Navigating 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 it 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 new blocks is halved (currently 6.25 bitcoins per block). This gradually reduces the rate at which new bitcoins are generated, until the limit is reached around 2140.

There have been three halving events so far, with the fourth halving expected to occur on April 19, 2024. The previous halving events occurred 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, evaluating the potential and risks of Bitcoin as an emerging asset class.

Bitcoin halving has different degrees of impact on investors, traders, and miners.

Bitcoin Investors:

Past performance of Bitcoin before and after halving events:
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Based on past halving events, although Bitcoin has reached new all-time highs after each halving, we observed that it takes longer and the multiples are lower to reach those highs.

Different Bitcoin balance addresses:
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The number of non-zero balance wallets has exceeded 50 million. The number of wallets with more than 1 bitcoin has also exceeded 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 wallets (balances exceeding 100 or 1,000 bitcoins) has decreased since the last halving.

Bitcoin Traders:

Changes in Bitcoin spot trading volume:
The average daily spot trading volume in the past week has been around 25 billion USD, 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.

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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 activities are expected to occur.

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 each halving, and then experiences a surge after the actual halving event.

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This time, the narrative revolves around Bitcoin’s Layer 2, and it is expected that many related projects will be officially launched before and after the halving event, which should bring a new wave of user growth to the entire Bitcoin ecosystem.

Bitcoin Exchange Balances:
Exchange balances are often seen as important on-chain indicators. Higher balances indicate that traders are depositing Bitcoin into exchanges, which could lead to selling pressure, and vice versa.

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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.

Miners:

Miner Balances – The Challenge of Miner Survival:
Apart from the halving event during the bull market period in May 2020, we have observed that Bitcoin balances in miner wallets are rapidly depleting 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 their 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.

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The upcoming halving event seems to be no exception. Since the fourth quarter of 2023, Bitcoin miners have been continuously selling Bitcoin, and the balance has now reached its lowest point since June 2021.

Miner Income:
Although the halving event leads to a reduction in block rewards, miners’ total income is largely dependent on the price performance of Bitcoin. Currently, miners’ total income has recovered significantly from the last bear market.

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Despite the reduction in block rewards, the total income of miners is largely determined by the price performance of Bitcoin. Currently, miners’ total income has recovered significantly from the last bear market.

Macro:

Bitcoin Market Cap vs. Central Bank Assets:
Is Bitcoin a tool for hedging against fiat currency? This is a question of common concern for investors.

Central bank assets worldwide indicate that global liquidity is one of the causes of inflation and seems to be related to the market cap or price performance of Bitcoin.

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Historical Asset Class Returns:
The historical returns divided by asset class from 2012 to 2023 indicate that Bitcoin has been the best-performing asset in 9 out of the 12 years. Although it has performed well, especially in 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).

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Bitcoin One-Year Correlation Matrix:
Within one year, 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 oil prices.

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Data Source: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: US Dollar Index, Gold: XAU, Emerging Market Stocks: iShares MSCI Emerging Markets, Core Bond: iShares Core US Aggregate Bond, HY Bond: SPDR Bloomberg High Yield Bond, Gold: XAU, Oil: Crude Oil, Real Estate Investment Trusts: FTSE Nareit All Equity REITs

Asset Allocation:
Bitcoin: Rolling 90-day correlation
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Bitcoin: Rolling one-year correlation
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Source: CoinEx Research, CoinMarketCap, Yahoo Finance; Data as of February 8, 2024: USD: US Dollar Index, Gold: XAU, Core Bond: iShares Core US 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.

Bitcoin Price Volatility:
Indeed, compared to stocks or fixed income, Bitcoin has been a volatile asset class. However, it is worth noting that as institutional investors increasingly adopt Bitcoin, the annualized volatility of Bitcoin has shown a significant downward trend. The Bitcoin market is becoming more efficient and exhibiting lower volatility.

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Asset Flows:
Bitcoin ETF Net Inflows:
Since the listing of Bitcoin spot ETFs on January 11, within a little over a month, the 10 different Bitcoin ETFs launched have attracted over 48.7 billion USD in net inflows, with the exception of Grayscale’s GBTC, which has seen continuous outflows.

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Bitcoin ETF Net Inflows:
Apart from the significant outflow of funds 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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Open Interest of Options and Perpetual Contracts:
Investors and speculators often use derivative products to gain exposure to the cryptocurrency space or execute hedging strategies.

While 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 surpassed 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 there will be a positive trend in the derivatives market activity.

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Overview of Physical Bitcoin Ownership:
Overall, about 30% of the current total supply of Bitcoin has been accounted for. Among them, exchanges such as Binance, Bitfinex, and Coinbase collectively hold over 1.8 million bitcoins, accounting for more than 8.8% of the total supply.

Publicly traded companies collectively hold about 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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Asset Allocation:
If Bitcoin becomes the next strategic asset class
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With a market cap only 1/13th of gold, Bitcoin is a strategic asset class for diversifying investment portfolios.

With the approval of Bitcoin spot ETFs, it is expected that more institutional funds will enter this emerging asset class.

How much capital can flow into Bitcoin?
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Let’s take a look at global asset management companies. Even if they allocate just 1% to Bitcoin, it can bring over 1 trillion USD of capital to this asset class, while the market cap of Bitcoin is only 1 trillion USD.

However, it should be noted that authorization and regulatory issues are still barriers to the adoption of cryptocurrencies, so the above content is only for the explanation of potential markets.

Optimizing Portfolio Performance through Bitcoin Allocation
CoinEx’s research team conducted backtesting on 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 greatly improves the equity curve but, more importantly, significantly improves the risk-adjusted return of the portfolio.

Detailed analysis is shown in the following table.
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Bitcoin Portfolio Allocation Backtesting
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 is still small.

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Cryptocurrency Regulation
Global Perspectives on Cryptocurrency Regulation
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Conclusion
The impact of Bitcoin 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 usually reaches 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 whales suggest a growing adoption of cryptocurrencies. Additionally, halving events often trigger new narratives, increased user engagement, and precede the launch of related projects, further driving the growth of the Bitcoin ecosystem.

In terms of 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 slowly being recognized and invested in by more institutional funds.

In this context, the future development of Bitcoin is bound to attract high attention. With the shift in central banks worldwide and the recovery of market liquidity, Bitcoin is expected to experience more positive development after the halving.

This article is provided by the official source and does not represent the stance or investment advice of this site. Readers must conduct their own thorough evaluation.