AI vs Rookie: A Comparative Study on Bitcoin Halving using ChatGPT
Assignment:
1. Considering the forthcoming Bitcoin halving (April 2024), mention and explain the respective potential impacts.
2. Explain whether similar past events can be analyzed for drawing robust insights (not necessarily predictions) and, if yes, explain the appropriate methodological framework.
3. Report ChatGPT’s opinion on the aforementioned points and compare it with your position.
Potential Impacts of Bitcoin Halving
Bitcoin halving (or halvening) is an event where Bitcoin block rewards are cut in half after every 210.000 blocks.
https://buybitcoinworldwide.com/halving/#what-is-the-bitcoin-halving
This mechanism periodically reduces the supply of Bitcoin and it is expected to continue approximately until 2140 when there will be no more mining rewards (or they will be insignificantly lower), where miner income will rely on network fees.
One approach to evaluating upcoming changes in the supply can be reviewed based on the stock-to-flow model. Stock-to-flow is a method to calculate the flow ratio against the stock, to analyze the scarcity of an asset. Based on the logic that the scarcity of an asset supports its function to be a store of value. A higher number represents high scarcity for the asset. A common approach used on precious metals.
https://learn.bybit.com/investing/bitcoin-stock-to-flow-model/
Although it doesn't take the demand side of the price equation into the picture, it is interesting to look at it and how Bitcoin’s position is changing against gold after the upcoming halving event. Currently, the Bitcoin reward per block is 6.25 BTC, which is roughly equal to 900 BTC a day and 328,500 BTC in a year, and the total Bitcoin in circulation is 19,5 million (reference link). Applying the stock-to-flow formula (Stock-to-Flow (SF) Ratio = stock ÷ flow) gives us 59 as a result which is below gold’s result, meaning gold is more scarce.
There are two points we want to highlight here, first one is the fluctuations in the gold supply. Gold’s supply is affected by factors like incentives in the market to mine more, new technological enhancements in mining or the discovery of new resources. The increased price of gold creates more incentive and risk-taking to find and unearth more gold which potentially will increase the supply. Compared to Bitcoin the supply and the plan of the remaining Bitcoin issuance is fixed, and coded. The second and more interesting fact specifically about the upcoming halving event is that with the reduction in supply, Bitcoin will become more scarce as an asset compared to gold measured by the stock-to-flow model. Reducing the flow portion of the formula and increasing the stock-to-flow result to around 120.
https://charts.bitbo.io/stock-to-flow/
Another critical and unique event expected while we are approaching to halving date is the approval of a Bitcoin spot ETF, easing the investment to Bitcoin by institutions. This event is expected to drive billions of dollars of investment into Bitcoin (reference link). Which can drive the price higher in a period where supply is shrinking and demand is increasing. Another factor to take into account can be the available Bitcoins on exchanges. Which has been in decline since 2021 July, this is directly affecting the depth of order books in crypto exchanges and creating an environment for rapid price increases within high-demand periods.
https://cryptoquant.com/asset/btc/chart/exchange-flows/exchange-reserve
Analysis of Similar Past Events
Bitcoin shows quite a consistent price cycle following approximately four year periods. Where it marks an all time high price in the late period of the following year and bottoming after twelve months. Below is a nice visualization of this circular trend.
https://twitter.com/therationalroot/status/1734553778731286590/photo/1
Of course, Bitcoin’s price doesn't act in isolation from the global economy and financial situation. Another way to look at Bitcoin’s price movement is to compare it with the money supply, which can be represented with M2 (a measure of money supply (reference link)) in the following graph. This data can support the store of value argument for Bitcoin and how it protects its value against the increasing supply and debasement of the currency.
