Bitcoin Halving: Impact on the Cryptocurrency Market
Bitcoin halving is a key feature of the Bitcoin protocol. To understand its historical background, we must trace back to the origin of Bitcoin.
Bitcoin was proposed by Satoshi Nakamoto in 2008 and launched in 2009. It aims to establish a currency independent of the traditional financial system, with a maximum supply of 21 million. Bitcoin is released through mining, where miners verify and record transactions in exchange for new Bitcoin rewards.
Bitcoin halving occurs approximately every 4 years or every 210,000 blocks. During halving, the reward for mining new blocks is halved (currently 6.25 Bitcoin). This gradually reduces the rate at which new Bitcoin is generated until it reaches its limit around the year 2140.
So far, three halving events have occurred, with the fourth one expected on April 19, 2024. The previous halvings took place on January 28, 2012, July 9, 2016, and May 11, 2020.
These events have attracted market attention and can have a positive impact on the price of Bitcoin in the short term, although their long-term effects are influenced by various factors such as market demand and macroeconomic conditions.
This report focuses on the impact of Bitcoin halving on the cryptocurrency market and its relationship with the global financial market. It evaluates the potential and risks of Bitcoin as an emerging asset class.
Contents:
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Different levels of impact on Bitcoin investors, traders, and miners
Bitcoin Investors
Bitcoin Traders
Miners
Miners’ Income
Macro
Bitcoin Market Cap vs. Central Bank Assets
Asset Allocation
Bitcoin: Rolling 1-Year Correlation
Bitcoin Price Volatility
Asset Flow
Bitcoin ETF Net Inflows
Open Interest of Options and Perpetual Contracts
Overview of Physical Bitcoin Ownership
Asset Allocation
How much capital can flow into Bitcoin?
Optimizing portfolio performance through Bitcoin allocation
Bitcoin portfolio allocation backtesting
Cryptocurrency Regulation
Global Perspectives on Cryptocurrency Regulation
Conclusion
Past performance of Bitcoin before and after halving:
According to past halving events, although Bitcoin has reached new all-time highs after each halving, we observed that it took longer and had lower multiples to reach those highs.
Addresses with different Bitcoin balances:
The number of non-zero balance wallets has surpassed the 50 million mark. Wallets with more than 1 Bitcoin have also exceeded 1 million. These types of wallets reflect the overall adoption of cryptocurrencies over a period of time, including halving events.
On the other hand, since the last halving, the number of whale wallets (balances exceeding 100 or 1,000 Bitcoin) has decreased.
Changes in Bitcoin spot trading volume:
The average daily spot trading volume in the past week was around $25 billion, still far from the levels of the previous bull market. Although spot trading volume has been gradually increasing since the last bear market, the price of Bitcoin is not far from its previous all-time high.
A V-shaped trend in price and trading volume is slowly forming. With the upcoming halving event and the increasing adoption of cryptocurrencies, more trading activity is expected.
Active Bitcoin wallet addresses:
Bitcoin halving usually brings new narratives to the Bitcoin ecosystem and injects new user activity. Historically, the number of active Bitcoin addresses tends to remain stable within a certain range before a halving event and then experiences a surge after the event.
This time, the narrative revolves around Bitcoin’s Layer 2, and a large number of related projects are expected to be launched before and after the halving event, which should bring new user growth to the entire Bitcoin ecosystem.
Bitcoin exchange balances:
Exchange balances are often considered important on-chain indicators. Higher balances indicate that traders are depositing Bitcoin into exchanges, potentially leading to selling pressure, and vice versa.
Facing the upcoming halving event, exchange balances have reached a new low since the last halving event. The latest balance is 2.31 million Bitcoin, accounting for 11.02% of the total supply.
Miner balances – the survival challenge for miners:
Except for the bull market period during May 2020 halving, we have consistently observed rapid depletion of Bitcoin balances in miner wallets before each halving.
This is mainly due to the sharp drop in miner income caused by halving. Mining companies and farms require a large amount of capital to upgrade mining machines and equipment in order to mine Bitcoin faster and more efficiently than others after halving. Faced with funding pressure, they tend to raise short-term funds through selling Bitcoin or engaging in leveraged operations.
The upcoming halving event seems to be no exception. Starting from the fourth quarter of 2023, Bitcoin miners began to sell off Bitcoin continuously, and the balance has now reached its lowest point since June 2021.
Although halving reduces block rewards, miners’ total income largely depends on the price performance of Bitcoin. Currently, miners’ total income has recovered significantly compared to the previous bear market.
Is Bitcoin an inflation hedge tool? This is a common concern among investors.
The assets of global central banks indicate that global liquidity is one of the causes of inflation, and it seems to be related to the market capitalization or price performance of Bitcoin.
Historical asset class returns:
Historical returns divided by asset class from 2012 to 2023 indicate that Bitcoin has been the best-performing asset in 9 out of 12 years. Despite its outstanding performance, especially during halving years and the following year, we observed a pattern where Bitcoin becomes the worst-performing asset class in the second year after the halving event (including 2014, 2018, and 2022).
Bitcoin 1-year correlation:
In a one-year timeframe, the price movements of Bitcoin and the S&P 500 index often show a higher correlation, reaching 0.85. On the other hand, Bitcoin shows a slight negative correlation with the US dollar and oil prices.
