Analysis

Will the Bitcoin Halving Still Boost the Price Post-Coronavirus?

After the coronavirus, will the halving have the same effect that analysts were saying it would in early 2020?

Although weeks of quarantining to fight the coronavirus have passed, it may seem as though time is moving extremely slowly: the times before quarantine at the beginning of March (in most of the world), just over a month ago, seem as though they happened in a distant past.

The time and space that the coronavirus has taken in our everyday lives also seem to have changed the cultural center of gravity around the globe–no matter what has been happening in just about any country, the coronavirus has completely taken over the conversation.

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This is also true in the Bitcoin community. Bitcoin, like the rest of the world, has been deeply affected by the spread of the coronavirus.

Before the coronavirus economic crash, and the steady recovery that has ensued, Bitcoin was in the midst of a bull market that was being largely attributed to the upcoming ‘halvening’ or ‘halving,’ an event in which Bitcoin’s mining reward is cut in half; this halving is expected to happen on May 11th, 35 days from press time.

Given the change in circumstances that the coronavirus has brought to Bitcoin, can we expect that the effects of the halving on the Bitcoin network will be different than in more ‘normal’ circumstances? And are there any other consequences of the halving this time that may not have come in the past?

What is halving?

On the Bitcoin network, halving happens regularly at preset intervals of every 210,000 blocks–roughly once every four years. This is built into the Bitcoin protocol.

While it’s not completely clear why Bitcoin’s creator implemented the halving mechanism, or exactly how halving affects the price of Bitcoin, the most popular theory seems to be that halving was designed to increase scarcity and that therefore, it usually drives the price of Bitcoin up.

In other words, if miners periodically have less incentive to keep doing their work, fewer coins will be mined, and the coins that are mined will be more valuable. Therefore, a decrease in mining activity–or a change in the types of miners that are able to run profitable mining operations–may ensue.

So, even though time seems like it may have slowed down considerably–and the coronavirus has tainted every aspect of our lives–the halving is ever-approaching.

Will halving boost the Bitcoin price?

For many analysts in the space, the effects of the halving seem to be the one predictable thing amidst a sea of chaos.

For example, Danny Scott, chief executive and founder of Bitcoin-to-fiat platform CoinCorner, told Finance Magnates that he expects that the halving to be business-as-usual.

“As with previous halvings, Bitcoin’s price tends to rise in the following months,” he said. “It’s a simple supply and demand scenario, so we don’t expect anything so far this year to have taken us off this track.”

Danny Scott, chief executive and founder of Bitcoin-to-fiat platform CoinCorner.

Indeed, in this context, Scott explained that “assuming some basic math for the sake of simplicity, the price of Bitcoin is currently around $7,000. The first time we achieved a price of $7,000 was around October 2017.”

“For the price to maintain from that point in time to today, there must have been around $400 million per month coming in to buy up the newly-mined Bitcoins. After the halving in roughly [35] days, the number of new Bitcoins being created will be halved, from 12.5 BTC per block to 6.25 BTC.”

Supply and demand

Therefore, “if the demand continues at $400 million per month (which it has done for the previous 2.5 years), it will create a standard supply and demand curve, and undoubtedly cause the price of Bitcoin to increase.”

What exactly will this price increase look like? Earlier this year, Jeremy Britton, chief financial officer at Boston Trading Co., explained it this way: “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.” In other words, miners were maintaining the $3,000 “floor.”

Therefore, when the next halving occurs in May, Mr. Britton believes that “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.”

The halving “isn’t the only factor to keep in mind.”

However, Danny Donahue, editor-in-chief at CryptoDetail.com, told Finance Magnates that the traditional price-boosting effects of a halving might not be enough to bring Bitcoin back up: “Bitcoin halving is an event that definitely influences the price movement,” he said, “but it’s not the only factor to keep in mind.”

For example, “the money circulating in the market is also important to take into account. Check the capitalization moves relating to price, you will notice a high correlation here. Another factor could be news about hacks or regulatory actions. And that’s not all the points. Basically, no one knows how Bitcoin halving will affect the price exactly.”

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However, Matthew Dibb, co-founder and chief operating officer of crypto investment firm Stack, sees some of the other economic effects of the coronavirus as being positive for Bitcoin: he told Finance Magnates that “since its low of $3,800, Bitcoin has rallied 92% and is showing strong signs of stability in its V-shape recovery.”

Indeed, Dibb sees the effects of the coronavirus as short-lived: “while the recent downturn has been a consequence of a global black-swan event, we believe these headwinds for digital assets are short-term, and that the overall valuation of BTC should rise quite consistently as more investors enter the market or expand their position in pursuit of a price jump soon after the halving.”

” We believe these headwinds for digital assets are short-term.”

Dibb said specifically that the “based on many of the macro-economic factors at play, including global Central Bank stimulus efforts, we are now seeing an increase in investor demand for Bitcoin and major digital assets as a means of diversifying portfolios and a ‘hedge’ against future economic uncertainty.”

Steve Ehrlich,  chief executive officer and co-founder of crypto trading platform Voyager.

And for some in the cryptocurrency community, these “global Central Bank stimulus efforts” are especially evidential that Bitcoin will continue to rise in the future for reasons beyond investor demand: “with the Federal Reserve printing trillions of dollars, the fundamentals of Bitcoin have never been more important,” said Steve Ehrlich, chief executive of crypto trading platform Voyager, to Finance Magnates.

