In this article, we will explore 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 the Panews from the Dalian Institute of Finance and Economics.
Summary
Deflationary supply
Maintaining a cautious attitude
Reasonable expectations
Intermittent historical rhythm
Fundamental growth
Conclusion
Currently, Bitcoin has 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 has experienced its fourth halving since its inception, and the annualized inflation rate of Bitcoin supply has once again decreased by 50%, which means it has completely surpassed gold in terms of scarcity.
When evaluating the state of the Bitcoin network during the halving period, we find that the growth rate of several important indicators has slowed down. However, despite this, the trend of growth continues and each time creates new historical peaks.
The rise in spot prices and the significant breakthrough of price historical highs have boosted the profitability of investors, which in turn has reversed the unfavorable situation of a 50% decline in mining income compared to the beginning of the year.
Due to the clever algorithm called “adaptive difficulty adjustment,” the Bitcoin supply curve is deterministic. This algorithm constantly adjusts the difficulty of the Bitcoin mining process, which keeps the average block interval of the Bitcoin network at around 600 seconds (10 minutes), regardless of the computing power applied by the miners.
Every 210,000 block heights (approximately 4 years), the Bitcoin network undergoes a predetermined halving of its issuance, resulting in a 50% reduction in newly minted Bitcoins. The fourth halving of Bitcoin occurred last weekend, and the block subsidy decreased from 6.25 Bitcoins per block to 3.125 Bitcoins, which means that approximately 450 Bitcoins can be minted every day (for the already mined 144 blocks).
In the four epochs since the birth of Bitcoin, a total of 19,687,500 Bitcoins have been mined, which is equivalent to 93.75% of the predetermined total supply of 21 million Bitcoins. Therefore, only 1,312,500 Bitcoins remain to be mined in the next 126 years, and the current epoch (between the third and fourth halvings) has issued a total of 656,600 Bitcoins (3.125% of the total supply). Interestingly, each halving represents a key point: the remaining percentage of unmined supply is equal to the new block subsidy (3.125 Bitcoins per block vs. the remaining 3.125%).
As the block subsidy halves every 210,000 block heights, the inflation rate of Bitcoin’s currency supply 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 as general equivalents. Historically, Bitcoin’s steady-state issuance rate (0.83%) is lower than that of gold (~2.3%), marking the historic completion of the title of “the scarcest asset” transitioning from gold to Bitcoin.
However, an important point we must note is that we need to correctly evaluate the scale of this halving. When assessing the relative impact of the halving on market dynamics, we must recognize that the total amount of newly minted Bitcoins after the halving is still very small compared to the global trading volume within the Bitcoin ecosystem. Currently, the total amount of newly minted Bitcoins after the halving accounts for less than 0.1% of the total capital for daily transfers and transactions seen today in terms of on-chain transfer volume, spot trading volume, and derivatives volume.
Therefore, the impact of the Bitcoin halving on available transaction supply is diminishing in each cycle. This is not only because the amount of newly minted Bitcoins after the halving is decreasing, 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 the differences from 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, and we believe that the early halving periods are significantly different from today. Past experiences may not provide significant guidance for our current analysis and predictions. However, over time, we have indeed seen a decrease in 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 necessary expansion of capital flows 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’s low point to the halving. We notice that the situations in 2015 and 2018 have significant similarities to the current cycle, as they both experienced growth of approximately 200% to 300%.
However, it is particularly noteworthy that the current cycle is the only one in history that announced a breakthrough of the previous historical price high before the halving event.
Our other perspective is to consider the market performance of Bitcoin within 365 days after each halving. Looking back at history, we find that the impact of the 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. 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) had a richer and more interpretable impact on the asset’s market size.
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 performance is strong in the year after each halving event, significant drawdowns still occur during this process, ranging from 30% to 70%.
During the bear market in 2022, a widely circulated saying was that no matter 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 law failed as the price of Bitcoin dropped more than 25% from the cycle high of 2017 during the widespread deleveraging process at the end of 2022.
Similarly, there has been a recent belief that Bitcoin’s price cannot surpass the current cycle’s historical peak before the halving. However, this “law” was also broken this year. We saw a new historical high at that time, which was the result of unprecedented supply tightness (as we mentioned in a previous article) and significant growth in 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 MVRV). In other words, as of the halving day, investors hold the highest book profits relative to their costs. Currently, the MVRV ratio is 2.26, which means the average unit book profit of Bitcoin is +126%.
In the previous section, we evaluated the price performance of Bitcoin in each historical epoch with the halving as the node. In this section, we will shift our focus to the growth of Bitcoin’s fundamental network, including mining security, miner income, asset liquidity, and transaction settlement volume during the halving period.
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 hash value per second continues to grow, currently reaching 620 exahashes per second (which is equivalent to the entire population of 8 billion people on Earth completing 775 billion hash operations per second).
Interestingly, the hashrate is at or near new historical highs in each halving event, indicating that at least one of the following two situations may occur currently: more ASIC devices are about to come online, or more efficient hash ASIC hardware is being produced. The conclusion drawn from these two situations is that although the issuance amount decreases by 50% after each halving, the overall security budget is not only sufficient to maintain current operating expenses (OPEX) but also to stimulate further investment in capital expenses (CAPEX) and OPEX.
Now, let’s calculate the income of miners in terms of US dollars. We find that although the growth rate of current income is also decreasing, the absolute scale is still expanding. In the past four years, miners’ cumulative income has reached a staggering $3 billion, increasing by an entire order of magnitude compared to the previous epoch.
We reiterate the important market indicator we are currently using: realized cap. It is a powerful tool for measuring the strength of capital invested and stored in Bitcoin over a period of time and can be used to compare the cross-epoch liquidity growth of Bitcoin denominated in US dollars.
When measuring the entire Bitcoin market using this indicator, we find that a total of $560 billion in value is “stored” in Bitcoin. The realized cap has increased by 439% compared to the previous period, supporting the current total market value of this asset, which has reached a staggering $1.4 trillion. It is also worth noting that despite the 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 by the entire network during the halving period, we can see that in the past four years, the total economic volume of on-chain transfers and settlements has reached $10.6 trillion. It is important to note that this value considers the raw unfiltered transaction volume and does not account for data corrections caused by internal asset management within wallets.
In addition, we also see that each transaction is settled without intermediaries, highlighting the incredible scalability of the Bitcoin network in terms of value throughput.
With the highly anticipated completion of Bitcoin’s halving, the issuance of each block has halved, and the scarcity of the asset has intensified. In this situation, the scarcity of Bitcoin assets still decisively surpasses gold.
Comparing various previous periods, we can see that the growth of hashrate, network settlement, liquidity, and miner income has contracted. However, the absolute values of these indicators have increased by an order of magnitude. From the perspective of market size, Bitcoin has achieved an incredible and impressive feat.
It is worth noting that compared to previous halvings, the network profitability of market investors from various industries has significantly increased in this halving. These investors also include the basic group of miners, whose total computing power has reached a new historical high in this halving, indicating that the current market still has enough security budget to stimulate the demand for operating expenses and capital expenses.
Source:
https://insights.glassnode.com
Original author: UkuriaOC, Glassnode
Original link:
https://insights.glassnode.com/the-week-onchain-week-17-2024/