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Welcome to Wirex News - Your Weekly Crypto Podcast, where we have engaging conversations with experts, thought leaders, and innovators exploring wide-ranging topics around cryptocurrency, financial management, security, and many more interesting subjects.
Welcome to the Wirex Weekly Crypto Podcast where we dive into engaging conversations with experts, thought leaders, and innovators. And I'm your host, Liana. I'm really excited to introduce our guest for today's podcast episode, Yves Renault, who heads up the trading department at Wirex. Welcome Yves.
Speaker 2:Thank you. Thank you very much, Lena, for having me. And, I'm really happy to to share my experience with the audience today. Thank you very
Speaker 1:much. Cool. Today, we will dive into one of the, hottest topics in the crypto world right now, which is Bitcoin halving and the ongoing bull run were so bad. Right? Yous, could you explain to us what is Bitcoin halving and why is it significant for the cryptocurrency ecosystem?
Speaker 2:Of course. Basically, after adding events, the Bitcoin block production reward is divided by 2. And, this event happens once every 4 years. And in practice, it, translates into a 50% drop in the Bitcoin supply growth. So it's like a supply shock in the likes of, you know, the the oil supply shocks that we've had in the late seventies, for example.
Speaker 2:But people usually use the term shock to describe an event that is unexpected. And, as far as Bitcoin is concerned, we know when the halving event will happen because we know it happens every 210,000, blocks. And, we know that a new block is produced roughly every, once every 10 minutes. So the Bitcoin cycle is, you know, really defined by these 210,000 blocks. And the cycle lasts 4 years.
Speaker 2:So the next halving is scheduled on April 20th. And, the block production reward, we dropped them from 6.25 Bitcoins to 3.125 Bitcoins, so half of it. You know, this drastic decrease in the supply growth typically reduces the market's selling pressure. You have less supply in the market, and it has a tendency to trigger a rally. And as you can imagine, this rally is always a major event in the crypto economy.
Speaker 2:Many projects in the sector, centralized or decentralized, design their business strategy and implement it over the 2 to 3 years that that precede the bull run with one one clear objective insights, to leverage the bull run as much as possible. So it's certainly exciting event for for most of us.
Speaker 1:Yeah. That sounds really exciting. What is the impact of the Bitcoin halving on miners? You know, and how do they prepare before the halving?
Speaker 2:It it can be really a stressful time for miners because, you know, halving the production reward, it could really hurt the miners, revenues. So miners basically receive Bitcoins and sell them in the markets within, a year on average. So if there's a price rally around the halving events, it is actually a relief for them because they can sell their production at a higher price. Miners have obviously what we call a breakeven price. It is a Bitcoin price level over which they can, operate and generate profits.
Speaker 2:It is the price where basically revenue covers the cost of production. And after April 20th, after the next holding, the breakeven Bitcoin price, would be estimated around $40,000 or so. As long as the price the market price of Bitcoin stays well above the 40,000 US dollars, miners can reasonably continue to operate and make profits. So this breakeven price depends on the energy cost, obviously, the hardware, the miners are using to mine, There are hardware pieces of hardware that are more efficient than others. And miners can improve their breakeven price by upgrading their their hardware.
Speaker 2:But to upgrade their hardware, they need to sell Bitcoins from their inventory because it's costly. They have to to to finance these upgrades. So having a running now before the halving is actually a chance for them to cover more easily their upgrade costs. And we've seen miners gear up, quite quickly now, with the most advanced equipments and, get ready for the post halving, period. Major miners actually started, gearing up in the second half of twenty twenty three.
Speaker 2:But, again, the timing for gearing up is important because you have, more advanced hardware coming out very frequently. And a miner can take the risk to wait for too long or wait for potential Bitcoin, pre halving running. Pre halving running is never a certainty. They just need to sell Bitcoins at a good price to finance the upgrades and enter the next cycle, comfortably.
Speaker 1:Wow. That's that's really interesting. And, you know, I I never knew about, you know, this side of, you know, with the miners. Right? You know, could you tell us more about Bitcoin mechanics and and why does halving happen every 4 years and not 6 or 10?
