Currently, Bitcoin has gone through its fourth halving, which has caused its supply inflation to decrease by another 50%, while its deflation has naturally increased. In this article, we will explore the evolution of the Bitcoin network over time in terms of price performance and its basic network metrics.
Summary
- Recently, Bitcoin has undergone its fourth halving since its inception, and the annualized inflation rate of Bitcoin supply has been reduced by 50% again, which also means that it has completely surpassed gold in terms of the scarcity of its issuance.
- When measuring the status of the Bitcoin network during the halving period, we found that the growth rate of several important indicators has slowed down. However, even so, its growth trend will not stop, and it will create new historical peaks every time.
- Rising spot prices and a sharp breakout from historic price peaks boosted investor profitability, which in turn reversed a 50% drop in miners’ revenues from the start of the year.
Deflationary Supply
Bitcoin’s supply curve is deterministic, thanks to a clever algorithm called “adaptive difficulty adjustment,” which constantly adjusts the difficulty of mining bitcoins, keeping the average block time around 600 seconds (10 minutes) regardless of the amount of computing power miners use.
Every 210,000 blocks (about 4 years), the Bitcoin network will have a scheduled halving, resulting in a 50% reduction in the amount of newly minted Bitcoins. The fourth Bitcoin halving occurred last weekend, with the block subsidy dropping from 6.25 Bitcoins per block to 3.125 Bitcoins, which means that the entire network can mint about 450 Bitcoins per day (for the 144 blocks that have been mined).
In the first four epochs after the advent of Bitcoin, a total of 19,687,500 Bitcoins were mined, equivalent to 93.75% of the pre-set total supply of 21 million Bitcoins. Therefore, there are only 1,312,500 Bitcoins left to be mined in the next 126 years, of which 656,600 Bitcoins (3.125% of the total) have been issued in the current epoch (between the third and fourth halvings). Interestingly, each halving represents a key point:
- The percentage of supply remaining to be mined is equal to the new block subsidy (3.125 BTC/block vs 3.125% remaining).
- 50% of the remaining BTC to be mined (1,312,500 bitcoins) will be mined between the fourth and fifth halvings.
Since the block subsidy halves every 210,000 blocks, Bitcoin’s inflation rate also halves approximately every 4 years. This brings the latest annualized inflation rate of Bitcoin supply to 0.85%, down from 1.7% in the previous period.
The fourth halving also marks an important milestone when people compare Bitcoin and gold, two general equivalents. For the first time in history, Bitcoin's steady-state issuance rate (0.83%) is lower than that of gold (~2.3%), marking the historic transfer of the title of "the scarcest asset" from gold to Bitcoin.
Keep a cautious attitude
However, it is important to note that the size of this halving needs to be put in perspective. When assessing the relative impact of the halving on market dynamics, we must see that the total amount of newly minted Bitcoin after the halving is still very small compared to global transaction volume within the Bitcoin ecosystem. At this point in time, the total amount of Bitcoin minted after the halving is only a small fraction of the on-chain transfer volume, spot trading volume, and derivatives volume we see today, currently equivalent to less than 0.1% of the total capital transferred and traded on any given day.
Therefore, the impact of Bitcoin halvings on available transaction supply is weakening in each cycle, not only because the number of Bitcoins mined after the halving continues to decrease, but also because the size of the assets and ecosystem surrounding it continues to expand.
Reasonable expectations
Bitcoin’s halving is a significant and well-publicized event, and each approaching halving naturally leads to increased speculation about its impact on price action. Balancing our expectations with historical precedent and creating a relatively loose analysis boundary based on Bitcoin’s past performance may be a wiser market analysis strategy.
Bitcoin's price performance varies greatly during each halving period. We believe that the early halving periods are very different from today, and past experience may not be a great guide for our current analysis and prediction. However, over time, we do see diminishing returns and a weakening of the total drawdown effect, which is a natural result of the ever-expanding market size and the expansion of the liquidity required to drive the growth of the market size.
- Red: Epoch 2 price performance: +5,315%, with a maximum retracement of -85%
- Blue: Epoch 3 price performance: +1,336%, with a maximum retracement of -83%
- Green: Epoch 4 price performance: +569%, maximum retracement -77%
Assessing Bitcoin’s price performance from the low of the last cycle until the halving, we note clear similarities between 2015 and 2018 and the current cycle, both experiencing increases of around 200% to around 300%.
However, it is particularly important to point out that the current cycle is the only one in history where the price has surpassed the previous historical price peak before the halving event.
Another perspective is to consider the market performance of Bitcoin within 365 days after each halving. Looking back at history, we found that the impact of halving was much greater in the second era, but we must also consider that the dynamics and structure of the current market have changed significantly compared to the period of 2011-2013, and we cannot simply compare the two different periods.
