On-Chain Analysis of Bitcoin Post-Halving
Bitcoin’s much-anticipated third halving took place a month ago. While this reduction in mining rewards is mostly regarded as a potential catalyst for upwards price action, it also has strong implications in Bitcoin’s blockchain itself. Leveraging blockchain’s transparent nature, IntoTheBlock extracts key indicators that paint a clear picture of what happened following the halving and highlight trends that may point towards what’s to come for Bitcoin in the following years.

In this piece we will cover the impact the halving has had on miners and its implications on the Bitcoin blockchain’s security. As well, we dive deep into patterns of accumulation among Bitcoin holders and a wave of new money entering the market. Ultimately, on-chain indicators suggest positive developments in Bitcoin in light of favorable macroeconomic conditions.

Impact on Mining & Blockchain Security

One of the most obvious consequences of the reward halving is its first-order effect on miners. Recall that in Bitcoin’s proof-of-work (PoW) consensus, miners are awarded with a block reward for solving complex algorithmic problems that validate transactions. Well, during the halving, the block reward dropped from 12.5 BTC to 6.25 BTC per block (on average every 10 minutes). Since Bitcoin’s price has been relatively steady since the halving, this resulted in miners’ revenues dropping approximately by half, thus making many smaller miners unprofitable.

As miners started to lose money, Bitcoin’s hash rate — a measure of the aggregate processing power of Bitcoin miners — dropped by 40% within a week of the halving. This made the Bitcoin blockchain less secure, as at this point a potential hacker could have attempted to commit a 51% attack with less processing power, making it less costly to attack.

Fortunately, though, Bitcoin’s PoW has a system in place preventing the network vulnerable in these scenarios: the mining difficulty. The mining difficulty, as the name suggests, represents the degree of complexity that it takes to mine a Bitcoin block. The difficulty level adjusts every 2,016 blocks — approximately every two weeks — to incentivize the supply of miners to adjust such that the average Bitcoin block is produced every 10 minutes. Essentially, if there are not enough miners, the average time to solve PoW’s algorithmic problem increases above the 10 minute threshold, therefore triggering a mining difficulty decrease to incentivize miners to return to the desired level. The opposite is also true.

The former of these two scenarios is what happened on the Bitcoin blockchain following the halving: the mining difficulty decreased 9.29% in order to increase block production back to the desired level. This was the second highest percentage change in the mining difficulty all year behind the one occurring after the volatile period in March, dubbed Black Thursday. The changes in mining difficulty are shown below:

Going back to Bitcoin’s hash rate, the difficulty adjustment also had a direct impact on this important metric. By making it easier to mine Bitcoin, it also became less costly for miners to participate in the consensus process. Therefore, this incentivized more miners to join the network, increasing the aggregate hash power securing the blockchain while keeping decreasing the time to validate a transaction block. As can be seen below the hash rate spiked back to 133 terahashes/second, just shy of its all-time high of 137TH/s achieved on March 1st.

New Addresses Increasing While Existing Buy the Dip

While hash rate is performing slightly below the levels achieved in March of this year, other blockchain indicators are at yearly highs. For instance, the average daily number of new addresses being created is currently at a level not seen since the 2017 bubble, a sign of interest in Bitcoin and adoption picking up following the halving.

As can be seen in the graph above the number of new addresses created is approaching 500k a day. Currently at a weekly average of 475k addresses created daily, this surpasses the 452k new addresses being created in late June 2019 when prices reached over $13,000 per Bitcoin. It is important to note, though, that one address does not equal one user. In many cases one user has multiple addresses spreading their Bitcoin across wallets, but at the same time cryptocurrency exchanges tend to hold multiple users’ Bitcoin in one address. Therefore, it can still be used as a proxy of new investors entering the market.

By using IntoTheBlock’s Historical In/Out of The Money (HIOM) indicator we can track how Bitcoin investors are positioning themselves through time. The HIOM estimates the number of users that are “in the money”, or making profits on their Bitcoin positions by calculating an address’s average cost and aggregating the total. Moreover, by comparing variations in the HIOM over time we can determine buying/selling activity based on the number of addresses profiting at a specific price level.

At the time of writing, Bitcoin sits at around $9,760. The last time Bitcoin held around this level for a prolonged period was in February of this year, preceding the 30% sell-off incurred in March. At that moment, 21.5 million addresses (73.5%) were in the money while 5.6 million (19%) were losing money on their positions. As panic regarding the coronavirus pandemic hit the markets prices collapsed but have since recovered.

If we compare the Historical In/Out of the Money today versus what we saw in February, we observe that new addresses have been buying and existing ones accumulating at lower prices. In the graph below we can see how the number of Bitcoin addresses in the money at a price of $9,760 increased by 2.7 million within less than four months:

This large difference in addresses profiting from their Bitcoin positions at approximately the same price points to the fact that holders bought at lower prices, thus driving their average cost down below $9,760. By comparing the number of addresses holding Bitcoin we can confirm this:

As can be seen in the graph above, the total number of addresses with a positive balance of Bitcoin grew less than a million during the same time period. Since this is less than the 2.7 million additional addresses profiting at current prices, it is evident that addresses continue to follow the Bitcoin mantra of buying the dip.

Macroeconomic Factors & Final Thoughts

In addition to the positive indicators developing on-chain, macroeconomic factors are also increasing the appeal of Bitcoin to institutional investors. With the federal reserve announcing that they do not plan on hiking rates above 0% until at least 2022, Bitcoin’s potential to act as a hedge for inflation has enticed wall street heavy-weights such as Paul Tudor Jones to invest in the top cryptocurrency.

Overall, the Bitcoin halving has had several effects on the underlying blockchain. While most people were aware of the decreases in mining revenue, the second and third order effects resulting from this event highlight the robustness of the Bitcoin blockchain. By comparing the state of key on-chain indicators a few months prior to the halving versus today, we can determine that new investors are buying Bitcoin while existing ones have been buying at lower levels.

All of this, along with supportive macroeconomic conditions, demonstrate the positive developments in Bitcoin following the anticipated halving. While this does not guarantee price will increase right away, it certainly points to strengthening fundamentals in Bitcoin’s underlying network.
['Lucas Outumuro']
['Blockchain', 'Technology', 'Cryptocurrency', 'Data Science', 'Bitcoin']