Speaker 2:I'll I'll try to explain why, although, you know, it's not necessarily my, area of of expertise. Still, I think that, you know, any trader, any investor should, should really grasp the importance of the Bitcoin mechanics and, use them to form a market view of their own. And, to understand how the Bitcoin adding works and why it's been designed that way, I think we should go over some of the basics, of the Bitcoin's block production. First of all, we mentioned that a new block was produced and added to the blockchain every 10 minutes. Producing a block means, you know, finding, a hash value, that identifies this block.
Speaker 2:And and the hash value a hash is a 64 digits, exact decimal value that a miner must find using, you know, complex algos that are CPU intensive, that are energy intensive. So this hash depends on the hash of the previous block, and it also depends on the contents of the block. So it depends on the transactions that are written, in the block. We we always mentioned that Bitcoin is a ledger technology. It is a ledger where all transactions are written in in the blocks.
Speaker 2:And, it takes roughly 10 minutes to find a valid hash value, produce and append the corresponding new block to the blockchain. And this 10 minute situation is is is stable. Again, every block production is currently rewarded with 6.25 Bitcoins, but the total Bitcoin supply has a world cap at 21,000,000 Bitcoins. This is something that, you know, many many of us know by now. There can be more than 21,000,000 Bitcoins, issued.
Speaker 2:So if miners were to produce blocks every 10 minutes and get the same reward of 6.25 Bitcoins every time, the protocol would just run out of Bitcoins in 4 to 5 years. So by dividing the reward by 2 every 4 years, we have a protocol that can reward block producers not indefinitely, but for the next, what, or less 15 years. And it can go on forever because Bitcoin is not actually infinitely divisible. The minimum rewards can only be at or above the smallest unit of Bitcoin, and that is one Satoshi. And, basically, the the the 115 years limits corresponds to the last cycle, the cycle where, if we try to divide the reward by 2 once more, the reward would fall below 1 satoshi.
Speaker 2:So So it's not something that we can pay out. Next month, we'll be entering cycle number 5, and the 33rd and last cycle is expected to end in sort of the year, 2,140 or so. So the idea behind this time frame of for 15 years, could have been to give, you know, Bitcoin a very good chance to be adopted worldwide and and mined in as many countries as possible to give Bitcoin the time to, to be adopted.
Speaker 1:You know, I I would like to think that Bitcoin would be, adopted, a little bit earlier. Right? But is there a reason behind the choice of a 10 minutes duration between 2 blocks?
Speaker 2:Yes. I I think so. I mean, the 10 minutes duration was, was probably picked, for a reason. And, at least according, you know, to specialists and, the emails we have from, Satoshi Nakamoto and so on. The challenge behind the choice, the 10 minutes choice, was to give the miner a chance to learn about the latest block added to the blockchain in a timely manner.
Speaker 2:So we mentioned that the block is identified by a hash. Right? And that the hash depends on the previous block's hash, but also on the contents on the block, so the transactions that are written in this block. So if miners are not informed about the creation of a new block in a timely manner, they could actually still be looking for a hash that depends not on the hash value of the latest block, but the hash value of another block. And these miners would actually be running expensive algos on outdated information, which is, of course, an incredible waste of resources.
Speaker 2:So imagine the scenario where a block is produced, not every 10 minutes, but every minute. For instance, a new block is produced in the US, and miners in Kazakhstan received the info about the new block within a 2 minutes delay. So these miners actually would still be running Algos based on a on a hash that is 2 blocks old because blocks are produced every minute, and they get the info 2 minutes, with a 2 minute signal. So it would be a complete waste of hash power. Actually, the miners in Kazakhstan would be completely excluded, from the production and the validation process because then have literally no chance, to participate in the process because they would always have an outdated view of the blockchain.
Speaker 2:And and this is a problem. It's a problem. It it actually poses a security risk for the blockchain, because a smaller number of miners, you know, concentrated geographically in the US, for instance, could gain control over, the Bitcoin production. So imagine now the reverse. Imagine the scenario where a block is produced every hour instead of every 10 minutes.
Speaker 2:So, you know, today, finding a hash, it's like winning the lottery. So a country that runs a lottery every 10 minutes instead of 60 minutes, improves the odds for a single person to win something by a factor of 6. Okay? So, it's the same for, for, for for mining, looking for a hash. Basically, if it's 10 minutes instead of 60, miners have more steady returns, better expectations, for for revenues.
