Academy Industry Analysis Article

OKEx Academy Talks Recap: Bitcoin Halving


The term Bitcoin Halving search volume rockets and the date approaches, what exactly will happen before, during and after the Bitcoin halving? OKEx Academy has put together an online Webinar with very special guests to share their insights on this topic under the spotlight, this article will guide you through the recap of the discussion. 

Guest Speakers:

Avaneesh Acquilla – CIO at Arrano Capital

Jason Choi – Head of Research at Spartan

Willy Woo – Woobull


Lennix Lai – Director of Financial Markets at OKEx

Lennix: Before we access the trading opportunities in relation to this halving event, I would like to ask Jason, recently we published a date-driven article pinpointing that historically, bitcoin or the other major PoW-token, would likely to have a pretty good bull-run before the actual halving occurrence and gradually depreciate afterward. Do you think there is a solid fundamental reason or rationale behind?

Jason:  I have a few theories around that but I think it’s important to caveat first, the having is an important event and that in highlights the programmatic scarcity of something like Bitcoin which is what gives it the characteristics that are valid in store value assets historically, but at the same time I am kind of hesitate towards just isolating it as a variable. The average return of Bitcoin over its lifetime is not really meaningfully different if you deploy, you know right after the two happenings on a three months or one year horizon.It’s also important to remember that the halving occurred during the longest bull market in kind of traditional risk assets. For us, we tend to look at the longer term impact of what it means for supply to reduce. And since the supply schedule is known, we tend to focus more on the demand side. 

I think one interesting case study is the fact that halving could have a short term impact on price, could be because it has been medic value right so we saw this in 2019 with something like Litecoin where I think price went up, about 500% in 200 days, and then gave up all of the gains, basically gave up 40% in the 30 to 40 days leading up to the halving before giving up more. 

So I think that to me, it suggests that people were trying to front run the halving event, and it became a self fulfilling prophecy, as more people speculated and tried to focus on each other. Price actually gave out before the haven’t even occurred, so the fundamental case hasn’t even played out there. How it’s going to be different for Bitcoin I think that demand is not going to be as transient, I think it’s a much more interesting setup for Bitcoin. 

I was looking at the demand side factors leading into this having and beyond,  looking at retail front first, I think things like social media volume and search volume for halving is almost at all time highs right now, compared to the last peak in July, 2016, we’re almost five times as many people interested in what halving is. In terms of stable coins on exchanges we have billions of dollars on the sidelines right now which may or may not be deployed,  and if they aren’t deployed I think Bitcoin is likely going to be the prime beneficiary as the most liquid pair, and on the awareness front compared to the last having is also a lot better in that in the last half of 2016. Bitcoin was very much still known as a transaction for illicit activities on the internet, whereas this time around, we have almost an arms race between two geopolitical powers. We have China coming up with DCEP, we have the US coming up with Libra, so blockchain in that FUD becomes more legitimized and less stigmatized for retail investors. 

I think we’ve recently reached all time high levels, and we’ve seen evidence in the past six months that miners have been accumulating significant amounts of their block boards as well. So that to us, indicates that there are signs of accumulation leading into this happening.

Long story short, I think that the fundamental case for supply reduction is that it’s an illustration of what makes something like Bitcoin a unique asset but I do think that demand side fundamentals probably matter more in this case, leading into halving and beyond are quite positive for Bitcoin.

Lennix: The market has two opposing viewpoints, majority from two main camps. The first camp argues the event is already priced in; the second believes the Halving is not priced in and will ignite the next bull market cycle. Proponents of the first cite the efficient market hypothesis, whereas advocates of the second point to supply/demand mechanics as well as the previous Halving market cycles.

Do you think the bitcoin market right now is just as efficient as in the stock market to adopt the classical market hypothesis? Or do you think the change of supply-demand in Halving would benefit the Bitcoin price?

Avaneesh: I think there are a number of factors at play here. The market is more efficient in the sense that the information is more widely available. There’s really a widespread understanding about Bitcoin and about the event, and I think ultimately when you have that dissemination of information, there’s always going to be a bit of pre-positioning. By the same token we have heard about smaller miners selling into this event so that can balance the market out in terms of current demand and supply. The one thing we know is that the demand and supply equation becomes more attractive after the halving so I personally think providing the global liquidity environment favorably we have a better chance of seeing the price advance in the second half of the year.

Lennix: Speaking of supply-demand of bitcoin, I checked out Willy’s Bitcoin Miners’ Energy ratio – the ratio between bitcoin market cap vs its energy consumption. Could you explain the correlation between bitcoin price and energy consumption? Do you think the energy costs of miners is the major factor in determining the bitcoin price?

Willy: Mining has a strong influence on the Bitcoin price bottom, what the miners represent is essentially what the bottom price range is. It’s supply side economics. When the price to energy ratio starts dropping to historical lows it means many miners will have gone out of business, leaving the strongest, most efficient miners, these miners will not sell during this period.                          Why would you? The weak miners have been liquidated, their sell pressure is gone, thus the price is ready to move up. The strong miners will sell minimally at this stage, and will HODL as much as possible, reducing the sell pressure on the market.

