In today’s article, we will be analyzing if Bitcoin will see a drop in price after its scheduled halving for May 12th, 2020.
What Is Halving?
The Bitcoin protocol is coded to halve its block reward every four years. When miners discover and verify a new block of transactions, they receive a number of BTC for their performance. The reward is currently 12.5 Bitcoins per block, but starting with May 12th, the reward will be reduced to 6.25.
Bitcoin Halving and Past Trends
If we look at the previous two halvings of Bitcoin (BTC) in 2012 and 2016, we can notice that its price dropped before and after the events. This trend has been noticed to happen, as we are getting closer to the May 2020 halving.
One theory regarding the price of BTC is that miners will sell before the halving in order to gather enough Bitcoin to fund their mining operations after the halving, which will then enable them to hold the BTC that they make.
This would put miners at an advantage, as when a block-reward halving occurs, the mining profitability of Bitcoin suddenly goes up.
Head of research at TradeBlock, James Todaro, expects the mining profitability of Bitcoin to go up from $7,000 to anywhere between $12,000 and $15,000 after the coin halves.
“Following the Bitcoin halving, miners’ estimated breakeven costs will rise from ~$7,000 today to ~$12,000–15,000 per BTC after. I would not be surprised if we see Bitcoin prices rise above these levels so that miners remain profitable.”
If BTC’s price does not see significant gains after the halving and will maintain the same mining difficulty, miners will experience a greater break-even price with the same income prior to the event.
Based on this logic, big mining facilities should also gather large amounts of funds before the Bitcoin halving to have later finances for their operations should Bitcoin not see significant gains after the halving.
Alejandro De La Torre, vice president of mining pool Poolin, explained how mining companies can be divided into two categories:
“Some mining farms are highly sophisticated operations with the teams having many years of experience in data centers and finance. These mining farms usually hedge their risk in various ways. You have also mining farms that have been at it for years, these have stocked up massive amounts of coins and expanded their operations further, these farms tend to be huge and usually can withstand a significant decrease in price.”
The CEO of investment firm BKCM, Brian Kelly, stated back in May 2019, that many miners sold enough of their BTC to get to cover expenses for the next 12 months:
“I’ve talked to a lot of miners around the world, a lot of them have said they have sold enough Bitcoin to get us through the next year or so and we are going to hoard Bitcoin at this point in time and we are not going to sell it and the supply of Bitcoin will get cut in half. Just real simple economics: lots of demand hitting little supply, price goes higher.”
After Kelly’s statement that miners sold their Bitcoin to fund their operations, the Bitcoin price lost 18%, going from $9,000 to $7,500 in the following weeks.
In 2012 and 2016, the Bitcoin price experienced drops before and after the halving, and only after 8 months Bitcoin saw a boost from bulls.
In the second block reward halving, which took place on July 9, 2016, Bitcoin’s price went from $683 to $572 in 77 days after the halving. Then, the price started to pick up after the next three months, with the bull rally starting in March 2017.
Bitcoin and the 2020 Halving
While some argue that Bitcoin’s recent drop is because of the halving date approaching, most associate this trend with the recent coronavirus outbreak, as in markets across Asia, Europe, and the United States, a panic sell-off was triggered.
So far, Bitcoin does not appear to have an inverse correlation with stocks and gold. Over the course of the last two weeks, Bitcoin, stocks, and gold have reacted in the same manner to recent events and have moved in similar patterns.
De La Torre pointed out that there is not enough evidence to support that Bitcoin’s price is inversely correlated with stocks or the general financial market.
“This is a test of the theory that Bitcoin is a hedge against market instability. We tend to see yearly events where this theory is tested. There is conflicting historical data on this theory (sometimes the price increase sometimes not), the results I believe are still inconclusive.”
If the COVID 19 outbreak continues to affect the supply chain of large mining centers, this could impact the hash rate of Bitcoin:
“This is more of a test of the mining manufacturers’ capabilities. The factories where all the parts are manufactured for these machines are in lock-down or are operating at a less than optimal capability. This will slow the production of mining rigs which in turn will affect the continued increase of the Bitcoin hash rate which then may cause some speculators to see this as a bearish signal.”
Bitcoin network has rates that are at a record high and has continued to set new peaks over the past two years. This is why it is yet unknown if a decrease in mining hardware sales might negatively affect the hash rate of the Bitcoin network.
But should the Bitcoin network hash rate decrease, this would lower the costs of mining Bitcoin, thus attracting more miners and, in the end, boost up the hash rate.
“The Bitcoin hash rate is at the highest it’s ever been. A drop, even a significant drop will most likely still be higher (in terms of hash rate) […] than what it was this same time last year. Additionally, the network is working as intended and it is still the safest decentralized financial tool ever seen by human society,”- said De La Torre.
Trader PlanB said that the $400 mln in monthly inflow from investors since 2017 kept BTC around the $7,000 level, but after the halving takes place, the amount to sustain this price would be half as much.
To maintain $7000 since Oct 2017, #bitcoin must have had about $400M new cash inflow every month last 2.5 years! (30d x 24h x 6blocks x 12.5btc x $7k assuming all trading is zero sum game)
After the halving, we only need $200M per month to keep $7k level. If $400M stays, then 🚀 pic.twitter.com/d6hYJqxIUr
— PlanB (@100trillionUSD) April 6, 2020
But if the $400 mln per month inflow is the same, then the price of Bitcoin will shoot up.
The CEO of Blockstream, Adam Back, has responded to this statement:
“Plus some activity is uncertain “waiting to see what happens with the halvening”. and if there is positive movement, the media talks about it and creates a positive reflexivity loop. looking forward to the quantitative hardening event, when bitcoin’s rate of coin supply halves!”
Plus some activity is uncertain "waiting to see what happens with the halvening". and if there is positive movement, the media talks about it and creates a positive reflexivity loop. looking forward to the quantitative hardening event, when bitcoin's rate of coin supply halves! https://t.co/cle5gIiM3i
— Adam Back (@adam3us) April 6, 2020
Among the uncertainties was the fear of miners closing down their operations and liquidating their coins, stated PlanB. But he thinks that ‘a couple of difficulty adjustments after the halving will take this risk away.’
According to a recent report from Genesis Mining, about 50% of Bitcoin holders and users think that the coin will see a surge after the halving.
There are opposing theories and opinions regarding the Bitcoin price movement after the halving. We have to take into account that back in 2012 and 2016, Bitcoin lacked the trading and mining infrastructure it now has in 2020.
Bitcoin’s price will always be hard to predict, no matter the data, theories, and patterns used. If we base our predictions solely on past trends, we can assume that there will be a drop after the halving, and then in the following months, Bitcoin will see a huge rally. But we have to take into account the current global economic situation as well as the more-developed infrastructure of the crypto industry, as circumstances have changed.
Featured image: independent.co