Speaker 2:And if they are a bit persistent running their own goals, they they will have to wait for ages, before getting some rewards. So increasing the block production time, could discourage miners and favor the largest ones, the ones with more resources, more capital to buy, the energy, the hardware needed to run the algos. And, this scenario would just, you know, compromise decentralization. So so I think developers, you know, probably wanted more miners to participate in the Bitcoin production. So the 10 minutes is a trade off here.
Speaker 2:It's a trade off that is supposed to promote, diversification. But, you know, I like to think of the 10 minute duration as, you know, the Bitcoin's heartbeats. And, every 210,000 heartbeats, we have a heavy event.
Speaker 1:You know, I I never knew so much consideration went into, you know, the the block production. And, yeah, that's just so much to, you know, unpack. Right? And I love the analogy of the 10 minute duration as Bitcoin's heartbeat, and I may actually use that. And out of curiosity, when did the first Bitcoin halving event happen?
Speaker 2:Well, it happened in 2020. So, so that was, you know, 4 years nearly 4 years, after the the first block was, created, and that was in 2,000 and 9. So, the the Bitcoin rewards or block production was initially set at 50 bit codes, and it dropped to 25 Bitcoins, after the first hand. And we never see the last cycle, obviously. The 3rd cycle is supposed to happen in 100 and 15 years or so.
Speaker 2:So, maybe Satoshi Nakamoto would see it happen. We don't know. I mean, according to Jamie Dimon, the chairman and CEO of of JPMorgan, he mentioned neighbors 2 months ago that Satoshi could could literally destroy Bitcoin once all the 21,000,000 Bitcoins are issued. So I don't know. Would, would Satoshi come back from his grave and destroy Bitcoin?
Speaker 2:There must be quite a lot of faith there. I guess, you know, for some people, Bitcoin has become a a region. And and jokes aside, I think it's a great achievement for something many often dismissed because of a lack of understanding. And, I remember I took interest in Bitcoin, after attending a speech by Andreas Antonopoulos in London back in 2015. So a friend invited me to join him there.
Speaker 2:And when you hear Andreas Ontolopuro speak, you you already know that Bitcoin is more than technology. It's a it's a strong political message. And it can speak to to to every generation, especially the new ones. To me, Bitcoin brings consensus against, you know, the unhealthy competition that banks are running often, at the expense, of their clients. And this is what happened in 2,008, 2011, where we had the the sub subprime crisis and we had the credit crisis in the EU and, the different sector baitouts that were perceived, again, by Main Street as as something that had to do to save, to to save the system because of of a risk, an unreasonable risk that it's taken.
Speaker 2:And I think Main Street is still paying today for for the poor management of the banking system. We can see it when we go to the bank. We do some basic operations. The level of compliance has has grown significantly.
Speaker 1:Yeah. And I, you know, and and I think a lot of people have, you know, lost faith, right, in the in the banking system, you know, but, they are unable to get into crypto because of, you know, because of lack of understanding, as you said. Right? So why did the, Bitcoin halving trigger the major cryptocurrency bull runs historically? If the halving event is a certainty, shouldn't the price of Bitcoin already reflect this event?
Speaker 2:Yes. Yes. Of course. There have been events. You know, as I as I said, it creates an imbalance between demand and supply.
Speaker 2:And, when the supply drops, when the supply growth, so the growth, drops by 50%. And if demand theoretically stays the same, we could expect the Bitcoin price to rise sharply, reasonably, you know, maybe by a factor of 2. In other words, the new supply demand equilibrium price is set at a level that is significantly higher. So we have today roughly 6,300 Bitcoins issued every week as rewards for the miners. Right?
Speaker 2:And they are added to the total available supply. A low cost portion of these, 6,300 Bitcoins is sold again within a year. And after April 20th, this number will drop to 3,150 Bitcoins. So if the halving event were a complete surprise, okay, we'd see an impressive price jump, a shock. The Bitcoin price could almost double within a short time frame.
Speaker 2:And and it is really really a shock. And, again, a shock, like we we like we've seen on commodity markets, on the oil markets during the, the decision from the OPEC to rise, to increase, to reduce, sorry, production with the late selling. But the handling event is not a surprise at all. So normally expectations of future handlings should push the price higher progressively, smoothly over time. And I say expectations, plural, because we should not be considering only the upcoming halving events in April, but also, you know, all future addings for the next 115 years or so.
