I. Introduction
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I. Introduction
In early February 2020, the price of Bitcoin regained the $10,000 mark. However, only two months ago, Bitcoin went through a bear market for nearly half a year, falling to $6,800, a drop of up to 40%, and the market was once full of pessimism. In just two months, Bitcoin staged the return of the king, and investors are also discussing whether the Bitcoin bull market is coming. According to predictions, Bitcoin will be halved in early May this year, and there are still about three months before the official halving of Bitcoin, and the Bitcoin halving market has long been recognized as an opportunity for growth in the industry. In addition, in 2020, BCH, BSV, ZEC and other encrypted digital currencies will also usher in the halving moment.
In the "Book of Heavenly Officials", Sima Qian described the law of change in the operation of the universe: "Husband Tianyun, a small change at the age of thirty, a change in a hundred years, a big change in five hundred years; three major changes and one era, three eras and a big change : This is a large number." As a part of the laws of the world, the economy's recovery, prosperity, recession, and depression also appear as the established rhythm of order changes. The same is true for Bitcoin---with the production reduction cycle as the boundary, the Bitcoin market is about a four-year cycle. At present, Bitcoin has gone through three rounds of market cycles. In each cycle, we can clearly observe the prosperity and depression, recession and recovery of Bitcoin.
Figure 1. The two halvings and the three market cycles of Bitcoin in history (2010.8-2020.2)
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2. Fate and reincarnation: Bitcoin's production reduction and three historical cycles
Why is the market looking forward to this halving of Bitcoin? Because Bitcoin has experienced two halvings in history, and each time the price is halved, the price of Bitcoin will usher in a wave of bull market. Although history is always strikingly similar, it will not simply repeat itself. Copying it completely is tantamount to seeking a sword in every boat. The purpose of our review is to grasp the key to the "interval between heaven and man" and "changes between ancient and modern times" through the review of history, so as to achieve "knowledge all over the world and judge the number of opportunities".
(1) The first cycle: the beginning of chaos, emerging (2010.8-2012.11)
The early Bitcoin was only an idealistic experiment, and it did not attract the attention of the public at the beginning of its advent. It was only spread among technical hackers and a few computer programmers. On May 21, 2010, a programmer in Florida, USA bought a $25 pizza coupon with 10,000 bitcoins, marking the first time bitcoin had a price in the real world. In July 2010, the Bitcoin exchange Mt.Gox was established in Japan, and Bitcoin began to have real market quotations. With the emergence of bitcoin exchanges, more and more people have begun to try transactions between legal tenders of various countries and bitcoins. At this point, the first business cycle of Bitcoin officially began.
Figure 2. The first market cycle of Bitcoin (2010.8-2012.11)
(2) The second cycle: towards maturity and in-depth exploration (2012.12-2016.7)
2013 was the first year that Bitcoin entered the global public's field of vision. At the end of March 2013, the financial crisis broke out in Cyprus, and bank depositors faced serious losses. Cyprus depositors chose to use Bitcoin as a hedging tool, and Bitcoin attracted the attention of the world for the first time; the time came to October 2013, when the U.S. Senate discussed Impact and opportunity brought by Bitcoin. Affected by the positive news of the hearing and the massive media reports on Bitcoin, Bitcoin continued to rise. Driven by market buyers, the price of Bitcoin reached a record high of $1,200.
The crazy rise of Bitcoin has attracted the attention of governments around the world. In order to prevent potential financial risks, in December 2013, five ministries and commissions of the Chinese government jointly issued the "Notice on Preventing Bitcoin Risks", which clarified the non-monetary nature of Bitcoin and prohibited all financial institutions and payment institutions from carrying out transactions related to Bitcoin. Business. So far, the Bitcoin bubble has been punctured, and Bitcoin has entered a plunge range.
After the slump at the end of 2013, Bitcoin ushered in a one-and-a-half-year slump, especially in the first half of 2015, due to the continued low price of Bitcoin, a large number of companies in the industry began to close down. But just like the competition mechanism of survival of the fittest in all markets, after surviving the cold winter, high-quality blockchain companies represented by Bitmain began to rise rapidly in the market recovery in the second half of 2015 and became industry giants.
Figure 3. The second market cycle of Bitcoin (2012.12-2016.7)
(3) The third cycle: the earth-shattering shock, the great flying frost (2016.8-2020.5)
The time came to July 2016, marked by the second reduction of Bitcoin production, and Bitcoin entered the third stage. In the previous stage, the new crowdfunding financing model represented by Ethereum (Ethereum) began to appear, and gradually matured in the third stage with the launch of the Ethereum mainnet and the development of ERC20 contracts—in 2017 In the spring, this initial coin offering (ICO) model began to emerge. Specifically, investors invest in a blockchain startup project with their bitcoin (BTC) or ethereum (ETH) in their hands, and get initial generation from it. encrypted digital currency in return.
