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The Bitcoin halving – in a nutshell

Chris Weston
Head of Research
Apr 17, 2024
Expected on 20 April (around 08:30 AEST). Let’s break the ecosystem into two key areas - Bitcoin miners (the primary market) and the speculators (the secondary market).

What is the ‘halving’?

  • Bitcoin miners use specialist computers to solve an ever-changing cryptographic (mathematical) puzzle. If one entity is lucky enough to solve this puzzle as ‘proof of work’ they gain the privilege of adding a block (of transactions) to the blockchain. 
  • The halving takes place after 210k blocks are mined (typically takes four years to play out) – subsequently, the number of Bitcoins that can be created ongoing are cut by 50%  
  • The reward that miners obtain for showing proof of work and adding a block to the blockchain falls to 3.125 Bitcoins (from 6.25 currently). 
  • The amount of Bitcoin rewards will fall to 450 tokens in daily production (from 900)
  • There are now around 19.7m Bitcoins that have been mined and in existence – Bitcoin has a hard cap on supply of 21m coins – all 21m coins will be in circulation by the year 2140.

The Primary Market – the halving primarily affects the mining community and could have implications here.

  • Essentially the halving means each successful miner gets 3.215 coins per puzzle solved and in total there will be 450 Bitcoins offered each day - it is therefore less profitable for miners to operate – although, this can be partially offset if the Bitcoin price is going up and energy costs are low. However, some of the higher cost miners will stop mining operations as a consequence
  • The difficulty of solving a puzzle will increase – as will the ‘hash rate’ which looks at the total computational power used in the mining process.
  • The big players would have already altered their business – cut costs and gone hard on mining to build up cash on hand and have amassed decent war chest to ride out a period of consolidation
  • Over time we should see fewer miners getting more of the coins available, but the more efficient miners should grow market share.

We can monitor how the market sees the earnings impact through the big listed miners:

  • Key players – Marathon Digital, Iris Energy, Riot Platforms, CleanSpark Inc
  • Or through to get wider exposure - Valkyrie Bitcoin Miners ETF 

The Secondary Market – once a miner has the coins, they can sell these into the market, this is where traders can then speculate on the direction through a crypto exchange or through a derivative (CFDs) 

  • There are 19.7m coins in circulation and that won’t change, hence there is no immediate impact here – it will not be a liquidity event and, of course, this is a well-known event that everyone has prepared for. 
  • While the halving has clear longer-term implications on price, near-term BTC will take its direction from market sentiment – for example, on Friday where BTC fell 9% on concerning geopolitical headlines, while PAX Gold – a token backed 1-for-1 with gold rallied 40%. This clearly subtracts from the idea that Bitcoin is currently a ‘store of value’ like gold, and therefore does reduce to use case for BTC as a more defensive vehicle in a multi-asset portfolio. Perhaps the exception to this was how BTC outperformed other markets during the 2023 US banking crisis – although it was only when the Fed started increasing its balance sheet that BTC outperformed other markets. 
  • There has also been a solid correlation between BTC weekly returns and the $ value of inflows into the 10 BTC cash ETFs which were recently rolled out – YTD we’ve seen $12.4b of inflows into the respective ETFs and these flows have held a strong relationship with the BTC weekly returns (R2 = 0.5227) – inflows have abated in recent weeks, so it’s no surprise to see BTC moving sideways since March 
  • Many also look at the stock-to-flow (S2F) model for a loose guide on valuation – given the reduction in future supply the basic S2F model suggests far higher prices over time.
  • The S2F model works best for ‘store of value’ assets – like gold and other commodities or markets – but it also works well for scarcity assets which BTC is becoming. Essentially this model takes the number of coins in existence and looks at it in relation to the known supply coming into the market each year – there has been a very good relationship since 2012 with the BTC price, which is why many see a huge upside potential for BTC over time.

(Source: Plan B and Bitbo)

The bottom line – with reduced supply seen over time, it really comes down to demand…. If we think there will be good demand – either through an increased adoption story, further inflows into ETFs, changes in regulation or through a move towards a ‘store of value’ then BTC has significant upside… for now, if the NAS100 was to correct 10%, and bond yields continue to head higher then the halving will be overlooked and BTC will head lower. 

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