Right place, right time. The Bitcoin halving event is such a major catalyst in the realm of cryptocurrencies that we felt it best to formulate strategy around its occurrence. In our CIO Perspectives – Timing the Bitcoin Halving Cycle (Jul 2023), our analysis revealed that “the start of the year (2024) is probably a good time to take a position in Bitcoin for anyone who’s feeling the FOMO (fear of missing out)”. We followed up with another of our CIO Perspectives – Approaching the Bitcoin Halving Cycle (Jan 2024), ascertaining that the demand-supply imbalances remained intact for bullish momentum. Indeed, since then, Bitcoin had seen a remarkable >60% gain in price on the back of those assessed factors.
Easy money has been made. Post-halving, price action becomes a little more complicated as more complex factors (macro, liquidity, regulations etc.) resume a major influence. One also needs to be aware of the challenges faced by Bitcoin miners following a halving – essentially, the halving of the Bitcoin block reward from 6.25BTC to 3.125BTC on 20 Apr 2024 is simultaneously a halving of their revenues; if costs remain the same, the price of Bitcoin must double for miners to maintain their profit margins. As both the price of Bitcoin and the hash rate (a measure of computing power required to mine Bitcoin) has remained relatively constant since then, miner profits would be severely curtailed, resulting in them having to draw on reserves to keep the lights on.
Figure 1: Bitcoin miner revenues squeezed by lower yields and higher costs
Miner revenues illustrated using total value of Coinbase block rewards and transaction fees paid.
Source: Blockchain.com, Bitcoin.com, DBS
Survival of the fittest. In anticipation of the halving, it is no surprise then that miners have been net sellers of Bitcoin since the start of 2024 while prices were running up; no doubt serving to build a liquid reserve buffer for expenses after the halving; ongoing costs of running the business must after all be paid in fiat terms and not in cryptocurrency. Should the current environment of lower profits prevail, high cost/low efficiency miners must liquidate all mined coins to stay afloat, raising selling pressure in the interim until losses force them to ultimately unplug their machines.
When enough miners have disconnected from the network, the hash rates would come down, reducing costs of mining and reaching a profitable equilibrium for the remaining more well-capitalised and efficient miners. Until then, the tug-of-war between miner selling and investor interest would likely see Bitcoin fluctuate sideways in a range till the next catalyst.
When moon? Enthusiasts would certainly be disappointed if Bitcoins all-time high of USD73k this year ends up being the cycle high; only narrowly overshooting the previous 2021 high of USD69k. We doubt this to be the case. While ETF approval and halving have dominated the headlines, we should not forget that Bitcoin is fundamentally still perceived to be a hedge against monetary debasement; as such, the next catalyst would likely be centered around monetary policy easing in some form. We have observed similar elements in the past – Bitcoin’s surge post-the 2012 halving was helped by the advent of QE3 that began in Sep 2012, the strong run in 2021 was also supported by the Fed maintaining zero rates and QE after the pandemic crisis. It was only the 2016 halving that occurred while monetary policy was tightening; Bitcoin’s performance was perhaps supported by fiscal loosening from the tax cuts under the Trump administration in 2017.
The current fourth halving has occurred under a policy inflection point; central banks have tightened aggressively and looking for signs to ease. When that occurs, it could catalyse another round of animal spirits to lift prices beyond current levels.
Defend against debasement. We consider it useful to separate the trader and portfolio manager personas inherent within every investor when it comes to the realm of cryptocurrencies. Volatility tends to unnerve investors, causing the “trader” mentality to dominate and change positions unnecessarily, often to the detriment of the portfolio. Bitcoin ultimately remains a hedge against monetary debasement. With the continued fiscal largesse of world governments and already ballooning debt, there remains plenty of reason to hold a position in Bitcoin – even if it is a small one – in a portfolio.
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