Original author: Michael Zhao, Grayscale
Original compilation: GaryMa, Wu Shuo Blockchain
Supply Impact: Bitcoin issuance will be halved around April 2024. Although miners face revenue challenges in the short term, underlying on-chain activity and positive market structure updates make this halving fundamentally different than before.
Miners’ situation: Faced with reduced block reward revenue and high production costs, miners are trying to relieve short-term financial pressure by raising funds through issuing equity/debt and selling reserves.
On-chain activities continue to grow: The emergence of inscriptions has given a new lease of life to on-chain activities. As of February 2024, more than 59 million non-fungible token (NFT)-like collections have been inscribed, bringing more than $200 million in transaction fees. This trend is expected to continue, thanks to renewed developer focus and continued innovation on the Bitcoin blockchain.
Impact of Bitcoin ETFs on the Market: Continued adoption of Bitcoin ETFs could significantly absorb selling pressure, potentially reshaping Bitcoin’s market structure and providing a new source of stable demand, which would be positive for price.
As we get closer to the 2024 halving, Bitcoin is not only still alive, it’s evolving. With the historic approval of a spot Bitcoin ETF in the United States and changes in capital flows, the structure of the Bitcoin market is changing. In this article, we’ll take a closer look at the meaning, importance, and historical impact of the halving on Bitcoin’s performance. We will then examine the current landscape of Bitcoin and why things are so different compared to just a year ago.
What is halving?
New Bitcoins are generated through a process called mining, where computers solve computationally intensive problems to earn block rewards of new Bitcoins. Bitcoin issuance is limited by design—approximately every four years, the mining reward is “halved,” effectively halving the number of new coins issued.
This kind ofdeflationfeatures are a fundamental attraction for many Bitcoin holders. While fiat currency supply relies on central banks and precious metal supply is affected by natural forces, Bitcoin’s issuance rate and total supply have been dictated by its underlying protocol since its inception. The combination of a fixed total supply and a gradually decreasing inflation rate not only creates scarcity but embeds deflationary properties into Bitcoin.
In addition to the obvious supply implications, the compelling excitement and anticipation surrounding Bitcoin’s halving also stems from its historical correlation with Bitcoin price increases:
However, it is important to understand that a post-halving Bitcoin price increase is not guaranteed to happen. Given that these events are highly anticipated, if a price surge is certain, rational investors will likely buy in advance, resulting in higher prices before the halving. This leads to frameworks like the Stock-to-Flow model. While it creates a visually appealing chart by correlating scarcity with price increases, the model ignores the fact that this scarcity is not only predictable but widely known in advance. We can come to this conclusion by looking at other cryptocurrencies that employ a similar halving mechanism, such as Litecoin, which did not consistently see price increases after the halving. This suggests that while scarcity sometimes affects price, other factors also play an important role.
Rather than attributing post-halving price increases to the halving itself, it appears that these periods coincide with significant macroeconomic events. For example, in 2012, the European debt crisis highlighted Bitcoins potential as an alternative store of value amid economic turmoil, causing its price to rise from $12 to $1,100 in November 2013. Similarly, the ICO boom of 2016 – which pumped more than $5.6 billion into altcoins – also indirectly benefited Bitcoin, boosting its price from $650 to $20 in December 2017. 000 USD. Of particular note, during the COVID-19 pandemic in 2020, massive stimulus measures fueled inflation concerns, potentially pushing investors toward Bitcoin as a safe haven, causing its price to rise from $8,600 to $68,000 in November 2021. These macroeconomic uncertainties and the search for alternative investment options appear to coincide with a period of increased interest in Bitcoin, which coincidentally coincides with the halving. This pattern suggests that while the halving helps reinforce Bitcoin’s scarcity narrative, the broader economic context and its impact on investor behavior may also have a significant impact on Bitcoin’s price.
Although the future macroeconomic environment remains uncertain, the impact of the halving on the Bitcoin supply structure is certain. Let’s dig a little deeper.
miner threat
The halving poses a challenge to Bitcoin miners. As Bitcoin issuance decreases from 6.25 BTC per block to 3.125 BTC, the revenue miners receive from block rewards is effectively cut in half. In addition, spending is increasing. Hash rate is a measure of the total computing power used to mine and process transactions on the Bitcoin network and is a key input in calculating miner payouts. In 2023, the seven-day average hash rate soared from 255 EH/s to 516 EH/s, an increase of 102%, significantly exceeding the 41% growth rate in 2022. The surge, driven in part by Bitcoins rising price throughout 2023 and companies acquiring more efficient mining equipment in response to favorable market conditions, highlights the growing challenges faced by miners. The combination of falling revenue and rising costs is likely to put many miners on edge in the short term.
While the situation may seem grim, there is evidence that miners are already preparing for the financial consequences of the halving. In the fourth quarter of 2023, miners apparently sold their Bitcoin on-chain holdings, possibly to build liquidity ahead of block reward reductions. In addition, significant capital raisings such as Core Scientific’s $55 million equity offering,Stronghold’s US$15 million equity financing and Marathon Digital’s ambitious US$750 million hybrid equity financing highlight the industry’s proactive attitude in strengthening reserves. Together, these moves suggest that Bitcoin miners are well-positioned to handle the coming challenges, at least in the short term. Even if some miners exit the market entirely, resulting in a drop in hash rate, it could lead to a mining difficulty adjustment, potentially lowering the cost per coin for remaining miners and keeping the network balanced.
