Bitcoin in the Spotlight - The Halving, Bitcoin L2s & Bitcoin DeFi
April 12th, 2024

Bitcoin is continuing to leading the crypto markets and remains in the spotlight for global investors interested in digital currencies and alternative investments that are inflation proof. This is a short overview on my favorite Bitcoin innovations and market analysis on the upcoming Bitcoin halving. Exciting times are ahead for Bitcoin owners and I share my framework for thinking about the different opportunities within the Bitcoin ecosystem with a focus on acquiring Bitcoin over any other asset in it’s ecosystem.

Bitcoin’s Next Halving

Bitcoin has a total supply of 21 million. The 21 million bitcoins in existence are scheduled to be mined through the year 2140. The underlying code ensures that only 21 million bitcoins will ever exist. Almost 90% of bitcoin’s total supply has been mined.

About 900 new BTC bitcoins are mined per day, currently. To sustain the emission and increase scarcity, the number of bitcoin emitted per block is regularly reduced. This process of reducing the bitcoin emission per block is known as Bitcoin Halving.

After a predetermined block height (840,000 for this halving event), the amount of bitcoin emitted per block is reduced to half of the previous number. For bitcoin new halving occurs after an interval of 210,000 blocks or 4 years.

The most recent (2020) halving reduced bitcoin emission from 12.5 bitcoin per block to 6.25 bitcoin per block. This means that instead of 12.5 bitcoins, miners will now be rewarded with 6.25 bitcoins per block mined.

The Halving: Sell the News or Bye the Hype - Looking Back

While the Bitcoin halving is often interpreted as a bullish signal for Bitcoin, in the past Bitcoin has sold off sharply with a sell-the-news event. For instance, in 2016, the market experienced a sharp sell-off from around $760 down to $540 - a correction of approximately 30% - right around the time of the halving.

This halving event may be different than the last four halving events now due to the Bitcoin ETF enabling institutions to own Bitcoin for the first time. I like using the on-chain insights from Glassnode to best evaluate what might happen this halving event.

Using Glassnode’s recent research piece, Adjusting Trading Strategies to the Upcoming Bitcoin Halving: Is This Cycle Different?, we can compare the last four cycles to this cycle. Looking at the chart below, when the cycles are laid on top of each other, it appears that in this cycle the Bitcoin price may keep going up without a significant pullback.

We’ll have to wait and see what happens to Bitcoin’s price as the 5th halving event occurs later this month. This time is different but still there are often good lessons to be learned from reviewing the past cycles to understand what’s most likely to occur this cycle.

Bitcoin L2s - Scaling Bitcoin for Mass Adoption

A big trend this year and ahead will be how to make Bitcoin more usable for global investors and financial markets. Bitcoin Layer 2s are projects that scale the Bitcoin blockchain with an additional execution layer that offers increased throughput by processing transactions off the main chain. Bitcoin Layer 2s use bitcoin as the gas token, and use the Bitcoin blockchain for settlement.

Bitcoin Layer 2 networks rely on the Bitcoin mainnet for the final settlement of their transactions on their own execution layer, and in this way, they maintain the level of security and decentralization of the Bitcoin mainnet blockchain. The leading Bitcoin Layer 2 projects include the Lightning Network, Stacks, Liquid, Merlin, and Rootstock.

I’m excited about the Bitcoin L2 innovation happening within each of these projects and others that are just starting like Citrea which use the latest privacy technology zero-knowledge proofs to make Bitcoin more usable for developers to build on top of Bitcoin. However with this excitement, I’m not forgetting that Bitcoin is the most valuable asset that I want to own. I don’t believe these other projects’ native tokens like, STX, will out perform BTC over the next year.

Bitcoin DeFi

As Bitcoin becomes more mainstream and it’s ecosystem of networks and companies expanding it’s reach, the potential for Bitcoin to pay it’s owners a dividend or reward for use within decentralized finance is getting easier and easier. Bitcoin DeFi is simply putting Bitcoin to work within global finance markets that enable borrowing and lending through decentralized finance. Here are the leading Bitcoin DeFi projects that I am watching on top of the L2s discussed above.

  • Badger enables Bitcoin to be minted on the Ethereum blockchain to be used in the Ethereum DeFi ecosystem. Anyone can lock up their ETH or staked ETH and then mint Bitcoin on the Ethereum blockchain to be used within Aave, Curve, or any borrowing and lending protocol in the Ethereum ecosystem that has an eBTC offering.

  • BRC-20 has brought fungible tokens to Bitcoin. Modeled on Ethereum's ERC-20 standard, BRC-20s enable fungible token creation on the Bitcoin network. BRC-20 tokens allow for the creation, deployment, and transfer of fungible tokens on Bitcoin.

  • Ordinals have brought NFTs to Bitcoin. Ordinals improves Bitcoin's capabilities by integrating digital content (such as images and text) into the blockchain. This is made possible through the use of SegWit and Taproot upgrades that occurred in 2023. The Ordinals token ORDI has over a $1B market cap and Galaxy Research estimates that the market size of Bitcoin NFTs built on Inscriptions and Ordinals will reach $4.5 billion by 2025.

Now with all the excitement shared around Bitcoin’s global adoption ahead, I want to end with a big idea that could influence how you decide to participate in investing in the Bitcoin ecosystem ahead.

The Fat Protocols Thesis - Why Owning BTC & ETH Is Better Than The Applications Built on Top

Back in 2016 a new idea and framework for investing in cryptocurrency networks was created by Union Square Ventures titled ‘Fat Protocols’. The idea is that within cryptocurrency and Web3, the base layer of technology - called the protocol layer - will capture more value than the application built on top.

This is the opposite of the social media internet era, aka Web2, when the applications like Facebook and Google, captured the most value compared the base layer protocols that they are built on like HTTPS.

This is a big shift. The combination of shared open data with an incentive system that prevents “winner-take-all” markets changes the game at the application layer and creates an entire new category of companies with fundamentally different business models at the protocol layer. - Joel Monegro

Staying Focused on BTC, Not The New Altcoins

With this viewpoint of value capture within cryptocurrency networks, I believe that Bitcoin and Ethereum will soak up most of the real investment into cryptocurrencies due to their unique positions in the market and strength of their network effects. For now, I’m watching all of the innovation and waiting for the last few 15-30% BTC price retracement to nibble on a bit more Bitcoin, not altcoins, before Bitcoin takes off to new heights with all of the central bank money printing combined with the global interest in digital currencies pushes Bitcoin to new ATHs above six figures ($100,000 per BTC) and beyond.

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