Lennix: Halving by the principal is an economic incentive to miners by programmatically cutting the expectation of supply and in theory, after an exact 32 halving events, the bitcoin network would be sufficiently sustained solely by transaction fees – hence no block reward is required.

Do you think the halving model in bitcoin – which is a complete contrary of fiat currency – would more likely to (BY DESIGN) encourage investing rather spending?

If that’s true, bitcoin is a form of digital collectibles or digital gold, do you think bitcoin has ALREADY proven to be a good alternative instrument for hedging macro events similar with gold?

Willy: BTC mimics gold, in that it’s designed to be scarce, anything that is scarce can be a good store of value, its design lends itself to storage of value, therefore investing. It’s far from proven as a hedge for macro,  it’s theoretically a hedge in it’s design, there’s strong metrics around it being less correlated to other macro. I think it needs more time to be proven, we need to actually see it behave before more people will trust in that behaviour. For example a war time safe haven, or a monetary collapse hedge. Also not  to be forgotten is how small it is, it really needs a $1T market cap before it begins to be useful for mainstream markets. Ideally $10T, the rough size of Gold.

Avaneesh: I think Bitcoin by its design is more suitable as a store of value than a payments solution. The stock to flow arguments capture how the scarcity can be compared to gold and silver. It already has many properties that are advantageous versus gold like portability and divisibility but gold has been around for thousands of years so people trust it. At the moment, people are just getting comfortable with bitcoin so naturally it will take time for that trust to build – once it is there it certainly can be an alternative investment to gold.

Lennix: We are stepping into an era where QE is infinite, and rich-world public debt is hitting 66trn, or 122% of GDP by year-end. Textbooks tell us that an uncontrolled money printing would lead to hyperinflation. And CB at one time had to pay off their debt by drastically deleveraging and raising their tax – but there would be political difficulties in doing esp amongst the rich-world.

Do you think the unbridled QEs would eventually lead us to hyperinflation – which gives us more reason to buy bitcoin? Or do you think the government is somehow able to keep inflation in check while at the same time maintain such a huge budget deficit?

Willy: It’s easy to say if we print money to infinity we will go to hyperinflation. My experience in markets is that second order effects are not to be discounted. The situation we are in is unique in that the whole world is printing money at the same time at a time when the global economy is at its height of interconnectedness, where previous studies were very isolated to a single country. We’ve also never seen the global  reserve currency as pure fiat, we are in uncharted territory and my personal view is that it’s dangerous to draw immediate and simplistic conclusions of: print money then we get hyperinflation. Sure that will likely happen, but it will take many many years, maybe a decade or more to play out, navigating that is in the nuances and those nuances will be important. 

If I was to zoom out, this is a reset of the long term debt cycle. Happens every 70-100 years, that reset usually comes with a new global currency, essentially a new agreement of what money is. The last reset was USD taking over GBP after WWII, history shows this transition will take decades. 

Do I think buying Bitcoin is a good idea in these times, well hell yes. It’s a hedge, it’s decentralised, it’s non confiscatable, it’s digital and we are in a digital age, and the boomer generation that loved gold as that hedge in similar economic circumstances will pass before this transition is done, leaving the generations who are comfortable with the digital age and therefore Bitcoin.

Jason: I think some people in crypto tend to have a pretty simplistic view of money printing and hyperinflation that once QE happens we’re going to see a sudden implosion of the dollar, money’s going to not mean anything. But as Willy pointed out right in 2008, and many people peddle the same narratives back then, they were saying we’re going to see hyperinflation in US after QE but inflation has consistently undershot expectations and CPI remained low.

And I think that’s because people have this kind of reductive view of what money printing actually is. And we all studied money multiplier economics so the only way for the monetary base to flow in the economy is if it translates into one into real money for banks to increase lending commensurately,  I’m not sure that’s happening immediately. I don’t think it’s my edge to kind of predict when hyperinflation may or may not happen. I think I always default back to the demand side. What’s the evidence telling us? The evidence is saying that there is a lot of demand for stable coins recently, especially in Asian OTC desk, the aggregate market cap of all stable coins USD denominated stable coins has reached $9 billion, so that signals to certain extent, the wider demand for dollars that we’re seeing now as to whether that’s going to be deployed into Bitcoin, into crypto I think that’s another question, but it presents a pretty nice setup in that you have 9 billion, you have billions of dollars of stable coins on exchanges, you have all of these demand side factors that I mentioned towards the beginning of this panel. 

We have this kind of narrative around the halving also happening at the same time, so I think it presents a pretty good entry point for crypto, but as to whether hyperinflation will be the immediate catalyst for the adoption of Bitcoin. I personally don’t think so. I don’t think it’s going to happen, even if it happens it’s not going to be a thing that happens you know next week or next month.

Avaneesh: There is a strong argument that QE and fiscal stimulus policies are having less and less of an impact on the real economy. We have seen such policies in the US and the gains to productivity and GDP growth are becoming increasingly limited. One consequence that can be seen is the impact on asset prices, so we have an economy that is struggling and headline inflation rates that are low at the same time as asset prices are going up. In the near term I think we will struggle with deflation for some time but the risk after this is probably stagflation rather than hyperinflation in my opinion.