Ecoinometrics - Five Bitcoin halving charts
A special issue with only (mostly) charts.
Bitcoin is about one year away from its 4th halving event. That is the reward for mining a new block will once again be halved from 6.25 BTC to 3.125 BTC.
This is written in code. No Bitcoin FOMC meeting. It will happen whether you like it or not. Deal with it.
We are taking this occasion to look at 5 new charts centred around the halving. Hopium warning.
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Five Bitcoin halving charts
Bitcoin’s growth from the bottom of the bear market
What is your investment thesis around Bitcoin?
Is it that Bitcoin is the ideal digital store of value? In that case you must believe that there is a lot more growth left in BTC given that gold is a market about 30 times larger than Bitcoin.
Is it that Bitcoin has to become the internet native currency? Under that scenario there is also a lot of room for the market to expand given that adoption is still small relative to the amount of people using the internet.
Is it that Bitcoin like all hard assets will benefit disproportionately from the devaluation of the US$? Then given that the US economy is addicted to debt Bitcoin can only grow over the long run.
Whatever your exact investment thesis (which is likely a blend of all the ones listed above) the upside for Bitcoin largely outweigh the risk BTC simply goes to zero.
As it turns out bear markets are always good entry points if you expect Bitcoin will grow on a multi-year scale.
If Bitcoin is down 50% you might think it sucks. But that’s seeing the glass half empty. Because another way of saying that Bitcoin is down 50% from its all time high is that just reclaiming this all time high will 2x the value of your position.
Or again, if you think Bitcoin could be one day worth 5 times as much as its current all-time high, then taking the bet now means you’ll generate a 10x returns on your position.
Which brings us to our first chart. Take each of the major Bitcoin bear markets. Mark the bottom. Track Bitcoin’s growth from the bottom to the bottom of the next major bear market.
That’s what you get, take your time to explore this chart.
A Bitcoin is digital gold narrative would warrant a 30x growth from the (current) bottom of the current bear market. Last cycle Bitcoin 21x from the bottom of the bear market. It 112x after the previous bear market and 539x after the previous one.
Bar some severe devaluation of the US$ we won’t see these 100x returns anymore. But 30x? Over a period of 5 to 10 years? Definitely possible.
Bitcoin’s growth before the halving
Now the previous chart was related to the halving as per the fact all the previous halvings occurred during the recovery period of a major bear market.
But here is a question: which came first, the chicken or the egg? The bull market or the halving?
That’s not a straightforward question and in the realm of the financial markets separating cause and effect is often tricky.
Historically what do we observe? We are about one year away from the next halving. That’s close enough that hodlers might start to act in the preparation of a “supply shock”. And that’s also the period where the halving slowly make its way back to the main narrative.
But what is the typical price trajectory leading to a halving? We only have three events to work with, so obviously this is historical study and not statistics, but bear with me.
In the year leading to the 1st halving Bitcoin was up 4x. In the year leading to the 2nd halving Bitcoin was up 2x. In the year leading to the 3rd halving Bitcoin was basically flat, down to 0.97x.
For this last one you might be tempted to blame the COVID crash. But actually when you look at the chart Bitcoin had been going sideways for a long time before COVID hit.
And even for the other two halving events, it doesn’t look like straight momentum building all along. Check out the chart below with the before and after the halving.
So from this it isn’t clear to me that the halving on its own is really a momentum builder before it happens. Some might say the halving is usually not priced in…
Bitcoin’s growth after the halving
After the halving though it has always been a different a story. Within a year, 3 times out of 3 we get a bull market. And not the small kind, the 3x to 90x kind…
See for yourself.
When you see a chart like that you understand why the halving narrative endures.
Now it also happens that those post halving trends coincide with very accommodative financial conditions. So it is more complicated than saying bull markets are only due to the halving events. But they are part of the positive narrative for sure.
So this time around it actually doesn’t matter if you believe the halving helps or not all hard assets will benefit from a return of QE.
Bitcoin’s on-chain activity before the halving
One last question you might have is whether or not the halving drives on-chain activity.
For that we can look at the active Bitcoin supply over a one year rolling period (as a percentage of the supply). That’s the amount of coins that have moved on-chain at least once. So it is a good gauge of how many coins are asleep vs how many coins are being used on-chain.
If the halving itself was driving on-chain activity you’d expect this active supply of Bitcoins to ramp up going into the halving or at least soon after.
On the chart below you can see Bitcoin’s growth starting about a year before the halving where each day is coloured based on the active supply. Blue means low active supply, red means high active supply. A transition in the direction of the blue to the red going into the halving would show that it drives on-chain activity.
Well apparently it doesn’t. Check it out.
Actually on-chain activity seem to be more related to topping price formations than anything else based on this chart.
Bitcoin on-chain accumulation relative to the halving
But if there is no extra activity driven by the halving, are hodlers at least stacking sats in a more forceful way around the halvings.
To figure this out we are taking the same format as the previous chart, except this time each day is coloured based on the on-chain accumulation score.
The on-chain accumulation score is a measure of how much buying pressure is happening on-chain. A high score means that a lot of cohorts of addresses are increasing the aggregate amount of coins they control while a low score means hodlers are not accumulating coins.
Take a moment to read the chart.
It is not like we are getting some super clean pattern. Whether it is during a bull market or a bear market strong on-chain accumulation periods come and go. And as you can see the on-chain accumulation score is better at showing when the price is heading south than when it is going to skyrocket.
That being said there is typically some on-chain accumulation strength around the halving events. But they aren’t the only ones and they aren’t even the strongest. So actually the halving doesn’t really look like a special event from the point of view of on-chain accumulation trends.
The tl;dr
So what are the lessons we can get from that?
The significance of the halving events as being triggers for bull markets is debatable. They don’t drive any unusually strong activity on-chain. They aren’t necessarily catalysts for momentum before they happen. And as time goes the mining reward is becoming a smaller and smaller fraction of the active supply which means it is unlikely to trigger a supply shock on its own.
But you can’t deny that they make for a good story around the idea that Bitcoin is a good store of value by design.
And the fact that after each of the three halvings Bitcoin experienced a bull run can only help feed the narrative that betting on the halving is a good idea.
Markets being reflexive that means you should not bet against history repeating itself next year. Which means that it is time to act now and take positions during the bear market if you want to maximize your returns.
Let’s see how that plays out.
That’s it for today. If you have any question don’t hesitate to reply to this email and I’ll get back to you.
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Nick
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