Indeed, “unlike fiat currencies, Bitcoin cannot be hyperinflated,” Ehrlich said. “Its blockchain is coded so that there will never be more than 21 million Bitcoin in existence, and there’s roughly only 2.8 million left to mine”–and because the upcoming halving will decrease the rate at which the remaining Bitcoin can enter the market, Ehrlich sees a bright future for BTC: “the perfect storm is brewing,” he said.

“[…] People will see the benefits of ‘scarce assets’ like Bitcoin, gold, and silver as national currencies around the globe face the threat of hyper-inflation following the printing of trillions of dollars worth of stimulus. At Voyager, we’re seeing this in real-time with 2.5x more buyers and sellers entering into this market, as we are growing by leaps and bounds.”

Therefore, Ehrlich believes that “Bitcoin could easily find a new fair market value between $10,000 and $14,000, closer to the cost of mining a Bitcoin post-halving.”

How will the halving affect the mining industry?

While the halving may have positive effects on Bitcoin’s price, however, the reduction in the amount of Bitcoin that are given as mining rewards could lead to some changes in the Bitcoin mining industry.

For one thing, the network could be fundamentally slow–Ehrlich said that “potentially, users could experience slower transaction speeds and less liquidity in the markets, but we think the latest scaling technologies are ready to step in and resolve this problem.”

There could also be a shift in the kind of miners who operate in the industry. “With the recent price drop of Bitcoin, miners are at risk of becoming unprofitable in the near term, and with the halving approaching, things could become even more difficult,” Ehrlich said. “Because of this, some mining rigs with outdated equipment have closed and there has been a rise in consolidation.”

And as the consolidation continues, the Bitcoin network may face an increased level of centralization in its mining landscape, which is a security concern: the more centralized a blockchain network is, the easier it is for a hacker to compromise it.

Centralization of Bitcoin mining has long been a concern: in late January, blockchain research firm TokenAnalyst published a report entitled “Centralisation in Bitcoin Mining: A Data-Driven Investigation,” in which it disclosed that “in 2020, bitcoin has also become a highly centralized system that places an increasing amount of trust in a small number of large entities, including Antpool, Btc.com, Btc.top, F2pool, and Viabtc.

The halving could make the Bitcoin mining industry more centralized

As mining rewards have continued to decrease over time, it’s become more and more difficult for small players to run a profitable mining rig–and while Steve Ehrlich explained that “there’s also been a significant investment in highly-efficient and cost-effective mining equipment that can weather volatile markets and the reduced mining rewards post-halving,” there is also concern that small- and medium-sized mining operations could become even rarer.

Ibrahim Alkurd, the chief executive of New Mine and Partner at Lavalier Capital.

Indeed, Ibrahim Alkurd, the chief executive of New Mine and Partner at Lavaliere Capital, told Finance Magnates last week that “economies of scale play a big factor in mining farms.”

“The recent price drop in BTC caused smaller mining farms that have more expensive power and machine costs to unplug,” he said. “Although the bigger mining farms have seen smaller profits after the recent price crash, they’re still running profitably.”

Though it may not seem like much, at least one miner has already shut down because of the halving–Chinese Bitcoin mining pool BytePool announced this week that it would be shutting down its operations because of concerns around the upcoming halving.

The problem could be especially acute because of the fact that a number of miners–particularly in China–have already been forced to either temporarily or permanently shut down their operations.

Changing the way that we think about Bitcoin

The events around the coronavirus have also revealed some other weak spots in commonly-held beliefs about how Bitcoin behaves in relation to other financial markets, particularly during times of economic crisis.

Indeed, Matthew Dibb explained that “with traditional markets tumbling, alternative assets have not escaped the panic caused by COVID-19…previously lauded as “digital gold,” bitcoin and other cryptocurrencies have similarly not been spared the vicious downward trend resulting from the coronavirus pandemic.”

Still, Dibb believes that “while digital assets have been heavily impacted by current market turmoil, this does not undermine their status as an uncorrelated asset or their potential to offer significant security and potential rewards to investors.”

Indeed, “Bitcoin’s sudden correlation with traditional markets should not be seen as refuting its status as a promising safe-haven investment,” he continued.

Instead, Dibb believes that “the most reasonable explanation for the current market situation is that the global spread of COVID-19 is a textbook ‘black swan’ event — an unforeseen occurrence that has a profound impact on markets, often causing them to behave in unprecedented and unpredictable ways.”

“These moments, however, do not rewrite the market characteristics that define the economy in normal times, and bitcoin’s correlation with the traditional market cannot be taken as a new status quo.”

Dibb believes that “taking a long-term view of bitcoin’s relationship with traditional markets unveils a track record of insularity from global economic fluctuations. Already, a decoupling between bitcoin and more traditional asset classes is visible in the market. Having printed a low of $3,800 only two weeks ago, bitcoin has since rallied about 92% to settle at $7,300 as of today.”

“From a macro point of view, bitcoin has gradually shifted away from its ‘risk-on/risk-off’ relationship with global equities, instead, following similar intraday movements to gold as investors seek safe-haven exposure to hedge their portfolio holdings.”

What are your thoughts about how coronavirus and the halving will continue to affect the price of Bitcoin? Let us know in the comments below. 

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