However, at the end of January 2018, as the growth of incremental funds in the market slowed down, the price of Bitcoin began to collapse and entered a recession stage; and by June 2018, some blockchain project teams had financial difficulties, and the market was beginning to experience a cold winter. From the "Shocking" in 2017 to the current "Flying Frost", Bitcoin is only in a normal business cycle.
Figure 4. The third market cycle of Bitcoin (2016.8-2020.5)
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3. Structural changes: Why is Bitcoin’s production reduction so important?
From historical experience, every time Bitcoin cuts production, it will bring a wave of bull market. Intuition tells us that the price of Bitcoin will rise after the production cut, so what is the reason behind it? Now we start from the theory of supply and demand for analysis.
From the perspective of demand, it can be seen from Figure 5 and Figure 6 that the main demand for Bitcoin comes from application demand and speculative demand. We can use the number of active addresses and daily average transaction volume of Bitcoin to reflect this Bitcoin Two needs. The demand for Bitcoin fluctuates significantly in the short term and continues to increase in the long term.
Figure 5. The number of Bitcoin active addresses (unit: number)
Figure 6. Average daily trading volume of Bitcoin (Unit: USD 100 million)
From the perspective of supply, the total number of bitcoins issued in the future is 21 million. At present, the blockchain network generates a block about every 10 minutes. At the very beginning, 50 bitcoins will be issued when a block is born, and then every 210,000 bitcoins will be issued. blocks (approximately four years), the number of issuances is halved. Although Bitcoin will be continuously generated, its circulation has been determined in advance, which has nothing to do with mining capacity. It is impossible to increase the total output of Bitcoin per unit time by increasing mining capacity, so the supply of Bitcoin is rigid. In addition, the production of Bitcoin is reduced about every 4 years. In the long run, the circulation per unit time continues to decline.
From the perspective of demand, we can use the activity and average daily transaction volume of Bitcoin to reflect the market demand of Bitcoin. It can be seen from Figure 5 and Figure 6 that the demand for Bitcoin fluctuates significantly in the short term and continues to increase in the long term.
It can be seen from the above that due to the rigid supply curve of Bitcoin and the relatively elastic demand curve, and the demand for Bitcoin fluctuates violently in the short term, the price of Bitcoin will fluctuate greatly in the short term.
Now let's look at the impact of Bitcoin's production reduction on the price in the long run, assuming that the supply and demand of Bitcoin grow at the same rate over time (the growth rate of demand is larger from actual observations, but this factor does not contribute to our analysis. cause a substantial impact), then it can be seen from the above figure that as time goes by, the supply and demand curves of bitcoin are moving to the right. When bitcoin is halved, the growth rate of supply slows down, causing the price of bitcoin to rise .
Figure 8. Supply and Demand Curves for General Commodities and Bitcoin in the Short Term
Now let's look at the impact of Bitcoin's production reduction on the price in the long run, assuming that the supply and demand of Bitcoin grow at the same rate over time (the growth rate of demand is larger from actual observations, but this factor does not contribute to our analysis. cause a substantial impact), then it can be seen from the above figure that as time goes by, the supply and demand curves of bitcoin are moving to the right. When bitcoin is halved, the growth rate of supply slows down, causing the price of bitcoin to rise .
If we further relax the assumptions and comprehensively consider the long-term and short-term changes in Bitcoin demand and the impact of supply reduction, then we will get a curve of Bitcoin price over time as shown in the figure below. In the short term, due to the rigid supply curve of Bitcoin, affected by changes in demand for Bitcoin, Bitcoin fluctuates violently in the short term. In the long run, due to the impact of production cuts and increasing demand, the price of Bitcoin shows an overall upward trend.
Figure 10. Bitcoin price changes over the long term
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4. Crisis under prosperity: optimism of the market and anxiety of miners
Under the expectation of the halving market, people are full of optimism about the future market trend of Bitcoin, but will the reality really be as everyone wishes?
From the above analysis, it can be seen that the reduction of Bitcoin production will indeed stimulate the price increase. Of course, this is only a conclusion drawn from the commodity attributes of Bitcoin, but the price of Bitcoin is not only affected by the relationship between supply and demand. Because Bitcoin has financial attributes in addition to its commodity attributes, this is why Bitcoin, like other financial assets, has bubbles. In addition, from every cycle of Bitcoin, we can observe the promotion of innovation, such as the birth of Bitcoin exchanges in the first cycle, the birth of altcoins in the second cycle, and the birth of altcoins in the third cycle. The birth of the token crowdfunding model, these innovations directly stimulated the soaring price of Bitcoin that year. From the current observations, in the forthcoming fourth market cycle of Bitcoin, regulatory innovation is very likely to determine the start time of this round of Bitcoin bull market.
