The dark side of the halving
The Bitcoin halving discussion continues to gain momentum throughout 2020. Investors and speculators are on their toes preparing for the upcoming block reward reduction, showing a record high interest in this topic, as evidenced by the increasing search queries for the term “Bitcoin halving” in Google.
Less than two weeks are left before the Bitcoin halving, with many analysts predicting that the asset price will rise to new highs after the anticipated event. Our first article about Bitcoin halving, “Will halving raise the BTC rate to $12,000?” highlighted the main reasons behind a possible growth of Bitcoin. Today we would like to look at the event from a different perspective and focus on the “dark side” of the halving and identify the main reasons why the price may not surge so high neither before nor after this miner reward cut.
Severe reduction in miner revenue
For those who don’t know, the third halving of Bitcoin will take place on May 12, and the reward for the mined block, which is now 12.5 BTC, will be halved to 6.25 BTC.
Traditionally, it will make the miners’ lives more complicated, since it will become twice as difficult to profit from securing the network, as the reward will be significantly reduced. This will drastically reduce the number of hobbyist miners and small players who will have no benefit mining the currency whatsoever. This will make an entire generation of SHA-256 integrated circuits, such as Antminer S9, obsolete immediately after the miner reward reduction, and S17 will become borderline profitable, yet won’t run at a loss just yet.
The current cost of Bitcoin mining with an ASIC Antminer S17 Pro is $2,950. At the given price of BTC and mining difficulty after the halving, it will be $5900. Therefore, at this rate, the S17 equipment will continue bringing profits, but due to low profitability, much of the received Bitcoins will be sold to pay for electricity. For these reasons, miners using outdated equipment will eventually be forced to disconnect from the network in order to avoid losses.
Previous halvings took place in 2012 and 2016. After the first reward reduction, Bitcoin value increased by a factor of 407 times, while the second one resulted in 28.5x growth. Many are convinced that the next halving will have the same market effect. This is more than a mere belief that history repeats itself — we have witnessed an emergence of models that support this theory.
Certain market cycles have taken place in 2012 and 2016, where positive movements occurred about six months prior to the halving.
But if everyone predicts a bull run, why hasn’t one happened yet?
The situation is different nowadays, and several reasons support the theory that investors’ expectations are already reflected in the price, and rapid growth due to an upcoming halving is not to be expected. Keep in mind that this is the first time in history when Bitcoin is approaching its halving in the light of bearish sentiment and how the price of Bitcoin will behave in this situation is yet to be seen.
The community has overestimated the upcoming event, including a market reversal, new potential highs, and the fact that institutional investors have long been present in the market. But as we can recall from the most anticipated events in the crypto industry, the least expected scenario is usually the one to unfold.
Take the Bakkt platform as an example. Most participants in the crypto community believed that its launch would be an impetus for the growth of the price of Bitcoin and bring billions of institutional dollars into the industry. However, Bakkt failed to live up to the expectations, and the rate of BTC fell a few hours after the launch of the platform.
A similar situation occurred at the end of 2017 when many expected the launch of Bitcoin futures from the Chicago Mercantile Exchange (CME) and the Chicago Options Exchange (CBOE). At that time, the price of Bitcoin reached a peak of $20,000 and started declining after the launch. It was the beginning of derivatives trading that was later on blamed for the negative price action of the asset.
Scarcity of Bitcoin
Bitcoin is known as a deflationary asset. Only 21 million coins will ever exist. Bitcoin halving is to occur every four years until 2140 when a total supply of 21 million coins is reached. To date, more than 18,300,000 Bitcoins have already been mined, which is equivalent to 87% of the total number of coins. That is, in the next 120 years, miners’ reward will equate to only 2.7 million coins, which will not have a significant impact on the market since it is an extremely small amount compared to the circulating supply.
In December 2017, when the price of Bitcoin reached its peak, Bitcoins were more scarce than in the current situation. That is, in December 2017, there were 16,750,000 BTC in circulation, which is 1.55 million coins or 9% less than today.
Therefore, in order to reach the previous levels, Bitcoin will require a much more significant inflow of capital than in 2017. At current rates, overcoming the $20,000 mark will require a capitalization of $367 billion, which equates to a 260% increase in the current price.
The halving case for altcoins
Let’s have a look at other examples of halving that have recently taken place.
This month, two forks of Bitcoin have gone through their first block reward reduction. More precisely, on April 8 and 10, two halvings took place on the Bitcoin Cash and Bitcoin SV networks. As a result, their mining rewards were reduced from 12.5 to 6.25 coins per block. A decrease made mining less attractive, which is why miners migrated to the Bitcoin network.
A week prior to the event, both assets followed a pump and dump scenario. They quickly grew by 20–30% and returned to their previous levels.
In addition, halving resulted in the decline of the hash rate of the network, which fell by 70%, and although these indicators have somewhat recovered, they are still 50% below the average levels of 2020.
This, in turn, has led to a doubling in the number of confirmations required to consider transactions to be final. Bitcoin, in comparison, did not experience a similar hash rate drop during the previous halving in 2016, although its short-term stagnation was still observed.
As a result, Bitcoin forks are now vulnerable to a 51% attack. This situation will continue until the Bitcoin halving or till the BCH and BSV rates rise by orders of magnitude, which will again make mining more attractive. This scenario is quite unlikely, though.
One way or another, their price at the time of halving has changed dramatically due to their creators’ manipulations — Craig Wright (BSV) and Roger Ver (BCH). But there are absolutely no fundamental reasons for their growth.
Litecoin halving that took place on August 5 is worth mentioning as well. Its hash rate collapsed by more than 70% and has not recovered since. Miners most likely switched to more profitable assets.
The price of the asset started its growth at the end of 2018 and reached its peak in mid-June at around $145. Litecoin gained over 450% over that period. Though this was accompanied by the growth of Bitcoin, Litecoin did outperform the first cryptocurrency by 130%. And, most likely, the demand for Litecoin took place precisely due to its halving. A month and a half before the reduction of the mining reward, the price of LTC began its decline towards the $90 level and by the end of the year fell to reach $36. Litecoin fell by more than 50% against Bitcoin from its peak values. Ironically, apart from the block reward, Litecoin halving affected the price of the asset as well. The price of Litecoin has been falling and still continues its search for a new bottom.
These assets are no more than alternative coins; they can be easily manipulated due to the smaller market capitalization, which is 40 times lower than the one of Bitcoin. Market cap is the reason which often stops Bitcoin from rapid growth, regardless of the market participants’ desire.
In any case, neither BCH nor BSV can serve as a base for building a Bitcoin strategy as both of them are merely forks of the first cryptocurrency.
Crypto derivatives markets were in their infancy, institutional participation was weak, and evaluation systems were practically absent until the end of 2017. Modern tools, such as futures and options, allow you to earn regardless of the direction of the Bitcoin price movement.
In addition, numerous factors point to an upcoming disappointment of the entire community. Even if Bitcoin can reach investor’s immediate expectations, the price and hash rate drop is yet to unfold. Since Bitcoin historically did not rise in price before halving, one of the reasons being that many miners are selling BTC to cover the costs and losses caused by the crisis. Moreover, the need to purchase new equipment may be another reason to sell the coins, since more than 35% of mining rigs will lose competitiveness by mid-May.
Furthermore, one last sobering thought: with recent events inflicted on world markets from the Coronavirus pandemic, pushing the global economy to the brink of a potential Great Depression, this time around, the halving may not play out as positively as it has previously done.