How to Respond to Bitcoin Halving: Insights into Cryptocurrency and Global Financial Dynamics
(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, with the aim of establishing 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 and are rewarded with new bitcoins.
Bitcoin halving occurs approximately every 4 years or every 210,000 blocks, where the reward for mining a new block is halved (currently the block reward is 6.25 bitcoins). This gradually reduces the rate of new bitcoin generation until it reaches the cap around 2140.
There have been three halving events so far, with the fourth one expected to occur on April 19, 2024. The past halving events occurred on January 28, 2012, July 9, 2016, and May 11, 2020.
These events attract market attention and can have a positive impact on the price of Bitcoin in the short term, although their long-term impact is 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, evaluating the potential and risks of Bitcoin as an emerging asset class.
Table of Contents:
Bitcoin Halving’s Impact on Investors, Traders, and Miners
Bitcoin Investors
Bitcoin Traders
Miners
Miners’ Income
Macro
Bitcoin Market Cap and Central Bank Assets
Asset Allocation
Bitcoin: Rolling One-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
Backtesting Bitcoin Portfolio Allocation
Cryptocurrency Regulation
Global Perspectives on Cryptocurrency Regulation
Conclusion
Past Performance of Bitcoin Before and After Halving Events:
According to past halving events, although Bitcoin reaches new all-time highs after each halving, we observe that it takes longer and the multiples are lower.
Addresses with Different Bitcoin Balances:
Non-zero balance wallets have surpassed the 50 million mark. Wallets with more than 1 bitcoin have also surpassed 1 million. These types of wallets reflect the overall adoption of cryptocurrencies over time, including halving events.
On the other hand, the number of whale addresses (balances exceeding 100 or 1,000 bitcoins) has decreased since the last halving.
Bitcoin Spot Trading Volume Changes:
The average daily spot trading volume in the past week has been 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 pattern in price trends 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 actual halving.
This time, the narrative revolves around Bitcoin’s Layer 2, and a significant number of related projects are expected to launch before and after the halving event, which should bring new user growth to the entire Bitcoin ecosystem.
Bitcoin Exchange Balances:
Exchange balances are often seen as important on-chain indicators. Higher balances indicate traders depositing Bitcoin into exchanges, which can lead 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 bitcoins, accounting for 11.02% of the total supply.
Miner Balances – Survival Challenge for Miners:
Except for the bull market period in May 2020, we have observed that Bitcoin balances in miner wallets are rapidly decreasing before each halving event.
This is mainly due to the sharp decline 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. From the fourth quarter of 2023, Bitcoin miners started to continuously sell Bitcoin, and the balance has now dropped to the lowest point since June 2021.
Although the halving event leads to a reduction in block rewards, miners’ total income largely depends on the price performance of Bitcoin. Currently, miners’ total income has recovered significantly compared to the last bear market.
Is Bitcoin an Inflation Hedge? This is a common concern for investors.
The global central bank assets indicate that global liquidity is one of the causes of inflation and seems to be related to the market value or price performance of Bitcoin.
Historical Asset Class Returns
Historical returns divided by asset class from 2012 to 2023 show that Bitcoin has been the best-performing asset in 9 out of 12 years. Although it has performed well, especially in the halving year and the following year, we observe a pattern that Bitcoin becomes the worst-performing asset class in the second year after the halving event (including 2014, 2018, and 2022).
Bitcoin One-Year Correlation
In a one-year period, the price trends of Bitcoin and the S&P 500 Index tend to have a higher correlation, reaching 0.85. On the other hand, Bitcoin shows a slight negative correlation with the US dollar and crude oil prices.
(Data Source: 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, Real Estate Investment Trusts: 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 bonds) has risen to a high level close to 1.0.
(Data 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 of Bitcoin with 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 been an unstable asset class. However, it is worth noting that as institutional investors increasingly adopt Bitcoin, the one-year annualized volatility of Bitcoin has shown a significant downward trend. The Bitcoin market will become more efficient and exhibit lower volatility.
Bitcoin ETF Net Inflows
Since the listing of Bitcoin spot ETFs on US exchanges on January 11, 2024, the launched 10 different Bitcoin ETFs have attracted over $4.87 billion in net inflows, with the exception of Grayscale’s GBTC, which has experienced continuous outflows.
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Apart from significant outflows from Grayscale, other Bitcoin ETFs continue 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.
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Investors and speculators often use derivative products to access the cryptocurrency field or implement hedging strategies.
Although futures perpetual contracts have been the most popular products in recent years, options have gained significant attraction in the market. In fact, since the second quarter of 2023, open interest of options has consistently exceeded that of perpetual contracts.
Due to the upcoming halving event and the increasing adoption of cryptocurrencies by retail investors and institutional funds, positive trends are expected in the derivatives market activity.
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Overall, around 30% of the total Bitcoin supply is already accounted for. Exchanges, including Binance, Bitfinex, and Coinbase, together hold over 1.8 million bitcoins, accounting for over 8.8% of the total supply.
Publicly traded companies hold a total of approximately 385,000 bitcoins, with MicroStrategy holding 190,000 bitcoins, accounting for 0.9% of the total supply. Institutional funds have also accumulated a large amount of Bitcoin, totaling over 850,000 bitcoins, with Grayscale Bitcoin Trust being the largest holder, with over 450,000 bitcoins.
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If Bitcoin becomes the next strategic asset class.
The market value of Bitcoin is only 1/13 of gold and is a strategic asset class for traditional investors to diversify portfolio risks.
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 in funds to this asset class, while the market value of Bitcoin is only $1 trillion.
However, it should be noted that authorization and regulatory issues remain barriers to the adoption of cryptocurrencies, so the above content is only an illustration of the potential market.
CoinEx’s research team has backtested the performance of a traditional 60/40 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.
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Diversification is key to portfolio management. In fact, the backtesting results show that even a 1% allocation of Bitcoin can improve the risk-adjusted return or Sharpe ratio of the portfolio.
A 5% allocation to Bitcoin leads to further optimization of the Sharpe ratio, but its impact on portfolio volatility and maximum drawdown remains small.
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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 typically reaches new highs, although the speed of these increases and growth multiples have been slowing down. The increase in non-zero balance wallets and the decrease in the number of whale addresses indicate continuous 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 poised for more positive development after halving.
CoinEx
Cryptocurrency
Bitcoin Halving)
