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 global attention since its inception in 2009. Its core feature is decentralization, which means it is not controlled by any central authority but instead records 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 the policies of any specific country, making it a unique international currency.

Bitcoin Halving concept

Bitcoin halving refers to the event in the Bitcoin network where the reward for producing new Bitcoins is halved every four years. This is a preset rule in the Bitcoin protocol designed to control the supply of Bitcoin and mimic the scarcity of gold. After every 210,000 blocks produced, the number of new Bitcoins miners receive is halved. From the initial reward of 50 Bitcoins per block to the current 3.125 Bitcoins in 2024. This periodic supply reduction is theoretically expected to push prices higher, thereby having a significant impact on the market if demand remains unchanged.

2. Analysis of the Bitcoin Halving Mechanism

Halving Definition and Historical Review

Bitcoin halving refers to the process in the Bitcoin network where the Bitcoin reward for newly generated blocks is reduced by half every 210,000 blocks, approximately every four years. This is a core part of the Bitcoin algorithm, aimed at controlling inflation and mimicking the gradually slowing pace of rare resource extraction. Since the Bitcoin network began operating in 2009, the initial reward was 50 Bitcoins per block, which will decrease to 3.125 Bitcoins in 2024. Each halving reduces the mining reward by 50%, directly affecting miner earnings 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 within the Bitcoin network. Whenever a Halving occurs, miner rewards decrease, and many less efficient mining farms may exit the market due to declining profits. To cope with the Halving, miners typically seek more efficient mining equipment and lower-cost power supplies to maintain competitiveness and profitability.

Halving Impact Analysis on Mining Economics

Halving events often lead to a significant reassessment of the relationship between mining costs and market value. Mining profitability is directly impacted, as the reduction in rewards means that the same mining efforts will generate less income unless the price of Bitcoin increases. This prompts mining companies to evaluate operational efficiency, invest in advanced technologies, or seek cost-effective energy solutions globally.

Miners adjust strategies, such as equipment upgrades and changes in geographical distribution.

To adapt to the Halving challenge, miners typically adopt a variety of 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 to take advantage of lower energy costs and a more stable policy environment.

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 prices up under stable demand conditions. 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 increased from $12 to $1,300, 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 increased 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 following the Halving, but then saw a significant increase over the following year. This indicates that the market needs time to digest the effects of the Halving, but will ultimately respond to the reduction in supply.

Long-term rise: Although there may be fluctuations in the short term, historical data shows that Bitcoin often experiences significant increases in the long term after Halving. This is due to the halving mechanism that continuously reduces the supply of Bitcoin, while the total supply is only 21 million, making Bitcoin a scarce asset.

Halving前后Bitcoin价格表现

• First Halving in 2012: One month after the Halving, the price rose by 9%. In the following year, the price skyrocketed by 8,839%.
• Second Halving in 2016: One month after the halving, the price fell by 9%. In the following year, the price skyrocketed 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 selling pressure: Miners may sell Bitcoin after the Halving, which could lead to short-term price pressure. However, miner selling behavior is often influenced by market demand. If market demand is strong, miner selling may be absorbed and not have a significant impact on prices.

Bitcoin spot ETF launched

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 of Bitcoin and traditional assets (such as gold, stocks)

Bitcoin is often referred to as "digital gold," possessing characteristics of non-government control and scarcity similar to gold, but showing different advantages in many aspects. First, the global nature and ease of trading of Bitcoin provide an advantage that transcends geographical limitations, making it more convenient 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 prices are not directly influenced by company performance or economic policies, providing investors with a potential hedging tool, which may exhibit characteristics that are not synchronized with traditional markets during periods 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 intense growth in October 2023, with its cumulative return rate rapidly rising in a short period, far exceeding other assets. This sharp increase highlights the potential and volatility of Bitcoin as an investment tool, while traditional assets such as stocks and bonds have seen relatively stable index growth.

There is a significant correlation between Bitcoin prices and their 30-day rolling volatility. During most periods, Bitcoin prices rise accompanied by an increase in volatility. At the beginning of 2024, Bitcoin prices reached a peak, and volatility surged significantly, indicating that the price's large fluctuations and increased investor uncertainty amplified market volatility. In March 2024, Bitcoin prices plummeted sharply, and volatility surged dramatically, indicating that when prices change rapidly, volatility indicators are an important measure of market uncertainty and changes in investor sentiment.

The market acceptance and growth potential of Bitcoin

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 trading 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. Furthermore, with the development of blockchain technology and the gradual improvement of the regulatory environment for digital currencies, Bitcoin's long-term growth potential 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. Large asset management institutions such as Grayscale, BlackRock, and Fidelity have Bitcoin spot ETF holdings amounting to hundreds of thousands of units, with a total managed asset value exceeding $50 billion. This not only demonstrates institutional investors' positive attitude towards Bitcoin investment but also suggests that Bitcoin, as an emerging asset class, is being recognized by an increasing number of participants in traditional financial markets.

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

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, 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 cryptocurrency market's maturity and a broader market acceptance in the future.

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 of Bitcoin with traditional financial assets, it offers a means of risk diversification for the portfolio. In times of global economic instability or inflationary environments, Bitcoin even exhibits 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 the risk-return profile of their portfolio.

Bitcoin exhibits a characteristic of low correlation with traditional assets. Apart from maintaining a relatively high correlation with Ethereum, BTC generally shows low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index. This low correlation demonstrates BTC's advantage as a diversification tool for asset portfolios, helping to mitigate systematic risks in investment portfolios. Especially during periods of traditional market turmoil or downward pressure, this characteristic of BTC may provide a certain level of protection for investors, reducing overall portfolio volatility. Therefore, the inclusion of BTC can be seen 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 traditional 60/40 investment portfolios (60% stocks, 40% bonds) and various Bitcoin allocation portfolios, as well as the trends in Bitcoin price changes, indicate that as the proportion of Bitcoin increases, the volatility of portfolio returns also increases. During periods of rising Bitcoin prices, the return rates of portfolios containing Bitcoin allocations are significantly higher than those of the traditional 60/40 portfolio. Especially after 2020, with the significant increase in Bitcoin prices, portfolios that include Bitcoin have shown stronger growth momentum.

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

The comparison of the Sharpe Ratio of Bitcoin and various assets over a rolling 12-month period shows that the Sharpe Ratio of Bitcoin at certain times is much higher than that of other assets, indicating that it provides the greatest excess return per unit of risk. In particular, during the years 2017 and 2021, Bitcoin's Sharpe Ratio peaked, reflecting an excellent ratio between investment returns and risk during these periods. 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