Benchmark Crypto Indices Weekly Performance Review — April 13

Over the past 7 days, the FS CryptoFX Agg Index increased by 4.5%, compared with a 12.1% increase for the S&P 500. Bitcoin started the week with a robust 10% rally that brought the price above $7,400 again for the first time since the March correction. However, Bitcoin sharply declined on Friday morning, and ultimately finished the week up 2.6% due to a rally on Sunday. Over the past two weeks, Bitcoin has tested its 50D moving average but was not able to break through this level of resistance. However, it is still too early to conclude that Bitcoin will not break through this key level of resistance and thus bears watching closely as key technical level in the coming week.

Sector Rotation
The sector leadership swung last week. FS CryptoFX Platform had the best performance, up 11.2% over the past week, primarily due to the strong performance of Tezos (+21%), Stellar (+14%) and Ethereum (+12%). Led by Zcash (13%) and Dash (+12%), the Privacy sector retained its momentum, and was up 6.7% on the week. Although it was up 2.3%, the Exchange sector trailed other “non-stablecoin” sectors last week.

Chainlink’s price surged 52% over the past week primarily due to the announcement of its listing by New York-based Exchange, Gemini. As a result, the FS CryptoFX 40 Mid-cap index (+9.5%) has been the best performing size-based index over the past week, beating the small-caps (+4.9%) and the large-caps (+4.0%).

Halving Rehearsal
One of the essential factors why Bitcoin is perceived as digital gold is its finite supply.  Satoshi Nakamoto set a cap for the total supply of Bitcoin at 21 million when he created the Bitcoin protocol. These 21million coins are  diminishingly released through the rewards of confirming transactions/packaging blocks (aka mining). This reward halves for every 210,000 blocks, hence the term “halving”. So far, Bitcoin’s block reward has been reduced from the initial 50 BTC per block to 12.5 BTC per block. Furthermore, it is expected to be reduced to 6.25 BTC per block when the block height reaches 630,000 early next month. In terms of total supply, more than 87% of the supply of Bitcoin has already been released.

Bitcoin block rewards are so important, not only because they are the only way for Bitcoin to be released into circulating supply, but also because they are the primary source of income for transaction confirmers (aka miners). As an integral part of the cryptocurrency ecosystem, the profitability of miners affects the security and functionality of PoW-type cryptocurrencies such as Bitcoin.

Bitcoin Cash was hard forked from the Bitcoin blockchain in August 2017, and Bitcoin SV was hard forked from Bitcoin Cash in November 2018. As hard forks of the original Bitcoin blockchain, both Bitcoin Cash and Bitcoin SV have the properties of Bitcoin, which include mining reward halving. Last week, the mining rewards for Bitcoin Cash and Bitcoin SV were halved. This is the first halving for these two cryptocurrencies since their creation through hard forks. The halving process and results are not only a trial of these two cryptocurrency ecosystems but also a good preview of Bitcoin’s halving that will come next month.

Bitcoin Cash first reached the block height of 630,000 at 8:19 am on Wednesday, and its mining reward was reduced from 12.5 to 6.25 per block. The halving of block rewards directly leads to a decrease in miners’ profitability. According to the data of Bitinfocharts, the hash rate of Bitcoin Cash dropped by 60%, from 3.6EH/s on April 8th to 1.4EH/s on April 10th. This implies that about two-thirds (by hash rate) of miners left Bitcoin Cash, either shutting down or switching to other SHA-256 cryptocurrencies.

The same thing also happened to Bitcoin SV. One day later, on the evening of April 9th, Bitcoin SV also reached its height of block 630,000, and its hash rate also dropped significantly, from 3EH/s to below 1EH/s. In the meantime, according to Blockchain.info, Bitcoin’s hash rate rose from 105EH/s on April 8th to 110EH/s on April 10th, reaching the highest level since the Bitcoin price bottoming at the end of March. From the increase and decrease in the hash rate of each currency, we can see most of the increase in Bitcoin’s hash power is likely attributable to the miners who fled from Bitcoin SV and Bitcoin Cash in favor of mining Bitcoin. As of today, the relative strength of Bitcoin Cash vs. Bitcoin is still weakening and Bitcoin Cash has underperformed Bitcoin by more than 8% this past week. Bitcoin SV trailed Bitcoin more than 10% at one point last week, but it has gradually recovered, and underperformed Bitcoin by the same ~8%.

Will there be any difference between Bitcoin’s and Bitcoin Cash’s/Bitcoin SV’s halving? First of all, similar to the other two cryptocurrencies, the income structure for Bitcoin miners is also highly dependent on block rewards (and  Bitcoin price). When the block reward is halved, mining profitability will be significantly decreased, and the price of Bitcoin required to maintain Break-even mining profitability will also be much higher. Depending on the price at the time, Bitcoin miners may migrate to Bitcoin Cash or Bitcoin SV in tiny proportions. However, a large-scale migration like what happened during the halvings of Bitcoin Cash and Bitcoin SV may not occur. The reason is that Bitcoin is a giant (based on both market capitalization and hash power) compared to the other two currencies. A small amount of migration would significantly affect the profitability of Bitcoin Cash and Bitcoin SV. Some miners using old mining rigs may be forced to shut down if the price does not increase enough. Lowering the hash rate will bring the entire ecosystem to a new equilibrium. However, for profitability, the real improvement may have to wait until new shipments of next generation of mining rigs in the second half of this year assuming price remains constant. 

In the short term, especially in the period before and after the halving, price volatility may increase. Since some miners may need to sell Bitcoin to finance their future operations, the selling pressure may increase. However, in the long run, we still believe that halving the reward is a positive catalyst – as miners are the only net sellers. With more development and broader adoption, the increase in demand and the decrease in supply will gradually push up the price of Bitcoin.