Coauthored with Julia Ofoegbu

Executive summary

Bitcoin's upcoming halving, scheduled for April 20th, 2024, presents a unique scenario. While historically halvings have triggered price volatility, this time around several novel factors suggest a different outcome. This report explores three key elements, from ETF flows to a thriving on-chain development scene, that position this halving as a potential turning point for Bitcoin.

I. Introduction

Bitcoin's built-in mechanism known as the halving is a pivotal event scheduled to occur around April 20th, 2024. This event cuts the reward for mining new bitcoins in half, impacting both miners and the overall supply of the cryptocurrency.

Past halving events have been significant moments in Bitcoin's history, often leading to periods of increased volatility. While price predictions are beyond the scope of this report, historical trends suggest that halvings can influence Bitcoin's value.

The Traditional Halving Narrative

The Bitcoin halving fundamentally alters the economic equation for miners. The block reward, which is the incentive for miners to validate transactions and secure the network, gets slashed in half. This creates a supply shock, as the new issuance of Bitcoin is significantly reduced.

In theory, this supply shock should drive up the price of Bitcoin due to the principle of scarcity. Historically, halving events have indeed been followed by periods of increased volatility, with some instances witnessing significant price surges. However, the exact timing and magnitude of these price movements have been difficult to predict.

Furthermore, past halvings have often been accompanied by short-term dips in price. This could be due to various factors, such as miners selling their newly acquired Bitcoin to cover operational costs or market participants taking profits after a price run-up in anticipation of the halving.

However, the exact timing and magnitude of these price movements have been difficult to predict. Historical data showcases significant volatility surrounding halving events. For instance, in 2012, the price of Bitcoin experienced a dramatic -91% drop five months prior to the halving, followed by a strong +72% rally in the five months after. Conversely, in 2016, the price rallied +74% five months before the halving, then dipped -28% two weeks after, but still managed to be up 53% five months post-halving. Even the 2020 halving, which coincided with the COVID-19 market crash, witnessed an 18% price increase five months before the event and a 40% rise afterward. These examples highlight the unpredictable nature of short-term price movements around halvings while suggesting a possible long-term upward trend in price on a larger timeframe.

II. Why This Halving Might Be Different

A. ETF Inflows

One key factor differentiating this halving is the emergence of Exchange-Traded Funds (ETFs) that hold Bitcoin, approved 3 months ago. These ETFs offer a new avenue for institutional investors to gain exposure to Bitcoin without the complexities of directly managing the cryptocurrency.

When existing Bitcoin spot ETF experience significant capital inflows, it can create a surge in buying pressure for Bitcoin. This is because:

ETF Creation: To back their shares, ETFs need to acquire Bitcoin. This effectively removes Bitcoin from the circulating supply, reducing overall availability.
Investor Demand: ETF inflows reflect growing investor interest in Bitcoin, potentially leading to increased demand from a new category of market participants.

Bitcoin spot ETFs are accumulating Bitcoin at a rapid pace. These funds, which launched about 100 days ago, now hold roughly 850,000 BTC (worth approximately $54 billion), While Bitcoin mining produces around 900 BTC daily, resulting in roughly 90,000 new BTC in the past 100 days, the spot ETFs have gobbled up a significantly larger amount – around 529,000 BTC (excluding the long-standing Grayscale Bitcoin Trust - GBTC). This translates to the ETFs acquiring nearly 5.8 times more Bitcoin than what's being mined. It's important to note that not all these Bitcoin came directly from miners. Some might have originated from GBTC or other sources.

Even for skeptics, the data suggests strong underlying demand for Bitcoin. Let's take the most bearish assumption: all the Bitcoin in the new ETFs came from Grayscale's Bitcoin Trust (GBTC). Grayscale's holdings have indeed decreased by roughly half, from over 600,000 BTC to around 300,000 BTC. However, even if we include the possibility that all these exiting Grayscale investors simply moved their Bitcoin to the new ETFs, there's still a net inflow of around 220,000 BTC. This translates to a significant buying pressure, with ETFs acquiring 2.4 times more Bitcoin than what's being mined. This strong demand, regardless of its source within the crypto ecosystem, suggests a bullish long-term outlook for Bitcoin, especially considering it coincides with the upcoming Bitcoin halving, a historical price driver.

B. More Efficient Mining Machines

The upcoming Bitcoin halving will cut miner rewards in half, putting pressure on profitability. However, the landscape of Bitcoin mining has evolved since the previous halvings. A key factor is the development of more efficient mining machines. Let's explore how these machines can help mitigate the profitability decrease and potentially sustain mining activity.