(Data sources: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: U.S. Dollar Index, Gold: XAU, Emerging Market Stocks: iShares MSCI Emerging Markets, Core Bond: iShares Core U.S. Aggregate Bond, HY Bond: SPDR Bloomberg High Yield Bond, Gold: XAU, Oil: Crude Oil, REITs: FTSE Nareit All Equity REITs)
Bitcoin: Rolling 90-day correlation:
Entering the end of 2023 and the beginning of 2024, the rolling 90-day correlation between Bitcoin and several key asset classes (gold, S&P 500 index, and core bond) has reached high levels close to 1.0.
(Source: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: U.S. Dollar Index, Gold: XAU, Core Bond: iShares Core U.S. Aggregate Bond)
This is a long-term view of the one-year rolling correlation between Bitcoin and other asset classes. The correlation between Bitcoin and the US dollar has risen from negative to almost zero.
Indeed, compared to stocks or fixed income, Bitcoin has always been a volatile asset class. However, it is worth noting that as institutional investors increasingly adopt Bitcoin, its one-year annualized volatility has shown a significant downward trend. The Bitcoin market is becoming more efficient and exhibiting lower volatility.
Bitcoin ETF Net Inflows:
Since the listing of Bitcoin spot ETFs on US exchanges on January 11, 2024, in just over a month, the 10 different Bitcoin ETFs launched have attracted net inflows of over $4.87 billion, with the exception of Grayscale’s GBTC, which has seen continuous outflows.
(Source: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: U.S. Dollar Index, Gold: XAU, Core Bond: iShares Core U.S. Aggregate Bond)
Apart from significant outflows from Grayscale, other Bitcoin ETFs have continued to attract inflows. It is worth noting that iShares Bitcoin Trust (IBIT) issued by BlackRock and Fidelity Wise Origin Bitcoin Fund (FBTC) launched by Fidelity.
(Source: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: U.S. Dollar Index, Gold: XAU, Core Bond: iShares Core U.S. Aggregate Bond)
Investors and speculators often use derivative products to access the cryptocurrency market or execute hedging strategies.
Although futures perpetual contracts have been the most popular product in recent years, options have gained significant attraction in the market. In fact, since the second quarter of 2023, the open interest of options has consistently exceeded that of perpetual contracts.
With the upcoming halving event and the increasing adoption of cryptocurrencies by retail investors and institutional funds, it is expected that the derivatives market activity will show a positive trend.
Overall, about 30% of the total Bitcoin supply is already accounted for. Exchanges, including Binance, Bitfinex, and Coinbase, collectively hold over 1.8 million Bitcoin, accounting for more than 8.8% of the total supply.
Publicly listed companies hold a total of about 385,000 Bitcoin, with MicroStrategy holding 190,000 Bitcoin, accounting for 0.9% of the total supply. Institutional funds have also accumulated a significant amount of Bitcoin, totaling over 850,000 Bitcoin, with Grayscale Bitcoin Trust being the largest holder, with over 450,000 Bitcoin.
If Bitcoin becomes the next strategic asset class:
Bitcoin’s market capitalization is only 1/13th of gold, making it a strategic asset class for diversifying portfolio risks for traditional investors.
With the approval of Bitcoin spot ETFs, it is expected that more institutional funds will enter this emerging asset class.
Let’s take a look at global asset management companies. Even if they allocate just 1% to Bitcoin, it can bring in over $1 trillion of funds to this asset class, while the market capitalization of Bitcoin is only $1 trillion.
However, it should be noted that authorization and regulatory issues remain obstacles to cryptocurrency adoption, so the above content serves as an illustration of the potential market.
CoinEx’s research team has backtested the performance of a traditional 60/40 investment portfolio and various Bitcoin allocation scenarios. The results clearly show that adding Bitcoin, even with single-digit allocations, not only significantly improves the equity curve but, more importantly, greatly enhances the risk-adjusted return of the portfolio.
Detailed analysis is shown in the table below.
Risk diversification is key to portfolio management. In fact, the backtesting results indicate that even a 1% allocation of Bitcoin can improve the risk-adjusted return or Sharpe ratio of the portfolio.
A 5% Bitcoin allocation leads to further optimization of the Sharpe ratio, but the impact on portfolio volatility and maximum drawdown remains minimal.
Bitcoin’s impact on the cryptocurrency and global financial markets is multifaceted and significant. Historical patterns indicate that halving events often attract more market attention, and the price of Bitcoin tends to reach new highs, although the speed of these increases and the growth multiples have been slowing down. The increase in non-zero balance wallets and the decrease in the number of whale wallets indicate the continuous growth of cryptocurrency adoption. Additionally, halving events often trigger new narratives, increase user engagement, and precede the launch of related projects, thereby driving the growth of the Bitcoin ecosystem.
As for the global financial market, the performance of Bitcoin is increasingly related to global liquidity, its correlation with other asset classes, and the adoption by institutional investors. Despite regulatory challenges, Bitcoin is gradually being recognized and invested in by more institutional funds.
In this context, the future development of Bitcoin is expected to attract high attention. With the shift of global central banks and the recovery of market liquidity, Bitcoin is expected to experience more positive development after halving.
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