It is for this reason that we find that the impact of the halving events in the two most recent eras (the third and fourth eras) on asset size is richer and more interpretable.
- Red: Epoch 2 price performance: +7,258%, with a maximum retracement of -69.4%
- Blue: Epoch 3 price performance: +293%, maximum retracement -29.6%
- Green: Epoch 4 price performance: +266%, with a maximum retracement of -45.6%
Although in general the market has been strong in the year following each halving event, there have still been some very large pullbacks in the process, ranging from 30% to 70%.
The intermittent rhythm of history
During the 2022 bear market, a popular saying was that no matter how low Bitcoin’s price fell, it would never fall below the historical peak of the previous cycle (the corresponding historical peak was $20,000 in 2017). Unfortunately, this law failed, because during the widespread deleveraging at the end of 2022, Bitcoin’s price fell by more than 25% from the 2017 cycle high.
Similarly, there has been a similar argument recently that the price of Bitcoin cannot break through the historical peak of the current cycle before the halving occurs. But in March of this year, this "law" was also broken. The new historical peak we saw at that time was refreshed again. This event was due to the unprecedented supply tension in history (we mentioned this reason in previous articles) and the significant increase in demand interest brought by the newly listed spot ETF.
But we must see that this Bitcoin price increase has also 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 halving event (measured by MVRV).
In other words, as of the date of the halving, investors are holding the largest paper gain relative to their cost. At the current time, the MVRV ratio is 2.26, which means that the average unit paper gain of Bitcoin is +126%.
Fundamental growth
In the previous section, we evaluated the performance of Bitcoin prices in various historical cycles with halving as the node. In this section, we will turn our focus to the growth of Bitcoin network fundamentals, including mining security, miner income, asset liquidity, and transaction settlement volume during the halving period.
The hash rate is a network statistic that measures the collective “firepower” of mining operators. The growth rate of hash rate has slowed during the halving period, but the absolute number of hashes per second continues to grow and currently stands at 620 Exahash per second (this is equivalent to all 8 billion people on Earth completing 77.5 billion hash operations per second).
Interestingly, hashrate has been at or near new all-time peaks at each halving event, suggesting that at least one of two scenarios may be occurring:
- More ASIC devices are coming online soon;
- More efficient hashing ASIC hardware is in production.
The conclusion drawn from both scenarios is that, despite the 50% reduction in issuance with each halving, the overall security budget is not only sufficient to maintain current OPEX (operating expense) costs, but also sufficient to stimulate further investments in the CAPEX (capital expenditure) and OPEX areas.
Now we calculate the revenue of miners in US dollars, and we find that although the current growth rate of revenue is also declining, the absolute scale is still expanding. In the past 4 years, the cumulative revenue of miners has reached an astonishing 3 billion US dollars, an order of magnitude increase over the previous era.
We would like to reiterate here the important market indicator we currently use - realized cap. It is a powerful tool to measure the capital invested and stored in Bitcoin over time and can be used to compare the liquidity growth of Bitcoin denominated in USD across cycles.
When we measure the entire Bitcoin market by this metric, we find that $560 billion of total value has been “stored” in Bitcoin. This is a staggering 439% increase in realized cap from the previous period, supporting the asset’s current $1.4 trillion market cap. It’s also worth noting that despite Bitcoin’s notorious volatility, terrible headlines, and periodic horror drawdowns, capital continues to flow into the market.
Finally, if we evaluate the total volume of transactions settled on the network during the halving period, we can see that the total economic volume of transactions transferred and settled on the network has reached $106 trillion over the past four years. We should also point out that this value considers raw, unfiltered transaction volume and does not take into account data corrections caused by internal management of assets in wallets.
In addition, we have to see that each transaction is settled without an intermediary, which highlights the Bitcoin network's incredible large-scale value throughput capacity.
Summarize
With the completion of Bitcoin's much-anticipated halving, the issuance of each block has been halved, and the scarcity of assets has increased. Under this circumstance, the issuance scarcity of Bitcoin assets still decisively exceeds that of gold.
Comparing previous periods, we see that the growth of hashrate, network settlement, liquidity, and miner revenue has all contracted. However, the absolute values of these metrics have increased by an order of magnitude, which is an incredible and impressive feat in terms of market size.
It is worth noting that compared with the previous halvings, the network profitability of market investors from all walks of life has increased significantly in this halving. These investors also include the basic mining group, and the total computing power they provide has reached a new historical peak in this halving, which shows that the current market still has enough security budget to stimulate the demand for operating expenditures and capital expenditures.
Source: https://insights.glassnode.com
Original author: UkuriaOC, Glassnode
Original link: https://insights.glassnode.com/the-week-onchain-week-17-2024/
Proofreading: Akechi, Annie
Layout: Annie
Review: Amber
