In this article, we will discuss the evolution of the Bitcoin network in terms of price performance and its fundamental network indicators. This article is sourced from an article translated by Daling Think Tank titled “The Fourth Halving,” compiled by PANews.
Summary:
Deflationary supply
Maintaining a cautious attitude
Reasonable expectations
Intermittent historical rhythm
Fundamental growth
Conclusion
Bitcoin has now undergone its fourth halving, resulting in a 50% reduction in its supply inflation and a natural increase in its deflationary nature. In this article, we will explore the evolution of the Bitcoin network in terms of price performance and its fundamental network indicators.
Recently, Bitcoin experienced its fourth halving, which reduced the annualized inflation rate of Bitcoin supply by 50%, surpassing gold in terms of scarcity.
When measuring the state of the Bitcoin network during halving periods, we found that the growth rate of several important indicators has slowed down. However, despite this, the trend of growth continues, and each halving creates new historical peaks.
The increase in spot prices and the significant breakthrough of price historical peaks have boosted investor profitability, reversing the disadvantageous situation of a 50% decrease in mining revenue compared to the beginning of the year.
Due to the clever algorithm called “adaptive difficulty adjustment,” the Bitcoin supply curve is deterministic. This algorithm continuously adjusts the difficulty of the Bitcoin mining process, ensuring that the average block interval of the Bitcoin network remains around 600 seconds (10 minutes), regardless of the computing power applied by miners.
Every 210,000 block heights (approximately 4 years), the Bitcoin network undergoes a scheduled halving, resulting in a 50% decrease in newly minted bitcoins. The fourth halving occurred last weekend, reducing the block subsidy from 6.25 bitcoins per block to 3.125 bitcoins, meaning the network can mint about 450 bitcoins per day (for the mined 144 blocks).
In the four epochs since Bitcoin’s inception, a total of 19,687,500 bitcoins have been mined, equivalent to 93.75% of the predetermined total supply of 21 million bitcoins. Therefore, there are only 1,312,500 bitcoins left to be discovered in the next 126 years, with the current epoch (between the third and fourth halvings) issuing a total of 656,600 bitcoins (3.125% of the total). Interestingly, each halving represents a critical point: the remaining percentage of yet-to-be-mined is equal to the new block subsidy (3.125 bitcoins/block vs remaining 3.125%).
As the block subsidy halves every 210,000 block heights, the inflation rate of Bitcoin’s currency also halves approximately every 4 years. This results in the latest annualized inflation rate of Bitcoin supply being 0.85%, lower than the previous period’s 1.7%.
The fourth halving also marks an important milestone in comparing Bitcoin to gold, with Bitcoin’s steady issuance rate (0.83%) for the first time lower than gold (~2.3%), signifying the historic completion of the transition from gold to Bitcoin as the “most scarce asset.”
However, it is important to correctly assess the scale of this halving. When evaluating the relative impact of halving on market dynamics, we must recognize that the total amount of newly minted bitcoins after halving remains very small compared to the global trading volume within the Bitcoin ecosystem. Currently, the total amount of newly minted bitcoins after halving accounts for less than 0.1% of the total capital transferred and traded on-chain in a single day.
Therefore, the impact of the Bitcoin halving on the available trading supply is diminishing in each cycle. This is not only because the amount of newly minted bitcoins after halving continues to decrease but also because the scale of assets and the ecosystem surrounding it continue to expand.
The Bitcoin halving is an important and well-known event that naturally leads to speculation about its impact on price trends. Balancing our expectations with differences in historical precedents and establishing a relatively loose analytical boundary based on Bitcoin’s past performance may be a wiser market analysis strategy.
The price performance of Bitcoin during each halving period varies greatly. We believe that the early halving periods are significantly different from today, and past experiences may not provide significant guidance for our current analysis. However, over time, we have indeed seen diminishing returns and a weakening of the overall drawdown effect, which is a natural result of the continuous expansion of the market size and the capital required to drive market growth.
Red: Epoch 2 price performance: +5,315%, maximum drawdown: -85%
Blue: Epoch 3 price performance: +1,336%, maximum drawdown: -83%
Green: Epoch 4 price performance: +569%, maximum drawdown: -77%
Now let’s evaluate the price performance of Bitcoin from the previous cycle low to the halving. We note that the situations in 2015 and 2018 have significant similarities to the current cycle, both experiencing growth of around 200% to 300%.
However, it is particularly noteworthy that the current cycle is the only one in history to break the previous historical price peak before the halving event was announced.
Another perspective is to consider the market performance of Bitcoin within 365 days after each halving. Looking back in history, we find that the impact of halving was much greater in Epoch 2. However, we must also consider that the dynamics and patterns of the current market have significantly changed compared to the period from 2011 to 2013, and we cannot simply equate the situations of these two different periods.