Speaker 2:So the impact of all future addings on the Bitcoin supply growth should theoretically be included in the price of Bitcoin today. And this is old theory, of course. And in practice, it's never that simple. There's always uncertainty around having events. And, for example, you know, the first question that comes to mind, will it happen again?
Speaker 2:Will will having happen again or will Bitcoin say by then? So even if every indicator, every metric, points towards the good probability to see Bitcoin survive or thrive, we are always looking for arguments to explain why Bitcoin could fail. And we are also looking for arguments to explain why a rally won't happen. Our decisions are usually hesitant and delayed as a result. So this time around, the rally seems to have started earlier than expected because Bitcoin ETFs were approved by the assistant, in January, so exactly 2 months ago.
Speaker 2:So thanks to the ETF figure, investing in Bitcoin has never been easier than it is today. And naturally, the fear of missing out has also spread among institutional clients. And, you know, the ease of investment through ETF vehicles with this fear of losing out, it's it's an exclusive cocktail. And, this is probably why we have an ongoing right now.
Speaker 1:Yeah. I mean, I I I love the fact that, you know, you're always looking for arguments to explain why Bitcoin could fail because, you know, if, we've gotta try to see from all sides. Right? What do you think, the other risk that could favor or prevent a market rally post halving?
Speaker 2:Well, there are, you know, certainly many factors, that could trigger market correction, for example, or at least fuel what we call fear, uncertainty and doubt. These three words, you know, they form the infamous, acronym FUD that we see using the press. So should we expect a severe correction before they're having events? The traders have a tendency to buy the rumour and sell the news. So we've seen it just after the ETFs were approved in January.
Speaker 2:And we've also seen, if you look back in history, we saw a price correction just before the last halving in May 2020. And we've we've also, as recently, a severe market correction of 14% last Tuesday from the from the from the highest price to the lowest intraday. A 14% correction when the 1st Bitcoin all time high was surpassed this year. So reaching the all time high, it's it's an important piece of news, obviously. And, and again, we have this this tendency to buy the rumor and sell the news.
Speaker 2:I mean, there are other, you know, factors that could trigger more correction. Obviously, we have miners that they could start dumping, for some reason, a large portion of the of the 2,000,000 Bitcoins they still hold in their inventory. You have dormant weights, orders. They could suddenly wake up and dump their holdings as well. We have the Mt.
Speaker 2:Gox, bankruptcy proceedings that we're talking about a total of 200,000 Bitcoins that are expected to be, redistributed, repaid, probably started already. And finally, we have, you know, the the US government holding more than 200,000 Bitcoins that have been seized over the years. That's, you know, it's nearly 1% of the total Bitcoin supply. So what are they going to do with these 200,000 Bitcoins? So, we we do have, you know, a natural tendency to to cling a bit to, contrarian events, looking for reasons why the market would fall.
Speaker 2:And we do fall for what we call in finance, in behavioral finance, the configuration bias. So we look for information that supports, our view against the view of the crowd, against the odds, against, reason sometimes. This is why Bitcoin rallies are anything but a a walk in a park when it's, it can be quite violent.
Speaker 1:Yeah. That's just so much to consider. And, you know, I have to say on a side note that I love the fact that you have, you know, managed to, incur fear of missing out and also, but, right, in this conversation. What about factors that favor the, market rallies?
Speaker 2:There are a few, obviously. You know, with time, as I mentioned, markets should become more efficient, Expected events will be better reflected in the Bitcoin price. But until then, you know, major price rallies typically draw attention. And, looking back at previous market rallies, that there was, you know, most likely a bubble effect going on at some point in each one of them. These are what I call moments when the market became highly speculative, where people were just buying for, again, for fear of missing out at practically in price.
Speaker 2:But, you know, rally is also fewer interest. It creates new projects, new initiatives. So it's not all speculative. It's not all explained by blockchain mechanics. Otherwise, because we eventually fail, there must be a fundamental interest behind, behind the rally or during rally.
Speaker 2:And there are, of course, you know, serious mainstream projects, looking to leverage the cryptocurrency advantage. Cross border payments, I know no third party is in. These are all advantages that cryptocurrencies usually have. But you know, the main Bitcoin advantage compared to competitors is certainly its impressive adoption there ranked and the growing confidence around it. And being in, being the first that in this market, has a has a clear advantage.
