Bitcoin Halving Depth Analysis: Comprehensive Assessment of Investment Impact

1. Introduction

Bitcoin and its unique properties

Bitcoin, as the first and most well-known cryptocurrency, has attracted global attention since its inception in 2009. Its core feature lies in 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 consent of the majority of the network's computing power. Furthermore, Bitcoin's global nature makes it unaffected by the direct influence of specific countries or policies, establishing it as a unique international currency.

Bitcoin Halving

Bitcoin halving refers to the event where the reward for producing Bitcoin within its network is halved every four years. This is a preset rule in the Bitcoin protocol, aimed at controlling supply and mimicking the scarcity of gold. For every 210,000 blocks mined, the number of new Bitcoins awarded to miners is halved. From an initial reward of 50 Bitcoins per block, it will decrease to 3.125 Bitcoins in 2024. This periodic reduction in supply is theoretically expected to drive up prices under constant demand, thereby having a significant impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Definition and Historical Review of Bitcoin Halving

Bitcoin Halving refers to the event where the Bitcoin reward for newly generated blocks is halved 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 rate of rare resource extraction. Since the Bitcoin network went live in 2009, the reward for each block has decreased from an initial 50 Bitcoins to 3.125 Bitcoins in 2024. After each Halving event, the mining reward is reduced by 50%, directly impacting miner profits and the overall Bitcoin economy.

The Role of Miners and Their Response to Halving

Miners play a key role in maintaining blockchain security and processing transactions in the Bitcoin network. Whenever a halving occurs, miner rewards decrease, and many less efficient mining farms may be forced to 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 remain competitive and profitable.

Analysis of the Impact of Halving on the Mining Economy ###

Halving events typically 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 will yield less income if Bitcoin prices do not rise. This prompts mining companies to evaluate operational efficiency, invest in more advanced technologies, or seek cost-effective energy solutions globally.

Adjustment of miner strategies

To cope with the challenges brought by the 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 to take advantage of the local 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 term, this reduction in supply may drive prices up, provided that demand remains stable. The halving event influences Bitcoin's economic model 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 to $1,300, an increase of over 100 times, lasting 357 days.
• 2016 Halving: Bitcoin price rose from $650 to $18,000, an increase of more than 27 times, lasting 511 days.
• 2020 Halving: Bitcoin price rose from $9,000 to $69,000, an increase of over 7 times, lasting 546 days.

Short-term fluctuations: After the last three Halvings, the price of Bitcoin experienced volatility within a month after the Halving, but then significantly rose within 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 increase: Although there may be short-term fluctuations, historical data shows that Bitcoin Halving leads to significant long-term price increases. This is due to the halving mechanism, which continually reduces the supply of Bitcoin, while the total supply is limited to 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, the price increased by 9%. In the following year, the price skyrocketed by 8,839%.
• Second Halving in 2016: A month after the halving, the price fell by 9%. In the following year, the price skyrocketed by 285%.
• Third Halving in 2020: A 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, putting short-term pressure on prices. However, miner selling behavior is often influenced by market demand. If demand is strong, the selling may be absorbed and not have a significant impact on prices.

Bitcoin major events and price impact (2018 -- 2024)

The launch of 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, increase 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

Bitcoin is often referred to as "digital gold," possessing characteristics of non-government control and scarcity similar to gold, but exhibiting different advantages in several aspects. First, Bitcoin's global and easily tradable nature provides advantages that transcend geographical limitations, making storage and transfer more convenient and cost-effective. Second, the Bitcoin market operates almost around the clock, offering higher liquidity and trading flexibility. Additionally, Bitcoin's price is not directly influenced by corporate performance or economic policies, providing investors with a potential hedge tool that may demonstrate non-correlation with traditional markets during times of increasing 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 other assets. This sharp increase highlights the potential and volatility of Bitcoin as an investment tool, while the growth of traditional assets has been relatively stable. Gold, as a traditional safe-haven asset, has shown 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. Most of the time periods show that the increase in Bitcoin price is accompanied by an increase in volatility. At the beginning of 2024, the price of Bitcoin reached its peak, and volatility significantly increased, indicating that large price fluctuations and increased investor uncertainty heightened market volatility. In March 2024, the price of Bitcoin sharply declined, and volatility sharply rose, showing that during rapid price changes, the volatility indicator is 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. The involvement of international payment giants in the early years 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, 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 and optimism about its growth potential. The Bitcoin spot ETF holdings of large asset management institutions reach hundreds of thousands of units, with a total managed asset value exceeding $50 billion. This demonstrates the positive attitude of institutional investors toward Bitcoin investment, suggesting that Bitcoin, as an emerging asset class, is gaining recognition from more and more participants in traditional financial markets.

At the same time, among publicly listed companies, several hold a substantial amount of Bitcoin, totaling over 250,000, valued at over $17 billion. The participation of multinational tech companies indicates the mainstream business sector's affirmation and expectation of Bitcoin's future value.

Overall, whether in the asset management industry or among major listed companies, large-scale Bitcoin holdings highlight the deep confidence in the market, 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 broader market 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 diversification for the portfolio. In times of global economic instability or inflationary environments, Bitcoin has even shown 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 portfolios.

Bitcoin exhibits low correlation characteristics with traditional assets, and aside from maintaining a high correlation with Ethereum, its correlation with mainstream assets is generally low. This low correlation demonstrates the advantages of Bitcoin as a diversification tool in an asset portfolio, helping to reduce systemic risk in the investment portfolio. Especially during turbulent times in traditional markets or when facing downward pressure, this characteristic of Bitcoin may provide a certain level of protection for investors, thus reducing overall portfolio volatility. Therefore, the inclusion of Bitcoin can be viewed as a strategic allocation aimed at enhancing the risk-adjusted return of the portfolio.

Over the past decade, a comparison of the standardized cumulative returns of traditional 60/40 investment portfolios and portfolios with varying allocations of Bitcoin shows that as the proportion of Bitcoin increases, the volatility of the portfolio returns also increases. During periods of rising Bitcoin prices, portfolios that include Bitcoin allocations have significantly outperformed the traditional 60/40 portfolio. Especially after 2020, as Bitcoin prices surged significantly, portfolios containing Bitcoin demonstrated stronger growth momentum.

However, this also comes with higher volatility, especially during peaks and pullbacks 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 ratio of Bitcoin against various assets shows that Bitcoin's Sharpe ratio was significantly higher than other assets during certain periods, indicating that it provided the maximum excess return for each unit of risk taken. In particular, during 2017 and 2021, Bitcoin's Sharpe ratio peaked, reflecting an excellent ratio between investment returns and risk during those times. However, Bitcoin's Sharpe ratio exhibited 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.

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