Bitcoin vs. global M2 supply. Source: Global Macro Investor
ChatGPT’s Opinion and Comparison
Chatgpt Response
The Bitcoin halving, scheduled to occur in April 2024, is a significant event that reduces the reward for mining new blocks by 50%. This will decrease the rate at which new bitcoins are created and subsequently increase the scarcity of Bitcoin. Here are some potential impacts:
1. Market Dynamics: Historically, Bitcoin halvings have led to increased volatility in the short term followed by a bull run in the medium to long term. This is often attributed to the increased scarcity of Bitcoin due to the reduced block reward.
2. Mining Economics: The halving can impact miners' profitability, especially those with higher operational costs. Some less efficient miners may be forced to shut down if the price of Bitcoin doesn't increase sufficiently to offset the reduced block reward.
3. Environmental Impact: If the halving leads to a decrease in mining activity, it could potentially reduce the environmental impact of Bitcoin mining. However, this effect may be temporary if the price of Bitcoin increases significantly, attracting more miners to the network.
Past halving events can indeed be analyzed to draw insights about these impacts. However, it's important to note that past performance is not indicative of future results, and many other factors (like regulatory changes, technological advancements, and macroeconomic conditions) can also influence the outcomes.
The appropriate methodological framework for such an analysis would likely involve a combination of time-series analysis (to identify trends and patterns around previous halvings) and econometric modeling (to isolate the effects of the halving from other factors). It would also be beneficial to consider qualitative factors, like changes in market sentiment and regulatory environment.
In conclusion, while the Bitcoin halving can have significant impacts on various sectors and aspects of the Bitcoin ecosystem, predicting these impacts with certainty is challenging due to the complex interplay of various factors. Nonetheless, analyzing past events using robust methodologies can provide valuable insights and help stakeholders prepare for the forthcoming halving.
Comparison
Comparing the ChatGPTs response, I find it quite generic and written with a “safety” approach, where it lacks the creativity to look at other sources of data and bring in additional insights. Also being a language model without access to recent events, it misses the critical developments around Bitcoin which might affect the results of the upcoming event. This also prevents ChatGPT from bringing in more context and factors that might need to be considered.
I also found item “3” as a shallow argument which felt like it was missing any supportive info behind the current energy usage of Bitcoin while painting a picture of a direct correlation between the increase of mining activity and negative environmental effects. This item also missing critical information about the Bitcoin difficulty adjustment (reference link) design.
References
(n.d.). Buy Bitcoin Worldwide: Bitcoin Stats & Data. Retrieved December 14, 2023, from https://charts.bitbo.io/
A beginner's guide to the Bitcoin Taproot upgrade. (n.d.). Cointelegraph. Retrieved December 9, 2023, from
https://cointelegraph.com/learn/a-beginners-guide-to-the-bitcoin-taproot-upgrade Bitcoin Stock-to-Flow Model: Will Scarcity Help Retain BTC's Long-Term Value? (2023, June 27). Bybit Learn. Retrieved December 12, 2023, from
https://learn.bybit.com/investing/bitcoin-stock-to-flow-model/
Bitcoin Taproot Upgrade - Taproot Explained. (n.d.). Trust Machines. Retrieved December 9, 2023, from https://trustmachines.co/learn/bitcoin-taproot-upgrade-basic-breakdown/ How the Bitcoin Taproot Upgrade Changed Bitcoin in 2021. (2023, October 18). Trust Machines. Retrieved December 9, 2023, from
https://trustmachines.co/blog/bitcoin-in-2021-the-bitcoin-taproot-upgrade-explained/ Iosif, E., & Christodoulou, K. (2022, February 07). A Robust Blockchain Readiness Index Model. arXiv. https://arxiv.org/abs/2101.09162
Sharma, R., & Cheng, M. (2023). Bitcoin's Taproot Upgrade: What You Should Know. Investopedia. Retrieved December 9, 2023, from
https://www.investopedia.com/bitcoin-taproot-upgrade-5210039
Tuwiner, J. (n.d.). Next Bitcoin Halving 2024 Date & Countdown [BTC Clock]. Buy Bitcoin Worldwide. Retrieved December 12, 2023, from
https://buybitcoinworldwide.com/halving/#what-is-the-bitcoin-halving