Half the buff boost, more bitcoin transfers into hibernation.

50% Reduction in Buff Boost Means Boosted Bitcoin Transfers Shift to Hibernation

Source: Daheng Think Tank

Summary

• The fourth Bitcoin halving is approaching. As this moment draws near, the scarcity of Bitcoin in the market has reached an all-time high.

• We have extensively evaluated various indicators of “available supply” of Bitcoin in the market, as well as the “supply-hold ratio” of long-term investors. These indicators exceed 200% of the new issuance amount.

• By comparing the relationship between market capitalization and realized market capitalization, we estimate that the capital influx into the Bitcoin market caused by supply scarcity will have a profound impact on the valuation of the entire Bitcoin market.

  • Binance Japan Expands Its Crypto Playground with 13 New Exciting Crypto Pairs!
  • Bitcoin’s Rollercoaster Ride Continues: Yo-Yoing Towards the Abyss
  • German Parliament Member Wants to Bring Bitcoin into the Legislative Fold as Legal Tender

Dynamics Assessment of the Fourth Bitcoin Halving in 2024

The halving of mining rewards is one of the most important milestones in the development of Bitcoin. It occurs after every 210,000 blocks have been mined and reduces the output thereafter. According to the logic of Bitcoin’s operation, the fourth halving should occur when the block height reaches 840,000. However, due to the influence of certain probability factors on block generation, as well as natural changes affecting the blocks themselves, the exact timing of the fourth halving is still unknown.

Considering the current average block speed, the most accurate estimate we can make is that the fourth halving is expected to occur on April 23, 2024, which is still 158 days away from the current time.

Figure 1: Bitcoin is approximately 158 days away from the next halving.

Given the high cost of mining and high operational expenses, Bitcoin miners need to use most of their gross income to pay for mining costs. So far, the monthly value of newly mined bitcoins by miners reached a peak of $1 billion throughout the year 2023. This high cost has a significant hindrance effect on capital inflow into the Bitcoin market (as miners tend to hold the bitcoins they mine rather than sell them to the market at the current price).

After the halving, this number will be reduced to $500 million per month, which is roughly equivalent to the selling pressure near $450 million per month in the vicinity of FTX a year ago.

Figure 2: Monthly new mined bitcoins and their market value (in USD).

In addition to the fascinating technological charm demonstrated by the halving of Bitcoin, its profound impact on the market is also a point of interest for investors. The market performance in the year after each previous halving has been impressive.

The market’s response to the halving of Bitcoin has sparked curiosity, whether the halving is the main factor that triggers a cycle of price increase or if it is simply one of the many factors driving the price up. In this article, we will explore this question from the perspectives of Bitcoin’s market supply and investor behavior patterns and hope to provide more corroborating evidence from an on-chain perspective.

In this article, we will break down our analysis of this issue into three different levels:

1. Evaluating the “available and active” supply of Bitcoin in the market

2. Discussing the “supply store and savings rate” of Bitcoin

3. Analyzing the impact of capital flow on the valuation of the Bitcoin market

Figure 3: Market changes within the 365-day cycle after the Bitcoin halving

Evaluation of the available supply of Bitcoin

Our first objective is to estimate the amount of Bitcoin that is liquid, active, and freely circulating. In other words, how much supply can investors reasonably expect to be available for trading in the short term?

In the chart below, we can see several heuristic approaches to Bitcoin supply that primarily consider the “Bitcoin age” as a key parameter. These methods calculate the time interval since the last on-chain Bitcoin transaction. The supply from short-term investors is currently 2.33 million Bitcoins, which is a historical low over the years. It should be noted that the “short-term supply of Bitcoin” in this statistic refers to Bitcoins that have been traded within 155 days.

Another data that depicts this “hot supply” (i.e., recently spent Bitcoins) is the number of Bitcoins with an “age” of less than one month, which amounts to 1.39 million Bitcoins. From this perspective, we can also consider the open interest of futures contracts (approximately 410,000 Bitcoins) as part of the Bitcoin supply in the derivative market.