Therefore, we find that the halving events in the recent two epochs (Epoch 3 and Epoch 4) have had richer and more interpretable effects on the asset’s scale.
Red: Epoch 2 price performance: +7,258%, maximum drawdown: -69.4%
Blue: Epoch 3 price performance: +293%, maximum drawdown: -29.6%
Green: Epoch 4 price performance: +266%, maximum drawdown: -45.6%
Although overall, the market trend after each halving is strong within a year, there are still significant drawdowns ranging from 30% to 70% during this process.
During the bear market in 2022, a widely circulated saying was that regardless of how much Bitcoin’s price fell, it would never be lower than the previous cycle’s historical peak (which reached $20,000 in 2017). Unfortunately, this principle failed as Bitcoin’s price dropped more than 25% from the cycle high in 2017 during the widespread deleveraging process at the end of 2022.
Similarly, there has been a recent belief that Bitcoin’s price cannot break the current cycle’s historical peak before the halving occurs. However, this “law” was also broken in March of this year when we witnessed a new historical peak, which was reconsolidated due to unprecedented supply scarcity (as mentioned in our previous articles) and significant demand interest brought by newly listed spot ETFs.
But we must also see that the price increase of Bitcoin has had a significant impact on the unrealized profits held by investors. In the current Bitcoin supply, the unrealized profits held by investors are the largest since the previous halvings, measured by the MVRV ratio.
In other words, as of the halving day, investors hold the highest paper profits relative to their costs. Currently, the MVRV ratio is 2.26, meaning the average unit paper profit of Bitcoin is +126%.
In the previous section, we evaluated the price performance of Bitcoin during each halving period. In this section, we will shift our focus to the growth of Bitcoin network fundamentals, including mining security, mining revenue, asset liquidity, and transaction settlement volume during halving periods.
Hashrate is a network statistic that evaluates the collective “firepower” of miners. During the halving period, the growth rate of hashrate has slowed down, but the absolute value of hashes per second continues to increase, currently at 620 exahashes per second (equivalent to the entire population of 8 billion people on Earth performing 77.5 billion hash operations per second).
Interestingly, the hashrate is at or near new historical peaks in each halving event, indicating that one of the following two scenarios may be happening currently: more ASIC devices are about to come online, or more efficient hash ASIC hardware is under production.
The conclusion drawn from these two scenarios is that despite the 50% reduction in issuance after each halving, the overall security budget is not only sufficient to cover current operating expenses (OPEX) but also enough to stimulate further investment in capital expenditure (CAPEX) and OPEX.
Now let’s calculate the mining revenue in USD. We find that the growth rate of current revenue may be slowing down, but the absolute scale is still expanding. In the past four years, cumulative mining revenue has reached a staggering $30 billion, growing by an order of magnitude compared to the previous epoch.
We reiterate the important market indicator we currently use—Realized Cap. It is a powerful tool to measure the strength of capital invested and stored in Bitcoin over a period of time, used to compare the cross-cycle liquidity growth of Bitcoin priced in USD.
When we measure the entire Bitcoin market through this indicator, we find that a total value of $560 billion has been “stored” in Bitcoin. The Realized Cap has grown by 439% compared to the previous period, supporting the current total market capitalization of Bitcoin, which is as high as $1.4 trillion. It is also worth noting that despite Bitcoin’s notorious volatility, negative headlines, and periodic terrifying drawdowns, capital continues to flow into this market.
Finally, if we evaluate the total transaction settlement volume settled on-chain during halving periods, we can see that the total economic volume of network transfers and settlements in the past four years has reached $106 trillion. It is important to note that this value considers raw unfiltered transaction volume and does not account for data corrections caused by internal asset management within wallets.
Furthermore, we also see that each transaction settles without intermediaries, highlighting the incredible scalability of the Bitcoin network.
With the highly anticipated Bitcoin halving completed, the issuance of bitcoins per block has halved, intensifying the scarcity of the asset. In this situation, the scarcity of Bitcoin assets decisively surpasses that of gold.
Comparing various previous periods, we see that the growth of hashrate, network settlement, liquidity, and mining revenue has contracted. However, the absolute values of these indicators have increased by an order of magnitude, supporting the incredible and impressive feat of Bitcoin’s current market size.
It is worth noting that compared to previous halvings, the network profitability of market investors in various industries has greatly increased in this halving. These investors include the foundational mining community, which has provided a total hashrate reaching a new historical peak in this halving, indicating that the current market still has sufficient security budget to stimulate operating and capital expenditure demand.
Article Source:
https://insights.glassnode.com
Original Author: UkuriaOC, Glassnode
Original Link:
https://insights.glassnode.com/the-week-onchain-week-17-2024/