Therefore, the halving of Bitcoin's production is only one of many factors that affect its price, not the only one. From the perspective of experience, many investors have come to the conclusion that "the price of Bitcoin will double from half a year before the halving occurs". Perhaps this will be true in the future, but from the perspective of bitcoin mine operations, the rise in bitcoin prices is uncertain, but the increase in mining costs after production cuts is certain. This is the biggest challenge faced by miners under the production cut market. dilemma.
In Bitcoin mining, the difficulty value determines how many hash operations a node (computer) needs to go through to generate a legal block. The higher the difficulty, the more computing power is required to obtain a valid block. No matter how the computing power of the entire blockchain network changes, the difficulty value will be adjusted to ensure that the block generation speed remains basically unchanged. Generally speaking, every 2016 blocks of the Bitcoin network (about two weeks) are mined, and the difficulty will be adjusted according to the computing power of the entire network. According to the new target value, we can calculate the probability of a hash operation winning. In actual operation, the computing power of Bitcoin’s entire network is getting bigger and bigger, which means that the probability of a single mining machine winning is getting smaller and smaller, that is, the bitcoin output of a single mining machine will gradually decrease over time, as shown in Figure 11. shown in the curve.
The halving of Bitcoin output in May this year actually means that in each block dug out by miners, the number of Bitcoin rewards drops from 12.5 BTC to 6.25 BTC, that is, the curve in Figure 11 shifts downward, which causes two serious impact:
(1) First of all, since the mining industry is a capital-intensive industry, the capital expenditure of old mining machines is fixed, so the operating leverage is high. When the output of mining machines is suddenly halved, the profits of old mining machines will be severely squeezed pressure, or even losses;
(2) Secondly, the mining farm needs to pay for electricity when mining, which is the variable cost of the mining machine. We know from the above that the output of a single mining machine decreases with time. When the daily mining income of the mining machine is less than the variable cost (electricity + labor costs, here we ignore labor costs), the mining machine will shut down. Due to the halving of output, the income of mining machines has been halved, which directly leads to a significant advance in the shutdown time of mines.
Figure 11. Bitcoin mining profitability analysis
Taking the actual situation as an example, on February 10, 2020, the price of Bitcoin was around 10,000 USD, and the computing power of the entire network was 103022 PH/S. Assuming that the price of Bitcoin and the computing power of the entire network remain unchanged in the future, we refer to The daily quotations and performance parameters of mining machines on the official websites of Bitcoin Mainland and Canaan Zhizhi can be used to obtain the following income table.
Table 1. Static profitability of mining machines before halving (assuming that the computing power and price of the entire network remain unchanged)
Generally speaking, the service life of the mining machine is about 1-2 years. It can be seen from the above static income table that all the above mining machines can pay back their costs within one year, which means that the remaining service life of the mining machines can bring profits after excluding the payback time. However, as mentioned above, Bitcoin will be halved this year, that is, the blockchain reward of Bitcoin will drop from 12.5 BTC to 6.25 BTC. At this point, we calculate the static income of the mining machine, as shown in the table below:
Table 2. Static profitability of mining machines after halving (assuming that the computing power and price of the entire network remain unchanged)
Does this mean that the mining machines cannot be used? Not really. Under Moore's Law, the price of mining machines is gradually decreasing. For example, the Antminer S17 mining machine was quoted at US$2,700 in September last year, but in February this year, its price had dropped to US$1,610. Therefore, after the halving, the price of existing mining machines will continue to decline, and the payback time of mining machines will return to the range of one year. Of course, the bad news is that for users who have bought mining machines now, this part of the expenditure is a silent cost, which has already been fixed, so they will face larger losses in the future.
Of course, the above calculations are based on the fact that the price of Bitcoin and the computing power of the entire network remain unchanged. If the price of Bitcoin doubles after the halving, then there is a possibility for miners to make a profit. Regrettably, this is only a possibility, but the continuous rise of Bitcoin's entire network computing power and the occurrence of halving are indisputable facts. Different from the optimism of the secondary market of encrypted digital currency on the future market of Bitcoin, miners are facing great risks. This is even a bet: the increase in the price of Bitcoin must be large enough to offset the increase in the computing power of the entire network Miners will be able to make a profit only by reducing the losses caused by production and production reduction. Perhaps the only good news for mines is: based on historical experience, after the halving occurs, the price of Bitcoin will double.
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