In summary, this “hot supply” represents approximately 5% to 10% of the circulating supply involved in daily transactions.

Figure 4: “Active supply” of Bitcoin

To study the supply of Bitcoin, we will mainly focus on Bitcoin wallets. By considering the spending behavior of Bitcoin wallets and categorizing them into “non-liquid buckets,” “liquid buckets,” and “highly liquid buckets,” we can observe their relative activity levels as shown in the graph below.

It is worth noting that these indicators have experienced a continuous decline since March 2020, primarily due to the impact of the special period and the widespread social effects on the Bitcoin market.

Figure 5: Liquidity and non-liquidity supply of Bitcoin

We can see a significant overlap between liquidity, highly liquid supply, and exchange balances. This multi-year decreasing trend of overlap indicates that Bitcoin is shifting from exchange wallets to non-liquid wallets with almost no transaction history.

Figure 6: Bitcoin Transaction Balances (Overlay Chart)

One subtle difference to note is the role of institutional custodians versus ETF types of products such as GBTC (a useful reference tool for future spot ETF products). The graph below shows our best estimate of the total transaction volume on the Coinbase platform, Coinbase Custody, and the GBTC cluster chain.

We should note the turning point in March 2020 depicted in the graph, when there was a significant increase in demand for GBTC and custodial products, which are generally categorized as illiquid supply of Bitcoin.

Figure 7: Trading activity of GBTC and custodial products

If we compare the amount of Bitcoin held by short-term investors to the balance on the trading platforms, we can see that they are similar, around 2.3 million bitcoins. The combined “available supply” of these two amounts is equivalent to 23.8% of the circulating supply, which is currently at its historically lowest level.

It can be said that the available supply of Bitcoin is relatively at an all-time low.

Figure 8: Available supply of Bitcoin held by short-term investors and total balance on trading platforms

Analysis on Saving and Holding Supply

One thing we can be sure of is that various indicators of “available supply” are declining in the Bitcoin market. In fact, this declining trend has been going on for several years, but it has significantly accelerated since the massive sell-off caused by the 3AC and LUNA-UST crash in June 2022.

Figure 9: Liquidity supply of Bitcoin vs supply from long-term investors

On the other hand, when we observe the inverse indicators of “saving and holding” together, we can see a significant gap forming. Here, we focus on the “storage supply”:

• Supply from long-term investors (Bitcoin supply with an “age” of over 155 days, represented by the dark blue line)

• Liquidity supply (wallets with very limited spending history, represented by the light blue line)

• Custodial supply (Bitcoin supply held for an extremely long time and lost, represented by the green line)

This difference is meaningful because it indicates that Bitcoin is moving away from the trading platforms, speculators, and active trading, and shifting towards cold storage of long-term investors, custodial products, and wallets.

Figure 10: Liquidity supply of Bitcoin vs supply from long-term investors

To understand the scale of this portion of Bitcoin supply, we can compare the storing and saving rate of Bitcoin relative to the newly mined portion. Currently, around 81,000 bitcoins are mined per quarter, which will be reduced to 40,500 after the halving.

Figure 11: Cyclical supply changes of Bitcoin within a 90-day period

If we analyze the changes in illiquid supply using the overlay method within a 90-day period, we can see that during all previous halving events, the illiquid balance of Bitcoin continued to rise. This indicates that the number of buying investors tends to increase significantly before and during the halving, with a growth rate that far exceeds the issuance rate before and after the halving of Bitcoin.

The illiquid supply is currently growing at a rate of 180,000 BTC per quarter, which is 2.2 times the issuance rate.

