The Bitcoin halving is upon us : now what?

What happened

The long-awaited Bitcoin halving will happen in a few hours, overnight between 19 and 20 April 2024. This event will reduce the reward for mining a new block on the Bitcoin blockchain from 6.25 Bitcoins (BTC) to 3.125 BTC

Occurring every 210,000 blocks—or roughly every four years, the halving is a core mechanism of the Bitcoin protocol, designed to control the inflation of Bitcoin by reducing the rate at which new coins are created. The protocol also adjusts mining difficulty based on the network's total computing power, ensuring that blocks continue to be mined every ~10 minutes.

While there are currently about 19.68mn BTC in circulation, it will take another ~115 years to reach the maximum supply of 21mn BTC hard cap, due to this declining new supply.

Impact on our Investment Case

Putting the halving in perspective

The halving is an essential component of Bitcoin tokenomics and impacts the long-term additional supply of the coin. According to basic economic principles, a reduction in supply with sustained demand generally leads to higher prices. However, it's essential to contextualize the significance of this halving event within the broader financial landscape.

With approximately 19.68 million BTC currently in circulation, the reduction from 900 to 450 newly issued BTC per day might seem minor. This change represents less than 1% of Bitcoin's daily trading volume, which has recently exceeded $50 billion. The impact of the halving was likely much more important in 2012 or 2016 when supply was lower and traded volumes thinner.

In summary, each halving has longstanding positive consequences, reducing the new supply. But in the very short-term, the Bitcoin moves will likely depend on a number of other factors, such as the flows from and to the crypto exchanges, the activity on the derivative markets, the demand for the U.S. Bitcoin ETFs, etc.

So why do we care about the halving?

Bitcoin – and the crypto industry by extension, seems to repeat a cycle of ~4 years. In each previous cycle, the halving happened during the same phase of the bull market which continued for several quarters after the halving.

Beyond the supply impact, each halving benefits from a lot of media coverage. It revives the enthusiasm in the crypto ecosystem.

History tends to rhyme with itself. With a rich pipeline of developments on the other protocols (e.g., the first tokenization of a mutual fund by Blackrock) and better regulatory clarity in the United States expected sooner or later, it should not be different this time.

Moreover, we should note that the U.S. Bitcoin ETFs have lately had a significant impact on the demand. The flows from these structures represent >$12bn of net new money into the ecosystem. As each institutional investor in the United States must now asses if and how this “new” asset class fits into its asset allocation, we expect these flows to be sustained.

The bull market should continue post-halving.

Are Bitcoin miners doomed?

The majority of the revenue of Bitcoin miners comes from… Bitcoin mining! With the halving, these firms will lose up to 50% of their income. We indeed wrote “up to”, as we expect the difficulty on the network to go slightly down after the halving as older and inefficient mining chips will be turned off after the mining.

For example, at a Bitcoin price of $60’000, some miners were able to reenergize the machines of 2019, that were used before the 2020 halving. Such hardware will not be profitable anymore next week.

A new generation of chips, much more efficient in terms of energy consumption, is being deployed by the largest miners. The institutionalization of the mining activity is expected to continue. While listed miners currently have a market share of ~20-25% of the total network, we expect it to increase.

Listed miners are ready for the next phase. Some have not hesitated to dilute existing shareholders to fund expansion plans, which largely explains their sluggish performance on a year-to-date basis.

Not all miners will survive after the halving. But this will represent opportunities for the remaining miners. Marathon Digital and Riot Platforms have accumulated war chests of $1.6bn and 1.3bn in cash and Bitcoins, which will be deployed for “strategic” opportunities – including industry consolidation.

What about the other blockchain-related stocks in general?

We can summarize our blockchain strategy in a simple rule: when cryptocurrencies rise, the revenues and the earnings of companies within our portfolio increase.

This relationship is the most straightforward for companies that hold Bitcoin on their balance sheet. New accounting rules set by the Financial Accounting Standard Board recommend to book digital assets at fair value. Many companies have adopted such a rule this year, while they previously conducted only impairment tests and hence had little to no impact on their balance sheet unless they sold their positions.

For crypto exchanges, the relationship is more indirect. The extended media coverage for the halving reconciles investors with the asset class. But as long as people trade, exchanges benefit from it – although the trading activity tends to increase when crypto prices go up.

Our Takeaway

The halving is an important event for the Bitcoin network and, by extension, the blockchain industry.

In recent times, we've observed significant variability in returns across different sub-themes within our blockchain strategy. Such intra-theme volatility underscores the importance of a diversified and actively managed approach. By spreading investments across various segments of the blockchain ecosystem, we can mitigate risks and capitalize on emerging opportunities.

Our recent strategy has benefited from an overweight position in exchanges, crypto services, and companies directly holding Bitcoin. However, the post-halving landscape presents a compelling case for re-evaluating the mining sector. At the current Bitcoin levels, no listed miners are at risk of immediate bankruptcy, and with the valuation of miners becoming increasingly attractive, as well as the likely gains of market share by the largest miners, we believe that the largest players will not only survive but thrive.