In-depth Analysis of the Bitcoin Halving Mechanism and Its Impact on Investors

1. Introduction

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

Bitcoin halving refers to the event in which the reward for generating Bitcoin in the network is halved every four years. This is a pre-set rule in the Bitcoin protocol designed to control supply and mimic the scarcity of gold. Every 210,000 blocks generated, the number of new Bitcoins received by miners is halved. From the initial reward of 50 Bitcoins per block, it is currently 3.125 Bitcoins in 2024. This periodic reduction in supply is theoretically expected to drive up prices under stable demand, thereby having a significant impact on the market.

2. Analysis of Bitcoin Halving Mechanism

Bitcoin Halving refers to the event in the network 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, aimed at controlling inflation and mimicking the gradually slowing pace of rare resource extraction. Since the network began operating in 2009, the reward for each block has decreased from the initial 50 Bitcoin to 3.125 Bitcoin in 2024. After each Halving, the mining reward is reduced by 50%, directly affecting miners' earnings and the overall Bitcoin economy.

In the Bitcoin network, miners play a key role in maintaining blockchain security and processing transactions. Whenever a halving occurs, miner rewards decrease, and many inefficient 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 maintain competitiveness and profitability.

The halving event typically leads to a significant reassessment of the mining costs relative to market value. Mining profitability is directly affected, as the reduction in rewards means that the same mining efforts will yield less income if Bitcoin prices do not rise. This encourages mining companies to evaluate operational efficiency, invest in more advanced technologies, or seek cost-effective energy solutions globally.

To adapt to the challenges brought by the 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 moved from China to Central Asia, Northern Europe, and even North America to take advantage of the 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 under stable demand conditions. The halving event influences the economic model of Bitcoin in this way, making it more like a "digital gold."

Historically, the price performance after Bitcoin Halving is as follows:

• 2012 Halving: The price increased from $12 to $1,300, a rise 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 after the Halving, but then saw significant increases over 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 rise: Although there may be short-term fluctuations, historical data shows that Bitcoin tends to experience significant gains in the long run after halving. This is because the halving mechanism continuously reduces the supply, while the total supply is only 21 million, making Bitcoin a scarce asset.

Miner selling pressure: Miners may sell Bitcoin after the Halving, which could put short-term pressure on prices. However, it is important to consider that miner selling behavior is often influenced by market demand. If demand is strong, miner selling may be absorbed and not have a significant impact on prices.

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, increasing Bitcoin liquidity and market depth, thereby having a positive impact on prices.

4. Advantages of Bitcoin as an Investment Asset

Bitcoin is often referred to as "digital gold", possessing characteristics of non-government control and scarcity similar to gold, but displaying advantages that differ from traditional assets in several ways. First, Bitcoin's global nature and ease of trading provide an advantage that transcends geographical limitations; compared to gold, Bitcoin is more convenient and cost-effective to store and transfer. Second, unlike the stock market, the Bitcoin market operates almost around the clock, offering higher liquidity and trading flexibility. Furthermore, Bitcoin's price is not directly affected by corporate performance or economic policies, which provides investors with a potential hedging tool. During times of increasing global economic uncertainty, Bitcoin may exhibit characteristics that are out of sync with traditional markets.

In recent years, the market acceptance of Bitcoin has significantly increased, with more and more financial institutions and technology companies beginning to support Bitcoin trading or accept Bitcoin payments. The entry 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 digital currency regulatory environments, 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 of Bitcoin and optimism about its growth potential. The Bitcoin spot ETF holdings of major asset management institutions such as Grayscale, BlackRock, and Fidelity have reached hundreds of thousands of units, with a total managed asset value exceeding 50 billion USD. This not only shows the positive attitude of institutional investors towards Bitcoin investment but also suggests that Bitcoin, as an emerging asset class, is gaining recognition from an increasing number of traditional financial market participants.

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

Overall, whether in the asset management industry or among major listed companies, the large-scale holding of Bitcoin highlights the market's strong confidence in it, as well as the potential importance of Bitcoin as an investment tool and a means of value storage in global asset allocation. This trend suggests an increase in the maturity of the cryptocurrency market and a broader market acceptance in the future.

5. Future Outlook and Investment Opportunities

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 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 utilize this digital asset to optimize the risk-return ratio of their portfolios.

The low correlation characteristics between Bitcoin and traditional assets, apart from maintaining a high correlation with Ethereum, generally show low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index. This low correlation demonstrates the advantage of Bitcoin as a diversification tool in asset allocation, helping to disperse the systematic risk of the portfolio. Especially during turmoil in traditional markets or when facing downward pressure, this characteristic of Bitcoin may provide a certain degree of protection for investors, thereby 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, a comparison of the standardized cumulative return rates between the traditional 60/40 investment portfolio (60% stocks, 40% bonds) and portfolios with varying allocations to Bitcoin shows that as the allocation to Bitcoin increases, the volatility of the portfolio returns also increases. During periods of rising Bitcoin prices, portfolios that include Bitcoin significantly outperformed the traditional 60/40 portfolio. Especially after 2020, as Bitcoin prices rose significantly, portfolios containing Bitcoin exhibited stronger growth momentum.

However, this also comes with higher volatility, especially during peaks and pullbacks in Bitcoin prices. This indicates that while incorporating Bitcoin into a portfolio may increase returns, it also raises the portfolio's risk exposure.

The comparison of the rolling 12-month Sharpe ratios of Bitcoin against various assets shows that Bitcoin's Sharpe ratio was far higher than that of other assets during certain periods, indicating that the excess returns it delivered per unit of risk were the largest. Particularly during 2017 and 2021, Bitcoin's Sharpe ratio peaked, reflecting an excellent ratio of investment returns to risk during those timeframes. However, Bitcoin's Sharpe ratio 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 more stable risk-adjusted return performance.