Despite the challenges posed by the reduction in block rewards, Inscription and L2 are playing an increasing role within the Bitcoin ecosystem and have recently emerged as promising use cases. These innovations may provide a glimmer of hope for miners, potentially increasing transaction throughput and increasing transaction fees on the network.
inscription
As we’ve explored before, inscriptions (“ordinals”) represent a groundbreaking innovation within the Bitcoin ecosystem. From simple images to custom “BRC-20” tokens, digital collectibles can be uniquely “engraved” to a specific Satoshi (the smallest unit of Bitcoin, as each Bitcoin is divisible into 100 million Satoshis). This new dimension of Bitcoin utility has spurred significant growth: to date, more than 59 million assets have been imprinted, generating over $200 million in transaction fees for miners (Exhibit 5).
The surge in network fees has had a profound impact, especially on November 20, 2023, when transaction fees on the Bitcoin network exceeded those on the Ethereum network for the first time, setting a new record in recent history. Since the advent of Ordinal Inscription, there have been multiple times where miners have received more than 20% of total transaction fees from inscription fees. Even compared to the total volume of NFTs on other chains, Bitcoin dominated NFT transaction volume in November and December 2023, a development that few could have predicted at the end of 2022.
Inscription’s success has had an impact on the Bitcoin network. Over time, as block rewards decrease, the question of how miners are incentivized to protect the network becomes more pressing. With transaction fees from ordinal already accounting for approximately 20% of total miner revenue, this emerging trend in inscription activity provides a new path to maintaining network security through increased transaction fees, at least for now.
However, this success also highlights scalability challenges, as users will have to bear higher transaction fees. This may prevent users from performing basic transactions like transferring money. Additionally, Bitcoin’s architecture limits programmability, which further limits the barriers to developing complex applications capable of using these inscriptions. This situation highlights the need for scalable solutions that can both increase throughput for efficient transactions and expand use cases such as trading NFTs and BRC 20 tokens.
In response, the community is exploring approaches such as Layer 2 Rollups, similar to those taken by Ethereum, to enhance scalability and usability. supportTaprootGrowing interest in wallets that offer greater programmability through enhanced privacy and efficiency features demonstrates a collective move to address these challenges. As transaction fees increase on the Bitcoin main chain, the development of L2 networks is a possible step forward.
As we discussed in our previous article on Inscription, the resurgence of Inscription and the introduction of the BRC-20 token has caused a cultural shift within the Bitcoin community, attracting a new group of developers who are interested in the network Excited about the possibilities for expansion. This shift is arguably one of the most important developments for Bitcoin, as it not only diversifies the ecosystem but also injects the community with new perspectives and innovative projects that will drive future growth.
Among existing Layer 2 (L2) solutions, some have been quietly laying the groundwork for this evolution for years. Stacks is a platform that introduces fully expression smart contracts to Bitcoin. It facilitates the development of a variety of decentralized applications (dApps) that leverage Bitcoins security, enabling functionality ranging from DeFi to NFTs. These dApps represent the forefront of Bitcoins transition to a multi-faceted ecosystem capable of supporting a variety of blockchain-based applications.
ETF Fund Flow
In addition to largely positive on-chain fundamentals, Bitcoin’s market structure looks favorable for post-halving prices. Historically, block rewards have brought potential selling pressure to the market, potentially causing all newly mined Bitcoin to be sold, thus affecting the price. The 6.25 Bitcoins currently mined per block equate to approximately $14 billion per year (assuming a Bitcoin price of $43,000). To maintain current prices, the corresponding buying pressure would be $14 billion per year. After the halving, these demands will be cut in half: only 3.125 Bitcoins are mined per block, which equates to a reduction to $7 billion per year, effectively reducing selling pressure.
ETFsgenerally provides access to Bitcoin exposure to a wider range of investors, financial advisors and capital markets allocators, which may lead to increased mainstream adoption over time. Following the approval of the U.S. spot Bitcoin ETF, these newly launched products saw net inflows of approximately $1.5 billion in the first 15 trading days, almost equivalent to three months of potential post-halving selling pressure. While the surge in net inflows in the first few days may be due to initial excitement and pent-up demand, assuming net inflows remain stable amid continued Bitcoin ecosystem adoption and maturation, ETF liquidity may have a positive impact. Sustained selling pressure from mining issuance has played a certain offsetting role. A sensitivity analysis of daily net inflows from $1 million to $10 million suggests that at the higher end, a reduction in selling pressure could reflect the effects of another halving, fundamentally shifting Bitcoin’s performance in a positive way. market structure.
in conclusion
Bitcoin has not only weathered the storm of the bear market, but it has also challenged outdated perceptions with its developments over the past year. While it has long been hailed as digital gold, recent developments suggest that Bitcoin is evolving into something much more. Fueled by a surge in on-chain activity, supported by the momentum of significant market structures, and backed by its inherent scarcity, Bitcoin has shown its resilience. The Grayscale research team will be paying close attention to its developments before and after the April 2024 halving, as we believe Bitcoin’s future is bright and bright.