Impact of Efficient Miners on Profitability:

Lower Operating Costs: More efficient mining machines require less energy to perform the same amount of hashing power compared to older models. This translates to significant cost savings on electricity, a major expense for miners. With lower operating costs, miners can maintain profitability even with a reduced block reward post-halving.
Hashrate Optimization: Energy efficiency also allows miners to optimize their hashrate (computing power dedicated to mining). By strategically deploying these machines, miners can maintain their overall hashrate without needing a proportional increase in energy consumption. This helps them stay competitive in the mining pool.

Continued Mining Activity:

Gradual Difficulty Adjustment: The Bitcoin network automatically adjusts mining difficulty roughly every two weeks. This ensures that finding a block remains challenging even with fluctuations in hashrate. With more efficient machines, miners can potentially absorb the initial profitability decrease from the halving while the difficulty adjusts to a new equilibrium.
Strategic Investment: The presence of efficient miners suggests that the industry is maturing and attracting players with a long-term perspective. These miners might be better equipped to weather short-term profitability dips caused by the halving, potentially reinvesting profits back into even more efficient machines over time.

It's important to note that the exact impact of efficient miners on profitability will depend on various factors, including the specific efficiency gains of these machines, the overall electricity costs, and the price of Bitcoin itself. However, their presence undoubtedly creates a buffer for miners and could lead to a smoother transition through the post-halving period compared to previous halving events.

Showcasing Efficiency with the Bitmain S19 Series

As an example of the impact of efficient mining machines, let's look at the Bitmain S19 series, released between May 2020 and July 2022. These machines are currently dominating the market due to their impressive efficiency gains.

Cutting-Edge 7nm Technology: The S19 series utilizes cutting-edge 7nm chip technology, achieving industry-leading hashrates while minimizing energy consumption. This translates to significant cost savings on electricity, a major factor in miner profitability.
Benchmark Efficiency: The S19 boasts models like the S19 XP, reaching a staggering 140TH/s hashrate at a remarkably low power consumption of 21.5J/TH. This exemplifies how efficient miners can maintain high performance even with a reduction in block rewards post-halving.
Overclocking Capabilities: For miners seeking to squeeze even more performance, the S19 series offers advanced overclocking firmware. This allows for further optimization of hashrate depending on individual needs and risk tolerance.

The widespread adoption of machines like the Bitmain S19 series demonstrates the mining industry's shift towards efficiency. These advancements can significantly buffer the profitability hit caused by the halving and potentially allow miners to maintain operations through the post-halving adjustment period.

Bitmain S19 XP

Let's delve deeper into a specific model within the S19 series – the Bitmain S19 XP, released in July 2022. This machine stands out as a prime example of how efficient mining rigs can mitigate the profitability challenges of the upcoming halving.

Impressive Hash Rate & Power Consumption: The S19 XP boasts a 140 TH/s hashrate while keeping power consumption remarkably low at 3010W. This translates to an efficiency rating of 22 J/Th, making it one of the most efficient miners on the market. This translates to significant cost savings on electricity, a crucial factor for miners, especially after the halving reduces block rewards.
5nm Chip Technology: The S19 XP utilizes a cutting-edge 5nm chip, further contributing to its exceptional efficiency. Compared to previous generation machines, this translates to more hashrate per watt consumed, allowing miners to maintain profitability even with a reduced income stream.

Overclocking Potential: While the focus here is efficiency, the S19 XP also offers advanced overclocking firmware. This allows experienced miners to potentially squeeze even more hashrate out of the machine, but it's important to remember that overclocking increases power consumption and heat generation.
Other Specifications: For reference, the S19 XP features standard connectivity options like Ethernet and operates within a temperature range of 5-45°C with a noise level of 75db.

The Bitmain S19 XP exemplifies how advancements in mining hardware can significantly impact profitability during the post-halving period. Its impressive efficiency allows miners to maintain operations and potentially even reinvest profits into future upgrades, further solidifying their position in the network.

While the S19 XP boasts an estimated income of $5,200 annually under ideal conditions, electricity costs are a significant factor. Assuming an electricity rate of $0.06 per kWh, the estimated yearly electricity expenses for the S19 XP would be around $1,600. Factoring in these costs, the S19 XP's estimated annual profit falls to around $3,600.

A recent profitability analysis by the well-respected Blockware Solutions team highlights the impressive efficiency of the Bitmain S19 XP miner. The table below compares the profitability of various ASIC miners before and after the upcoming Bitcoin halving, considering both machine specs and electricity costs.

Currently, most ASIC miners remain profitable, apart from the older S9 series. However, the post-halving picture changes. Notably, the S19 XP is projected to remain profitable even under the assumption of the halving happening at current Bitcoin prices, even with relatively high electricity costs of $0.09 per kWh. This underlines the S19 XP's exceptional efficiency and its potential to weather the profitability challenges introduced by the halving.

