Bitcoin Halving & Investors Confidence

Research Briefing

April 28, 2020

Most currency pairs against the USD are starting to recover its losses slowly, including cryptocurrencies. However, we expect Bitcoin to pass the recovery phase and surge in the upcoming days as investors confidence begins to take effect. With the United States being a dominant global financial proxy, the confidence in its currency relies on its economic performance. Countries across the globe are expected to experience falling gross domestic product (GDP) rates and are currently facing economic downturns. Meanwhile, Bitcoin is experiencing an economic uptrend, and it's halving is only weeks away.

When users think of the term “asset” for Bitcoin, they think BTC. The underlying asset for Bitcoin is the network, which consists of the entire Bitcoin economy, blockchain, and the units of Bitcoin, BTC. Consequently, the Bitcoin network is a partial source for Bitcoin’s value. Correlation between the Bitcoin halving and the price of BTC is considered bullish depending on demand. Halving is generally a bullish event because it reduces the block reward for newly mined Bitcoin entering circulation by half. The Bitcoin network and the halving have different reasons for a bullish BTC sentiment other than traditional commodities and stocks.

The source of Bitcoin’s utility is transparency and user control. These attributes are entirely dependent on the integrity of the Bitcoin network. Since Bitcoin’s debut, there have been many theories regarding the network performance. To many users, Bitcoin is simply a store of value; however, its network reveals Bitcoin to be more than just a simple asset. Surviving disruptions in consensus protocols demonstrate the robustness of the Bitcoin network. The economics of Bitcoin proves to be effective in many ways; for example, the halving addresses more than supply and demand. Sufficient knowledge of the Bitcoin Network and its components will yield enhanced utility and user experience. While the overall Bitcoin Network enables payments, more users are discovering confidence from transparent characteristics in Bitcoin.

Sustaining Bitcoin’s share of the digital economy is vital to the strength, security, and speed of the network. The economics of Bitcoin plays an essential role in the digital economy at large. Sustaining a high level of strength, security, and speed in Bitcoin’s network, the ecosystem must continuously improve the efficiency and efficacy in mining rewards, cost of transactions, and data consumption. The process¹ and mechanism in place is also beneficial to the long-term ability to be exogenous and endogenous to the Bitcoin network.


¹  The Bitcoin mining process is solving computational problems. In simple terms, this process involves organizing and matching for the problems to be solved. The simplified sequential process involves:  (1) Taking a list of active transactions. (2) Grouping them into a block. (3) Referencing previous blocks to add onto the chain. (4) Solving a computational match for the blockchain.

 

With all the different components to the Bitcoin network, the halving takes all measures into account. The halving is an algorithmic supply rate set to adjust every 210,000 blocks that will reduce the number of BTC rewards mined per block by half. The adjustment occurs approximately every four years; however, the correct measurement is every 210,000 blocks from the previous halving. The halving schedule will continue to adjust until Bitcoin reaches 21,000,000 BTC. It is important to note that the maximum quantity includes the genesis block, and lost wallets with immobile BTC, which cannot be spent.

In any network and ecosystem, competition is a trait that implies maturity. The combination of more miners participating, and the halving; the ecosystem becomes more competitive and increases the networks difficulty.

The network difficulty plays a role in mining by representing two different perspectives of opportunity. One point of view is the statistical² difficulty for miners and the possibilities of their reward. Another perspective is the opportunity for companies to innovate and improve processing units to news levels of adequate power but also efficiently producing those computational powers to gain a competitive advantage.

Bitcoin hashrate per second from January 01, 2020 to April 28, 2020.

² The general coefficiency formula for Bitcoin mining is the following:  (a)  Increases in miners result in higher rates of competition, in which it increases the difficulty of mining. In this case, it results in a lower probability on the hash rate to find a block, decreasing the possibility of a miner receiving the reward.   OR   (b)  Decreases in miners result in lower rates of competition, decreasing the difficulty of mining. In this case, it results in a higher probability of the hash rate to find a block, increasing the possibility of a miner receiving the reward.

Investor confidence is not just about the price, but knowing what to expect in order to correlate with valuations. The algorithm for the Bitcoin network allows users to know in advance the rate of newly mined Bitcoins entering circulation. In addition to knowing what to expect and the rate of block rewards, the users will know the maximum amount of Bitcoin that will ever exist. Such transparency gives Bitcoin an advantage for investor confidence. Users can monitor statistics and analyze the performance and strength of the Bitcoin network.

While being able to monitor the Bitcoin network, analyzing the difficulty portrays the trend for the number of miners competing for the reward. Considering that some investors prefer to correlate Bitcoin and Gold, the two assets have different advantages. When trying to determine the supply and demand for Gold, it is essential to note that its supply is only Gold mined above ground. In the event of significant amounts of Gold surfacing in the future, it will impact the supply and demand ratio and will make the confidence of investors more volatile.

Since we initiated our briefing report on monitoring the recent global economic events, and the upcoming Bitcoin halving, the outlook has shown that cryptocurrencies have made significant positive progress. Investors that participated in hedging into USD in the first week of March, will be confident in Bitcoin as a hedge. Exchange operators should anticipant and plan for an influx of traffic volume on cryptocurrency exchanges. Considering investor confidence is crucial when assessing the current state of the crypto-market; therefore, we believe all factors lead to a bullish sentiment of confidence for Bitcoin in the upcoming days and domino effect positively impacting the crypto-market.

In our previous briefing report, we mentioned the current global events and the strengthening of the United States Dollar. On March 11, 2020, we alerted investors of a possible bearish outlook. The following day, the price of BTC suffered extreme volatility, dropping the price of BTC approximately 45%. Nonetheless, we feel it is safe to conclude that our previous investors alert is finished and no longer in effect.

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