Overview

With the next bitcoin halving happening in April, historically a bullish event, investors in the U.S. and worldwide are now contemplating how to position their portfolios to maximize gains from the potential surge.

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Key Background

The halving is an automated event hardcoded into the bitcoin network. It occurs every four years (specifically, every 210,000 blocks) when the bitcoin issuance rate is slashed in half. The upcoming halving will reduce the issuance rate from $234,248.37 to $117,124.18 per block based on current prices. These reductions will happen every four years until the final bitcoin is mined in 2140.

This time around, the halving is occurring when the price of bitcoin is already rallying, and there is significant anticipation of a bitcoin spot ETF approval by the Securities and Exchange Commission by the end of the upcoming winter (there are 12 applications currently pending from blue chip firms such as BlackRock and Fidelity). Additionally, recent upgrades to the bitcoin protocol (e.g., Taproot) and the potential products and services built on scaling solutions such as Fedmint, Ark, and the Lightning Network are expected to increase bitcoin’s utility in the coming years, which could also impact price over the next cycle.

On the other hand, the next halving is coming during unprecedented and volatile economic conditions. A key variable is the highest interest rate in decades, which can harm assets such as bitcoin that do not provide yield on their own.

Key Statistic

Bitcoin's price has historically surged during each halving period, either in the halving year or two years later. Inflows from institutional capital, financial products, and a growing user base have been significant market drivers.

It's also important to note that the all-time low price in each halving period has continuously increased and has never been revisited in subsequent cycles. This applies to all ATLs from cycles H1 through H3 and is documented in the Rising Bottom Hypothesis.

Outlook and Implications

Of the factors mentioned above, the approval of a spot bitcoin ETF will likely have the most significant impact on bitcoin's post-halving price. A key reason is that bitcoin now behaves like an uncorrelated asset, as envisioned. During the pandemic, bitcoin was highly correlated with 10-year treasury yields. On the other hand, bitcoin and treasuries became highly uncorrelated when interest rates surged, and bitcoin crashed last year.

However, given endogenous cues that led to the recent bitcoin surges, such as the excitement over a spot ETF, bitcoin is starting to chart its own path. This is evidenced by the minuscule correlation between the assets, even if rates remain higher for longer.

While it is difficult to underscore how much money could flow into a spot ETF, it will not take much to move the price. The U.S. ETF market is approaching $10 trillion, while bitcoin's market capitalization is currently $700 billion. Moreover, bitcoin's average daily trading volume is about $24.874 billion. Furthermore, unlike futures ETFs that purchase contracts, a spot ETF would have to procure the assets physically.

Decision Points

Based on past performance, the best time to allocate towards bitcoin is in the months leading up to a halving, even if it may take a year or two of holding to reap the benefits. Besides, unlike the previous halvings, there is now an increasing number of financial instruments and approaches investors can leverage to capture the bitcoin price action, from directly buying bitcoin, stock in bitcoin mining companies or public companies that hold bitcoin on their balance sheet, to bitcoin ETFs.

Starting with ETFs, most bitcoin ETFs available for investors fall into either long and short ETFs, and presently serve as alternatives to a spot ETF. The long ETFs are aimed at those looking to capitalize on price appreciation, while short ETFs are for those seeking to capitalize on price drops.

As you can see in the charts below, not all ETFs are the same. When choosing an ETF, investors must compare the expense ratios, underlying holdings, contracts, AUM, liquidity, tax implications, and relative performance to the bitcoin price. It is also worth noting that some ETFs may be less appealing or impacted once the SEC approves a spot bitcoin ETF.

Additionally, some bitcoin ETFs offer supplementary or hedged exposure to bitcoin, which can benefit investors looking for different investment angles. In some cases, these ETFs have outperformed conventional bitcoin ETFs. For instance, Valkyrie's WGMI ETF, which invests in publicly traded bitcoin mining companies, has yielded over 110.78% YTD returns.

Further, at the moment, the only bitcoin mutual fund available is the Bitcoin Strategy ProFund (BTCFX). It provides exposure via bitcoin futures contracts, and investors can invest in it with a minimum of $1,000.

Apart from ETFs and mutual funds, investors can buy stocks of public companies involved in bitcoin or invest in bitcoin mining companies. In fact, despite concerns of reduced profits due to the halving, the number of bitcoin miners is increasing globally, partly due to bitcoin mining's growing role in renewable energy initiatives, energy grid stabilization, and rural electrification.

This growth can also be linked to the increased on-chain fees during this cycle—current fees (excluding block rewards) per block are ~$56,627, a significant increase of 880% from the start of the halving cycle. However, evaluating mining companies' debts is crucial. These companies are also undergoing mergers, acquisitions, and buying new mining hardware in preparation for the upcoming halving, so investors should monitor these developments to make informed decisions. For the most part, bitcoin miners tend to perform as high-beta plays on bitcoin. They can outperform the asset during bullish periods, but the opposite is true during market corrections.

Case in point, the bitcoin ecosystem isn't immune to shocks from the wider crypto space. In 2022, the largest publicly traded bitcoin miner, Core Scientific (CORZQ), filed for bankruptcy in December, partly due to unpaid debts from Celsius Network, one of its major clients, which filed for bankruptcy earlier that year. Nevertheless, in this case it is targeting a relisting on Nasdaq in January.

Finally, investors can also purchase shares in MicroStrategy, a business analytics firm currently holding the world’s largest bitcoin balance sheet and is sitting on a $1 billion profit. Grayscale also operates a private placement bitcoin fund that it is trying to convert into an ETF. Presently, those shares are available on OTC markets at a 10% discount to NAV. Looking at the overall YTD returns across these various instruments against the bitcoin price shows both Grayscale's GBTC investment trust and MicroStrategy (MSTR) outperformed bitcoin by ~131.3% and ~115.26%, respectively.

Investors who don't prioritize bitcoin in their IRA can buy it directly and self-custody or use a custodian like Anchorage Digital. Self-custody is considered a safer but more involved approach than opting for a custodian, which involves considering the custodian’s reputation, insurance and technology setup. Note that there are better buy-in strategies than Dollar-Cost Averaging, especially in a bull market.

In the run-up to each halving cycle, bitcoin-related assets and tokens tend to increase in value and are temporarily lauded as better—or equal—investments to bitcoin. Stacks' STX, with its 200% rise, Bitcoin Cash, ORDI, and Ordinals are the latest entries gaining interest due to the growing popularity of NFTs on bitcoin and the potential bitcoin spot ETFs.

However, these tokens tend not to sustain their value and growth and are typically outpaced by bitcoin (as was the case with BCH in 2020). It is, therefore, highly recommended to prioritize safer fund allocation by sticking with bitcoin.

In closing, it's worth restating that past performance doesn't guarantee future results. Bitcoin's upcoming halving may cause a sustained price drop. Investors must weigh each investment carefully and consider bitcoin in these market conditions to prepare for financial upheavals.

Further Reading

Grayscale’s Crypto Fund Discounts Extend Far Beyond Bitcoin

How Investors Should Approach Bitcoin Miners As The Halving Draws Near

You Can Buy Bitcoin At A Discount, If You Trust The SEC To Be Rational