort will generate less income if Bitcoin prices do not rise. This prompts mining companies to evaluate operational efficiency, invest in advanced technologies, or seek cost-effective energy solutions on a global scale.

Miner Strategy Adjustment

To adapt to the challenges posed by Halving, miners usually adopt various strategies, including 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, taking advantage of the lower energy costs and more stable policy environments.

3. The Impact of Halving on Bitcoin Supply

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

Halving前后Bitcoin价格表现

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

Short-term volatility: After the last three Halvings, the price of Bitcoin experienced fluctuations within a month after the Halving, but then rose significantly over 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's halving leads to significant price increases in the long term. This is because the halving mechanism continuously reduces the supply, and the total supply of Bitcoin is only 21 million, making it a scarce asset.

Halving前后具体价格表现

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

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

The launch of the Bitcoin spot ETF

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

comparison with traditional assets

Bitcoin is often referred to as "digital gold", possessing characteristics of non-government control and scarcity similar to gold, but displaying different advantages in several aspects. Firstly, the global nature and ease of trading of Bitcoin offer advantages that transcend geographical limitations, making storage and transfer more convenient and cost-effective. Secondly, compared to the stock market, the Bitcoin market operates almost around the clock, providing higher liquidity and trading flexibility. Additionally, the price of Bitcoin is not directly affected by corporate performance or economic policies, offering investors a potential hedging tool that may exhibit characteristics of decoupling from traditional markets during times of increased global economic uncertainty.

Over the past year, the cumulative return rate of Bitcoin has shown significant differences compared to other traditional assets. Bitcoin experienced a period of dramatic growth in October 2023, with its cumulative return rate rapidly climbing, far exceeding that of other assets. This sharp increase highlights the potential and volatility of Bitcoin as an investment tool, while traditional assets such as stock and bond indices have shown relatively stable growth. Gold, as a traditional safe-haven asset, has had moderate growth and volatility, consistent with the performance of stock and bond indices.

The price of Bitcoin has a significant correlation with its 30-day rolling volatility. For most periods, price increases are accompanied by increased volatility. At the beginning of 2024, when the price of Bitcoin peaked, volatility increased significantly, indicating that large price fluctuations and increased investor uncertainty contributed to market volatility. In March 2024, the sharp decline in price was reflected in a sharp rise in volatility, illustrating that during rapid price changes, the volatility indicator is an important gauge of market uncertainty and shifts in investor sentiment.

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 tech companies beginning to support Bitcoin trading or accept it as payment. The involvement 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 gradual 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 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 and optimistic growth potential for it. The Bitcoin spot ETF holdings of large asset management institutions have reached hundreds of thousands of units, with total managed assets exceeding $50 billion. This demonstrates the positive attitude of institutional investors towards Bitcoin investment and suggests that Bitcoin, as an emerging asset class, is being increasingly recognized by traditional financial market participants.

Among listed companies, several hold a considerable amount of Bitcoin, totaling over 250,000, with a value exceeding 17 billion USD. The involvement of multinational technology companies further indicates the acknowledgment and expectation of Bitcoin's future value in the mainstream business sector.

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

V. 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 an unstable global economy or inflationary environment, Bitcoin even demonstrates characteristics of a safe-haven asset. By analyzing Bitcoin's performance under different market conditions, investors can better understand how to leverage this digital asset to optimize their portfolio's risk-return ratio.

Bitcoin maintains a low correlation with traditional assets, except for a higher correlation with Ethereum, and generally has a low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index. This low correlation demonstrates the advantage of Bitcoin as a diversification tool for asset portfolios, helping to spread the systematic risk of investments. Especially during times of turbulence in traditional markets or when facing downward pressure, this characteristic of Bitcoin may provide a certain degree of protection for investors, thereby reducing the overall volatility of the investment portfolio. Therefore, the inclusion of Bitcoin can be viewed as a strategic allocation aimed at improving the risk-adjusted return of the portfolio.

Over the past decade, the comparison of standardized cumulative returns between the traditional 60/40 investment portfolio (60% stocks, 40% bonds) and portfolios with varying proportions of Bitcoin allocation shows that as the proportion of Bitcoin increases, the return volatility of the portfolio also increases. During periods of rising Bitcoin prices, the return rates of portfolios containing Bitcoin allocations significantly outperformed the traditional 60/40 portfolio. Especially after 2020, with the significant increase in Bitcoin prices, portfolios that include Bitcoin demonstrated stronger growth momentum.

However, this also comes with higher volatility, especially during Bitcoin price peaks and pullbacks. This indicates that while incorporating Bitcoin into a portfolio may increase returns, it also increases portfolio risk exposure.

The rolling 12-month Sharpe ratio comparison of Bitcoin with various assets shows that Bitcoin's Sharpe ratio was significantly higher than other assets during certain periods, indicating that it provided the highest excess returns for each unit of risk taken. Particularly 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 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.