In-depth Analysis of Bitcoin Halving Mechanism: A Comprehensive Assessment of Its Impact on Investors

1. Introduction

Bitcoin, as the first and most well-known cryptocurrency, has been the focus of attention since its inception in 2009. Its decentralized nature, blockchain-based transparent ledger, and global reach not controlled by any single country or institution make it a unique digital asset.

The Bitcoin Halving refers to the event in which the Bitcoin reward generated in the network is halved every four years. This is a preset rule in the Bitcoin protocol aimed at controlling supply and mimicking the scarcity of gold. Every 210,000 blocks, the number of new Bitcoins that miners receive is halved, gradually decreasing from the initial 50 Bitcoins per block to the current 3.125. This periodic supply reduction theoretically increases prices in the absence of a change in demand, thereby having a significant impact on the market.

2. Analysis of the Bitcoin Halving Mechanism

Bitcoin halving refers to the halving of the Bitcoin reward for mining new blocks after every 210,000 blocks are generated, occurring approximately every four years. This is a core part of the Bitcoin algorithm, aimed at controlling inflation and mimicking the gradually slowing rate of extraction of rare resources. From 50 Bitcoins per block in 2009 to 3.125 Bitcoins in 2024, the mining reward decreases by 50% after each halving, directly affecting miner profits and the entire Bitcoin economy.

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

Halving events typically lead to a significant reassessment of the mining costs versus market value. Mining profitability is directly affected, as the reduction in rewards means that the same mining effort will generate less income if Bitcoin prices do not increase. This prompts mining companies to evaluate operational efficiency, invest in advanced technologies, or seek cost-effective energy solutions globally.

In order to adapt to the challenges brought by halving, miners usually adopt various strategies, including upgrading hardware, optimizing mining algorithms, and relocating to regions with cheaper electricity costs. For example, many miners have migrated from China to Central Asia, Northern Europe, and even North America to take advantage of the 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 if demand remains stable. The halving event impacts the economic model of Bitcoin in this way, making it more like a "digital gold".

Historical data shows that after the last three Halvings, the price of Bitcoin has significantly increased:

• 2012 Halving: Price rose from $12 to $1,300, an increase of over 100 times, taking 357 days.
• 2016 Halving: Price rose from 650 dollars to 18,000 dollars, 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.

In the short term, the price may experience fluctuations after the Halving, but often increases significantly within the following year. This indicates that the market needs time to digest the impact of the Halving, but will ultimately respond to the reduced supply. In the long term, the Halving mechanism continues to decrease the supply of Bitcoin, which has a total of only 21 million, making it a scarce asset.

However, miners may sell Bitcoin after the Halving, putting pressure on the price in the short term. But the extent of this impact depends on the strength of market demand; if demand is strong, the miners' selling may be absorbed without significantly affecting the price.

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 encourage institutional investors to enter 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 known as "digital gold," possessing characteristics of non-government control and scarcity, but it also shows unique advantages in several aspects. Firstly, Bitcoin's global nature and ease of trading transcend geographical limitations, making it more convenient and cost-effective to store and transfer than gold. Secondly, the Bitcoin market operates almost around the clock, providing high liquidity and trading flexibility. In addition, Bitcoin's price is not directly influenced by company performance or economic policies, which may make it a potential safe-haven asset, exhibiting characteristics that are out of sync with traditional markets during times of increased global economic uncertainty.

Over the past year, the cumulative return rate of Bitcoin has significantly outperformed other traditional assets. In October 2023, Bitcoin experienced a dramatic increase, with its cumulative return rate rapidly climbing, far exceeding that of assets such as gold, the Dow Jones Industrial Average, the NASDAQ Composite Index, and the S&P 500 Index. This sharp rise highlights the potential and volatility of Bitcoin as an investment tool, while the growth of traditional assets has been relatively stable.

There is a significant correlation between Bitcoin prices and their 30-day rolling volatility. Price increases are usually accompanied by an increase in volatility, especially when prices peak in early 2024, where volatility also significantly rises. In March 2024, when prices sharply declined, volatility surged sharply, reflecting market uncertainty and changes in investor sentiment. In the cryptocurrency market, volatility is closely linked to price, and this should be considered when allocating assets.

In recent years, the market acceptance of Bitcoin has significantly increased. More and more financial institutions and technology companies support Bitcoin transactions or accept it as a payment method. The involvement of international payment giants such as PayPal and Square has made Bitcoin more mainstream, providing ordinary investors with convenient investment and usage options. As blockchain technology evolves and the regulatory environment for digital currencies gradually improves, the long-term growth potential of Bitcoin is widely recognized. As a borderless currency, Bitcoin's potential role in the global economy is expanding, and its growth potential is acknowledged by many investors.

As of April 6, 2024, several well-known ETFs and listed companies hold large amounts of Bitcoin, reflecting the market's acceptance and optimism about its growth potential. The Bitcoin spot ETF holdings of large asset management firms such as Grayscale, BlackRock, and Fidelity reach hundreds of thousands of units, with total assets under management exceeding $50 billion. Listed companies like MicroStrategy, Galaxy Digital Holdings, and Marathon Digital Holdings also hold a substantial amount of Bitcoin, totaling over 250,000, worth over $17 billion. The participation of multinational tech companies like Tesla indicates the mainstream business sector's affirmation and expectations of Bitcoin's future value.

V. Future Prospects and Investment Opportunities

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

Bitcoin shows low correlation with traditional assets; apart from maintaining a high correlation with Ethereum, it generally has low correlation with mainstream assets such as the Dow Jones, S&P 500, Nasdaq, and Hang Seng Index. This low correlation demonstrates Bitcoin's advantage as a tool for portfolio diversification, helping to mitigate systemic risk. Especially during times of turmoil or downturns in traditional markets, this characteristic of Bitcoin may provide protection for investors and reduce overall portfolio volatility.

Over the past decade, investment portfolios containing Bitcoin allocations have significantly outperformed traditional 60/40 portfolios(, with 60% in stocks and 40% in bonds). As the proportion of Bitcoin increases, the volatility of portfolio returns also rises. During periods of rising Bitcoin prices, portfolios with Bitcoin allocations perform exceptionally well, especially after 2020. However, this also comes with higher volatility, particularly during peaks and downturns in Bitcoin prices. This indicates that incorporating Bitcoin into a portfolio may increase returns, but it also increases risk exposure.

The Sharpe ratio of Bitcoin ( measures the excess return per unit of risk ) and has been far higher than other assets during certain periods, particularly peaking in 2017 and 2021, reflecting an excellent investment return-to-risk ratio. However, the Sharpe ratio of Bitcoin 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 less volatility, indicating a more stable risk-adjusted return performance.