To the crypto outsider, Bitcoin’ halvings’ may appear as a semi-mythical and quirky anomaly unique to the BTC sphere: much like a solar eclipse, they come every once in a while, greeted with much anticipation.
If you don’t already know, a halving (or ‘halvening,’ as some say) is an event in which the coin rewards that are paid out to miners are cut in half. The next halving is expected to take place on Monday of next week around 7:45 PM EST. These events occur once every 210,000 blocks, or roughly one time every four years.
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To the average outsider, halvings may seem like incidents of no real consequence; for the inner crypto community, though, halvings can have a wide range of consequences.
In the longer-term, a number of analysts and traders expect the halving to boost the price of Bitcoin–in the past, Bitcoin has seen a significant rally 12-18 months after a halving has occurred.
What is #Bitcoin halving?
On blockchain, miners mine a new block every 10 mins
When new block is mined, miner earns block reward. This block reward is reduced to half every 4yrs.
Current block reward: 12.5 BTC
Halving in May 2020
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On the other hand, “any other industry would be put out of business overnight.”
In other words, there could be an exodus of mines who are responsible for 30-40% of the total computing power on the Bitcoin network; this could certainly be a big shock to the security of the Bitcoin ecosystem, and could contribute further to mining centralization on the network.
In a way, though, it’s almost remarkable that only these miners seem to be in imminent danger of shutting down: Dr. Marc Fleury pointed out that the reality of the impact on halving is hard to stomach: “while cost is held steady, income is halved overnight,” he said.
“This idiosyncratic feature of Bitcoin has proven itself to only be successful in the crypto industry, as any other industry would be put out of business overnight with that type of impact on margins. Miners are a persistent, patient, and well-capitalized group,” he said.
“They play into the two reasons why Bitcoin price tends to go up after the halving. Firstly, because new supply from miners is halved, supply is also halved. And secondly, miners tend to hold onto Bitcoin until the price is right, which usually means when the price doubles,” he said.
In other words, miners won’t sell their BTC at a loss: Jeremy Britton, chief financial officer at Boston Trading Co., explained to Finance Magnates earlier this year that “at present, it costs around $3000 just in electricity to mine a single bitcoin (notwithstanding the cost of hardware, and internet access).”
“This is why, when BTC ‘crashed’ earlier in 2019, the price did not go below $3000; miners did not wish to sell for a loss.”
Therefore, when the next halving occurs in May, “the price to mine a single bitcoin will increase to a minimum of $6000. Whatever the new ceiling is, the floor will be $6k, as miners will refuse to sell for a loss,” he said; some estimates have put that figure over $12,000.
Dr. Fleury compared this to the “OPEC of the 70s”: it “was able to dictate the price of oil due to its control of oil supply. The halving is a supply shock. Many miners, who do first reap the rewards, will not survive.”
Is the halving already priced in?
The effects could be particularly severe for miners if the expected price increase won’t ever come; a number of cryptocurrency analysts believe this to be the case.
Why? Jimmy Nguyen, president of the BSV advocacy organization known as the Bitcoin Association, told Finance Magnates that “these events have been known from the outset–a halving is not new information.”
Similarly, Steven Wagner, Senior Contributor at Decred.org, told Finance Magnates that “this will be Bitcoin’s [3rd] halving, so no one is expecting any surprises,” and that although “historically, there has been some correlation with price increase,” Wagner believes that “a price rise could even be a self-fulfilling prophecy.”
Dr. Marc Fleury also commented that “many people believe in the theory of effective markets, which essentially says that all the information available about the halving should already be priced in.”
However, Dr. Fleury also seemed to imply that crypto markets don’t necessarily behave in the ways that traditional markets do, and that the theory of effective markets may not apply in the same way.
“Let’s pass in silence over the fact that crypto markets are notoriously irrational and prone to manipulation,” he continued. “Far from ‘transparent’, the crypto markets are notoriously asymmetrical with a few whales, miners included, who have outsized influence.”
” The halving may turn out to be a non-event”, and the “influence of miners” could “wane”
However, Fleury isn’t totally opposed to the idea that the effects of the halving may not have a big impact on price: “depending on whether demand expansion or supply constraints will play a bigger role, there are two possible outcomes of the halving,” he said.
The first is that “the halving may turn out to be a non-event based on stock-to-flow analysis; as there is less flow (coins produced by miners) while the stock (circulating supply) increases, the influence of miners wanes.”
The second, according to Fleury, has to do with circumstances unique to this moment in time: “we may see a more dramatic price reaction to the halving with monetary policy, creating a tsunami of liquidity and the current ‘flight to safety’ mentality.”
“It may seem ironic, or even incomprehensible, that crypto-assets currently appear to be safer during the current crisis, but that is the state that we are currently in,” he continued. “Therefore, the current economy has the potential to make or break crypto.”
“So far, the data tells us crypto has outperformed stock, bonds, gold, and even oil, as stores of value. Crypto’s aetheric nature and lack of real economy backing assets counter-intuitively plays in its favor,” he argued, adding that in his opinion, “cryptocurrencies can’t go down with the economy for they are not linked to the economy.”
Therefore, even though “the intrinsic impact of the halving may be mild,” Dr. Fleury believes that “the macro environment is strongly bullish for cryptos.”
“Play at your own risk,” he said.
What do you think the effects of the halving will be on the Bitcoin mining industry and the crypto industry as a whole? Let us know in the comments below.