C. Ordinals, BRC20s, Taproot Wizards

Bitcoin's transformation from simply a digital currency is well underway. A thriving "new building culture" is unlocking a wave of functionalities, expanding its potential use cases. Here's a look at three key examples and how they're already contributing to increased demand and network activity:

Ordinals: Forget just sending bitcoins; now you can attach unique data like images or text directly onto individual bitcoins. Ordinals are making waves, essentially turning bitcoins into "digital artifacts" with potentially collectible value. This is attracting collectors and artists to the Bitcoin ecosystem, driving demand for specific bitcoins with unique Ordinals inscribed on them. The increased demand for these bitcoins translates to higher overall transaction fees, boosting network activity.
BRC20s: Inspired by Ethereum's ERC-20 token standard, BRC20s are already allowing developers to create new tokens on top of the Bitcoin blockchain. These tokens represent a variety of assets, from loyalty points and in-game items to even stablecoins pegged to real-world currencies. This wider range of use cases for Bitcoin is attracting new users and developers, leading to increased network traffic and transaction fees.
Taproot Wizards (and similar projects): Taproot, a recent upgrade to Bitcoin, opened doors for more advanced smart contracts. Projects like Taproot Wizards are already showcasing this potential by creating intricate, on-chain games or interactive experiences directly on the Bitcoin blockchain. These innovative uses of Taproot are sparking further development of decentralized applications (dApps) built on Bitcoin, attracting a new wave of users, and increasing network activity.

The impact of these innovations is undeniable. By offering functionalities beyond just a store of value, Ordinals, BRC20s, Taproot Wizards, and similar projects are contributing to:

Increased demand for Bitcoin: New use cases are attracting a broader range of users and collectors, potentially driving up the price of Bitcoin.
Enhanced network activity: More transactions due to Ordinal inscriptions, token transfers, and dApp usage are leading to higher transaction fees and increased network utilization.
A more vibrant ecosystem: A wider range of functionalities is attracting developers and entrepreneurs, fostering innovation and further development within the Bitcoin ecosystem.

The popularity of Ordinals is evident. Over 60 million digital inscriptions have already been minted directly on the Bitcoin blockchain, generating over $400 million in fees.

While Ordinals initially focused on inscriptions like images (think NFT-like Taproot Wizards), text inscriptions are now more common, potentially representing BRC20 tokens.

III. Counterarguments and Considerations

While the unique factors discussed suggest this halving might be different, it's important to acknowledge some potential counterarguments:

Overall Market Conditions: The broader market sentiment can significantly impact Bitcoin's price. Even with the factors mentioned, a bearish market trend could dampen the positive effects of the halving. The cryptocurrency market is still young and susceptible to volatility. External economic factors or crises could also influence investor sentiment and lead to a decrease in demand for Bitcoin, regardless of the halving.
Regulatory Changes: Stringent regulations or government crackdowns on cryptocurrencies could hinder Bitcoin's adoption and price growth, regardless of the halving. Governments around the world are still grappling with how to regulate cryptocurrencies, and stricter regulations could limit their accessibility and use.
Unforeseen Events: Unforeseen events, like major security breaches or economic crises, could disrupt the entire cryptocurrency market, impacting Bitcoin's price trajectory. The cryptocurrency market is still evolving and faces security risks. A major hack on a cryptocurrency exchange or a significant global economic downturn could erode investor confidence and lead to a sell-off of Bitcoin.

It's crucial to consider these potential challenges alongside the factors suggesting a different outcome for this halving. While the unique aspects like ETF inflows and a booming new building culture create a promising scenario, recognizing the influence of external market forces and potential regulatory hurdles is essential for a balanced perspective.

IV. Conclusion

The 2024 Bitcoin halving is poised to be a landmark event. While past halvings have demonstrably impacted price, this one presents a unique confluence of factors that could significantly alter its trajectory.

Key Takeaways:

The introduction of Bitcoin ETFs opens a new avenue for institutional investment, potentially creating sustained buying pressure.
Advancements in mining technology and well-capitalized miners suggest continued network activity despite the reward reduction.
The emergence of Ordinals, BRC20s, Taproot Wizards, and similar innovations is fostering a "new building culture," expanding Bitcoin's use cases beyond just a store of value.

These factors, combined with a maturing market, paint a distinct picture compared to previous halvings. The potential for increased demand due to ETF inflows and a more diverse ecosystem fueled by the "new building culture" suggests a scenario where the price impact of the halving might be more pronounced and sustained.

The 2024 halving has the potential to be a watershed moment for Bitcoin. If it successfully navigates potential counterarguments like broader market conditions, regulations, and unforeseen events, it could usher in a new era of wider adoption, innovation, and potentially, a more stable and valuable future for Bitcoin.