In-depth Analysis of Bitcoin Halving: Impact Assessment for Investors

1. Introduction

The unique properties of Bitcoin

Bitcoin, as the first and most famous cryptocurrency, has attracted global attention since its inception in 2009. Its core feature is decentralization, relying on no central authority, but instead recording transactions through the blockchain, a public ledger. This design not only ensures system transparency but also enhances security, as modifying recorded information requires consensus from the majority of the network's computing power. Furthermore, Bitcoin's global nature makes it unaffected by specific countries or policies, becoming a unique international currency.

Bitcoin Halving mechanism

The Bitcoin Halving refers to the event where the reward for producing Bitcoin in the network is halved once every four years. This is a preset rule in the Bitcoin protocol designed to control supply and mimic the scarcity of gold. For every 210,000 blocks generated, the number of new Bitcoins that miners receive is halved. From the initial reward of 50 Bitcoins per block to the current 3.125 Bitcoins in 2024. This periodic reduction in supply theoretically raises prices under unchanged demand, thus having a significant impact on the market.

2. Analysis of the Bitcoin Halving Mechanism

Halving Definition and Historical Review

Bitcoin Halving refers to the event where the Bitcoin reward for newly generated blocks is cut in half for every 210,000 blocks produced, occurring approximately every four years. This is a core part of the Bitcoin algorithm, intended to control inflation and mimic the slowing rate of rare resource extraction. Since the Bitcoin network began operating in 2009, the initial reward of 50 Bitcoins per block has decreased to 3.125 Bitcoins in 2024. After each Halving, the mining reward is reduced by 50%, directly affecting miner earnings and the entire 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. During a Halving, miner rewards decrease, and less efficient mining operations may exit the market due to reduced profits. To cope with the 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 typically lead to a significant reassessment of the mining costs versus market value. Mining profitability is directly affected, as the reduction in rewards means that the same mining effort will yield less income if the Bitcoin price does not increase. This prompts mining companies to evaluate operational efficiency, invest in advanced technologies, or seek cost-effective energy solutions globally.

miner strategy adjustment

To adapt to the challenges brought by Halving, miners typically 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 locally 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 prices up, assuming demand remains stable. 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 over 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 surged significantly within 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 Halving leads to significant long-term price increases. This is because the halving mechanism continuously reduces the supply of Bitcoin, and 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: One month after the Halving, the price increased by 9%. In the following year, the price surged by 8,839%.
• Second Halving in 2016: A 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-off pressure: Miners may sell Bitcoin after the Halving, leading to short-term price pressure. However, miner sell-off behavior is often influenced by market demand. If demand is strong, the sell-off may be absorbed and not significantly affect the price.

The impact of the launch of spot ETFs

In January 2024, the first Bitcoin spot ETF was 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

compared with 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. Firstly, Bitcoin's global nature and ease of trading provide an advantage that transcends geographical limitations, making storage and transfer more convenient and cost-effective compared to gold. Secondly, unlike the stock market, the Bitcoin market operates almost around the clock, offering higher liquidity and trading flexibility. Additionally, Bitcoin's price is not directly influenced by company performance or economic policies, providing investors with a potential hedge tool that may exhibit characteristics of decoupling from traditional markets during 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 tech companies beginning to support Bitcoin transactions or accept it as a payment method. In the early years, the entry of international payment giants made Bitcoin more mainstream, providing ordinary investors with convenient investment and usage channels. 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.

V. Future Outlook and Investment Opportunities

Diversification effect of the investment portfolio

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 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 maintains a low correlation with traditional assets, except for a relatively high correlation with Ethereum, while the correlation with mainstream stock indices is generally low. This low correlation demonstrates the advantage of Bitcoin as a diversification tool for asset portfolios, helping to disperse systematic risks in the investment portfolio. During times of turmoil or downward pressure in traditional markets, this characteristic of Bitcoin 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, the traditional 60/40 investment portfolio has experienced increased volatility in returns compared to portfolios with varying proportions of Bitcoin allocation as the proportion of Bitcoin increases. During periods of rising Bitcoin prices, portfolios containing Bitcoin allocations significantly outperformed the traditional 60/40 portfolio. However, this also came with higher volatility, especially during peaks and downturns in Bitcoin prices. This indicates that while incorporating Bitcoin into a portfolio may enhance returns, it also increases the exposure to portfolio risk.

The Sharpe ratio of Bitcoin has been significantly higher than that of other assets during certain periods, indicating that it provides the highest excess return for each unit of risk taken. Especially during 2017 and 2021, the Sharpe ratio of Bitcoin peaked, reflecting an excellent ratio of investment returns to risk during these time periods. However, the Sharpe ratio of Bitcoin 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 performance.