Figure 12: Comparison of illiquid supply and mining volume within a 90-day period

From the perspective of “investor holding time,” we can see a similar accumulation pattern between long-term holders (blue) and treasury supply (green). Interestingly, this investor behavior seems to occur in three waves:

1. The first wave occurs in the middle of a bear market when prices experience a significant pullback from all-time highs

2. The second wave occurs in the later stages of a bear market when the market has essentially completed the bottoming process

3. The third wave spans the entire halving period and involves a significant influx of expected investors

Figure 13: Comparison of storage volume for long-term holders and mining volume

The accumulation rate can also be assessed using wallet sizes as a starting point. The following chart includes users with assets in wallets holding fewer than 100 bitcoins. These accounts, ranging from small retail investors to high-net-worth individuals, include shrimp (<1 BTC), crab (1-10 BTC), and fish (10-100 BTC) holders.

Overall, since February 2022, the cumulative rate of these users has exceeded the new issuance of Bitcoin. This period has already set the longest duration on record and continues to refresh this record over time.

Figure 14: Comparison between balance changes of accounts from shrimp to fish and Bitcoin issuance

In summary, the following chart displays the net balance changes of various “storage” supply indicators since January 1, 2022. We use the changes in circulating supply (orange) as a reference and find that the accumulation rate of investors ranges from 1.1 times to nearly 2.5 times the new issuance rate.

Not only is our “available supply” indicator at a historical low, but investors’ “supply storage” rate is also significantly higher than the issuance rate before the halving. The cyclical nature of the Bitcoin market during bear markets and halving events can be described by these investor accumulation patterns, reminding us of the saying in the market: Bear markets create subsequent bull markets (and vice versa).

Figure 15: “Storage” supply situation under multiple indicators since January 1, 2022.

Analysis of the changes in capital waves

In recent analysis reports, we have focused on the capital rotation in the entire digital asset ecosystem. In previous reports, we used realized market cap as a representative parameter for capital inflow, outflow, and rotation.

From a behavioral perspective, long-term Bitcoin investors tend to buy low and sell high, a process that revalues Bitcoin’s low-cost basis to a higher cost basis. For example, Bitcoin purchased for $6,000 in 2018 can be sold for $60,000 in 2021. For the buyer, the purchase in 2021 required an additional 900% capital inflow compared to before.

Another important conclusion is that although the current storage supply is increasing, the opposite situation can also occur. As shown in the graph below: when investors complete their profit-seeking trades by buying low and selling high, their storage supply is reactivated and reinvested into the liquidity cycle.

Figure 16: Components of realized market cap – realized profit

In this framework, we can analyze the inflow/outflow of capital required to cause a $1 market cap change per $1 of Bitcoin market value fluctuation.

The last indicator we are discussing today – liquidity indicator, or volatility indicator, has also been mentioned in our recent analysis. It describes the magnitude of changes in realized market cap needed to generate a $1 total market value change in the Bitcoin market. Under this indicator, we notice some interesting details:

• In the late bull market (orange area in the figure below), capital inflow of more than $0.75 (usually more than $1.0) is required to achieve a $1.0 market value change. It turns out that this is an unsustainable condition.

• During a bear market, with capital and investor attention loss, this price may drop to between $0.10 and $0.30. This will lead to more intense price fluctuations, as even small amounts of capital inflow or outflow can have a huge impact.

The median of this indicator (red line in the figure below) has remained close to $0.25 in the long term, indicating that both Bitcoin’s supply and liquidity are relatively tight – because most of the time, a $0.25 capital inflow/outflow will cause a $1.0 market value change. In many ways, this is consistent with the supply dynamics discussed above, where “available supply” is at historically low levels, and the increasing storage rate will continue to deteriorate market liquidity.

Figure 17: Capital inflows and the proportion of total market value fluctuations they cause

Summary

The fourth halving of Bitcoin is imminent, which is an important milestone in terms of fundamentals, technology, and ideology. Given the well-known return on investment in previous cycles, this will still be an exciting field for investors.

In this article, we have used various supply-side indicators to discuss the tension faced by the supply side of the Bitcoin market. There is significant consistency among these indicators, proving that the “available supply” in the current market is still at historic lows, and the “supply storage ratio” is far more than 2.4 times the current Bitcoin mining rate.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!