Speaker 1:Yeah. I mean, I've definitely seen a lot of interest, in the space, around Bitcoin and, you know, and obviously there's a lot of, like, you know, the Bitcoin Maxis that, are, you know, promoting and and, you know, really advocating this. Right? What are the most relevant indicators that could help us navigate the current or next bull run?
Speaker 2:I come from the the from divertic markets. This is, this is where I started investment banking. So I can so I have a tendency to look at derivative markets, and some valuable indicators are provided, I think, by derivative markets. And when I say derivative markets, I'm talking about futures and options, on Bitcoin, on the BTC USD team, pair more specifically. And these instruments, futures and options are put on major venues like Busilomi, so the Chicago Mercantile Exchange, or Derivit.
Speaker 2:So during the last major rally at the beach, or in the final quarter of 2021, the put call ratio, and we explained what it is, the put call ratio ended up above 90%. So it just means that there were more puts than calls traded. And puts are typically traded on the downside. So traders looking to hedge a risk on the downside will actually buy put options, right? So what that says, what the 90% is saying is that traders were looking, almost exclusively to hedge their downside exposure, in the options markets.
Speaker 2:They would hedge downside for fear of a severe market correction. So the put call ratio in itself by definition, it's a value between 0 and 1. And the ratio above, 90%, above 0.9 is really exceptional. If you look at the mortgage right now, its ratio is at 65%. So there is some kind of balance here.
Speaker 2:90% indicated in the past that, we were close, probably close to the end of speculating running. It was, I think, one of the easiest indicators to read at the time. If it soars, it might be because sentiment is shifting. Traders consider that the market is overpriced. So this indicator is not enough, of course.
Speaker 2:And I'm just going here over the the very simple tools that, that worked in the past. But there is, of course, absolutely no guarantee that they would work on the future. Another tool, that I look, regularly look, is the spread between the perpetual, BTC future and the spot price, the Bitcoin price. Perpetual futures are, you know, very risky emerging products. So, basically, perpetual future traders would have a collateral in Bitcoins that they can pledge to buy, these perpetrators for no shareholder value, US dollar value, that can be worth 10 times the value of the Bitcoin collateral.
Speaker 2:So they can leverage their exposure to the Bitcoin market 10 10 fold. Actually, in the widest scenarios, perpetuals can let users, build a notion of position worth $50 the Bitcoin value they actually would. But it's not free. First of all, it's risky because you run the risk of having your collateral liquidated if the market goes against you. And it's not free.
Speaker 2:If the perpetual future price is above the spot price, long traders, so perpetual future buyers, would pay a funding cost. And this funding cost can be extremely high. And at the peak of a bull market, this funding cost can reach 2% of the Bitcoin price per day. So imagine you have a wrong position in futures at the at the heights of the markets. You will be paying 2% of the value of your of your of of your lotion per day.
Speaker 2:I mean, we've seen it yesterday they already get close to 1% on platforms like Deribit. But it can really get out of control. And this spread can indicate how speculative the market is. Because, you know, holding leverage can be very expensive. And it's not unusual to see leverage long positions just capitulate because they don't want to pay 2% or even 1%.
Speaker 2:So they sell their provisioned futures. And by selling these futures, they actually put a selling pressure on the market. And we have, we typically have collateral liquidations that trigger a severe correction in the process. And this is this is what happened. And last Tuesday, when the markets corrected by 14%, the market is currently extremely leveraged.
Speaker 2:We have, an open interest in US dollars on futures with Bitcoin, that are at a record level. And so seeing these these market corrections, I think won't be, unusual during a work, especially.
Speaker 1:You know, I I used to think like, with this whole Bitcoin and cryptocurrency, market, you know, it used to be so overwhelming. Right? But, you know, I really appreciate you distilling it down for us, and I'm so glad you agreed to be, a guest on our podcast. Your input and insights have been incredibly valuable, and it's been a pleasure to have you join us. Thank you.
Speaker 1:Thank you. The the pleasure is mine
Speaker 2:as well. Pleasure is mine.
Speaker 1:Oh. Oh, man. You know, like, I I am learning so much, with this conversation. So thank you. Thank you again for for being here to, you know, really explain everything to us.
Speaker 1:And for all our wonderful listeners out there, I trust you found this discussion engaging. Remember to show your support by liking, subscribing, and spreading the word about this episode. Thanks for tuning in, and until next time, take care.