The Trovio investment team believes an upcoming catalyst for digital assets and Bitcoin specifically is the Bitcoin halving. Historically this has resulted in Bitcoin rallies leading up to and after the event. We believe the bullish price momentum that we have seen so far in 2023 could continue as we approach next year’s halving and a deep dive into the event is important for digital asset investors.
Bitcoin’s halving cycle is a term that refers to the reduction of block rewards for those participating in mining. Bitcoins halving occurs every 210,000 blocks resulting in a 50% reduction in the prevailing block reward. At present each new block mined receives 6.25 BTC, following the upcoming halving during April/May of 2024 new Bitcoin emissions will be reduced to 3.125 BTC per block mined.
The Halving cycle is etched into stone via Bitcoin’s underlying code benefiting the network in a multitude of ways. The first and most immediate impact of the event is a downwards adjustment to Bitcoins issuance and inflation rate. With the assets supply hard capped at 21m, the halving acts as a mathematically consistent means to an end, in Bitcoins case this end point is a terminal inflation rate of 0%, a far cry from the double-digit rates we have become accustomed to seeing in fiat currencies. The below chart shows the planned drop in issuance and inflation rate at each halving event.
The follow-on effects of the Halving also impact the growing mining industry, which by default benefits the long-term decentralization and security of the Bitcoin network. In the early days of Bitcoin, it was possible for individual miners to mine Bitcoin using their personal computers. However, as the network grew, it became more difficult for individual miners to compete with larger mining operations. As total issuance decreases the mining network is forced to adapt to a smaller pool of profits, this tightening results in optimisation of mining operations from both a hardware and energy procurement perspective. Simply put, the halving cycle weeds out unprofitable mining operations allowing for the network to further decentralize as more adaptable participants take market share.
The looming reduction in issuance plays an essential role in incentivising miners to find the most energy efficient methods for powering machines, helping to reduce the overall carbon impact of the energy consumptive process. Examples of this rapid move towards utilising renewable energy exist in companies like UpstreamData building modular mining systems capable of running off vented and flared methane, which were previously wasted biproducts of the oil and gas industry and Iris Energy who power their industrial mining operations with renewable energy sources including hydroelectricity. Although due to the planned and cyclical nature of the Halving cycle, miners are able to continually optimise operations to remain competitive, helping to lessen the impact of each halving on Hash rate thus maintaining network security.
Below we are able to observe an exodus of miners following the May 2020 halving through a ~12% drop in Bitcoins Hash rate, the reduction occurred over a 26-day period and was subsequently recovered during the following month.
Although there is scope for another reduction in Hash rate, it is likely that a combination of liquid supply reduction and Bitcoins network implementing necessary difficulty adjustments, that this decrease will be quickly retraced. The difficulty adjustment is a critical feature of the network that ensures stability in the rate of block production. Difficulty is adjusted every 2,016 blocks (roughly 2 weeks) resulting in an increase or decrease in the amount of effort required to complete a block. If hashing power decreases the network will automatically decrease difficulty incentivising more miners to join.
Due to Bitcoins scarcity, a combination of current supply dynamics and the prevailing macro environment will also play a role in the asset’s growth following the 2024 halving. We are set to enter the next halving cycle during what will likely be a period of easing monetary policy and further fiat currency debasement. Below we can see the US implied policy rates forecasting significant rate cuts over the next 24 months. Historically Bitcoin has outperformed during periods of monetary easing and liquidity expansion as the asset’s capped supply provides a safe haven for those looking to protect and grow capital.
capital continues to flow into Bitcoin, it will be competing with a high time accumulation regime observable in the “Long Term Holder” investor cohort below. When compared to one year out from the 2020 halving, the total supply of bitcoin held by LTH’s has increased 19% leaving a materially smaller float for new entrants to purchase.
A review of Bitcoins historical 12-month performance following each halving event shows the positive/bullish effects of the halving are diminishing as the shrinking new supply has a lessor impact on price. Although positive momentum is still produced before and after the halving and in combination with the macro and supply side factors discussed above, we believe the bullish outperformance will continue over the 2024 halving. Below we can observe the 12 month return profiles of +8,137%, +281% and +559% for the first second and third halving.
The upcoming halving event will continue Bitcoin on its path to a terminal inflation rate of 0%, incentivise miners to optimise operations and maintain the security of the network whilst assisting in further decentralization of the mining industry. Bitcoin’s case for inclusion into a diversified portfolio grows as both macro factors and digital asset catalysts stay favourable
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