Bitcoin Halving Mechanism and Its Impact on Investors

1. Introduction

Bitcoin, as the first and most well-known cryptocurrency, has attracted global attention since its inception in 2009. Its core feature is decentralization, relying on no central authority, but rather recording all transactions through the blockchain, a public ledger. This design not only ensures system transparency but also enhances security, as modifying any recorded information requires the consensus of the majority of the network's computational power. Furthermore, Bitcoin's global nature makes it less susceptible to direct influence from specific national policies, becoming a unique international currency.

Bitcoin Halving refers to the event that occurs every four years where the rewards for generating new coins in the Bitcoin network are halved. This is a pre-set rule in the Bitcoin protocol aimed at controlling the supply and mimicking the scarcity of gold. For every 210,000 blocks, the number of new bitcoins earned by miners is halved, from an initial 50 bitcoins per block to the current 3.125. This periodic reduction in supply is theoretically expected to raise prices under constant demand, thereby having a significant impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Definition and Historical Review

Bitcoin Halving refers to the process where the Bitcoin reward for newly generated blocks is halved every 210,000 blocks (approximately every four years). This is a core component of the Bitcoin algorithm, designed to control inflation and mimic the slowing rate of extraction of rare resources. Since the Bitcoin network began operating in 2009, the reward has gradually decreased from an initial 50 Bitcoins per block to the current 3.125. After each Halving, the mining reward is reduced by 50%, directly affecting miner earnings and the overall Bitcoin economy.

Miner Roles and Responses

Miners play a key role in maintaining blockchain security and processing transactions in the Bitcoin network. When Halving occurs, miner rewards decrease, and less efficient mining farms may exit the market due to declining profits. To cope with Halving, miners typically seek more efficient equipment and lower-cost electricity supplies to maintain competitiveness and profitability.

impact on mining economics

Halving events typically lead to a significant reassessment of the mining costs versus market value. Mining profitability is directly affected, as the same mining effort will yield 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.

Miners' Strategy Adjustment

To adapt to the challenges brought by the Halving, miners are adopting various strategies, including upgrading hardware, optimizing mining algorithms, and moving to regions with cheaper electricity costs. 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 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

Historical data shows that after each Halving, the price of Bitcoin has experienced a significant increase:

• 2012 Halving: The price rose from $12 to $1,300, an increase of over 100 times, taking 357 days.
• 2016 Halving: Price rose from $650 to $18,000, an increase of over 27 times, taking 511 days.
• 2020 Halving: Price rose 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, but then surged significantly over the following year. This suggests 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 price increases in the long term. This is because the halving mechanism continuously reduces the supply, and the total supply is only 21 million, making Bitcoin a scarce asset.

miner sell-off pressure

Miners may sell Bitcoin after the Halving, which could put pressure on prices in the short term. However, miners' selling behavior is often influenced by market demand. If demand is strong, the selling may be absorbed and not significantly impact prices.

4. Advantages of Bitcoin as an Investment Asset

compared to traditional assets

Bitcoin, as "digital gold", possesses characteristics of non-government control and scarcity, showing unique advantages in many aspects:

1. Global and easily tradable: transcending geographical limitations, storage and transfer are more convenient and cost-effective.
2. High liquidity: The market operates almost around the clock, providing greater trading flexibility.
3. Independence: The price is not directly affected by company performance or economic policies, and it can serve as a potential hedge.

Over the past year, the cumulative return of Bitcoin has significantly outperformed traditional assets. In October 2023, it experienced a dramatic increase, far exceeding other assets. This sharp rise highlights the potential and volatility of Bitcoin as an investment tool.

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 technology companies supporting Bitcoin trading or accepting it as a payment method. The early involvement of international payment giants like PayPal and Square 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 regarded positively. As a borderless currency, its potential role in the global economy is expanding, and its growth potential is recognized by many investors.

As of April 6, 2024, several well-known ETFs and publicly listed companies hold a large amount of Bitcoin, reflecting the market's acceptance and optimistic growth potential. The Bitcoin spot ETF holdings of large asset management institutions such as Grayscale, BlackRock, and Fidelity amount to hundreds of thousands of units, with total assets under management exceeding $50 billion. This not only shows the active attitude of institutional investors but also suggests that Bitcoin, as an emerging asset class, is being increasingly recognized by traditional financial market participants.

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

V. Future Outlook and Investment Opportunities

Diversification Effect of Investment Portfolio

Incorporating Bitcoin into a traditional investment portfolio can provide significant diversification benefits. Due to its low correlation with traditional financial assets, Bitcoin offers a means of risk diversification for the portfolio. In unstable global economic conditions or inflationary environments, Bitcoin even exhibits characteristics of a safe-haven asset.

Analysis shows that Bitcoin generally has a low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index, demonstrating its advantages as a diversification tool that helps mitigate systemic risk in investment portfolios. This characteristic may provide investors with some protection during turmoil in traditional markets, reducing overall portfolio volatility.

Over the past decade, investment portfolios that included Bitcoin have outperformed the traditional 60/40 portfolio (60% stocks, 40% bonds). Particularly after 2020, as Bitcoin prices rose significantly, portfolios that included Bitcoin demonstrated stronger growth momentum. However, this also came with higher volatility, indicating that including Bitcoin may increase returns but also increase risk exposure.

The Sharpe ratio of Bitcoin has been much higher than that of other assets during certain periods, especially peaking in 2017 and 2021, reflecting excellent risk-adjusted returns. However, its Sharpe ratio also exhibits extreme volatility, corresponding to its price fluctuations. In contrast, traditional stock indices like the S&P 500 and Nasdaq have lower Sharpe ratios but exhibit less volatility, reflecting more stable risk-adjusted return performance.