You might be wondering just what is going on in the Bitcoin world. For those of you who are a little curious, just know that it’s Bitcoin halvening season. In fact, as we write this article, Bitcoin has just experienced its third-ever bitcoin halvening. To be precise, this halvening occurred at 3:23 p.m. EST on Monday, May 11. Pretty exciting, right?
For some of you, especially if you are a newer investor, you might be wondering exactly what this might mean for you and your investments. Needless to say, we were kind of wondering the same thing. After all, many have suggested that this might be the time to make some predictions on the Bitcoin price. Perhaps, even on a platform like Hedgetrade where you can receive rewards for a prediction that is correct. That’s why we put together a list of some of the possible outcomes of Bitcoin halvening in 2020.
But first things first, what is bitcoin halvening?
Bitcoin Halvening Defined
You might have heard of Bitcoin halving or Bitcoin halvening. Before you get too confused, we wanted to let you know that both terms actually mean the exact same thing. These words are interchangeable and both refer to the time when the reward for mining new bitcoins will be cut in half. This means some time in May when the halvening occurs, the reward will go from 12.5 bitcoins to 6.25.
This halving event occurs every 210,000 blocks of transactions, approximately once every four years, until all possible Bitcoins are mined. It was hardcoded by Satoshi Nakamoto himself into the bitcoin protocol to ensure that bitcoin will always remain a deflationary asset. This means that bitcoin will only go up in value. Or at the very least, hold its value, as the supply of new bitcoins decreases. It explains why there is excitement every time bitcoin goes through this process.
Having said that though, it does not mean that the price of bitcoin will follow a straight trajectory up. It is still subject to volatile price swings caused by market demand for cryptocurrencies. This is in addition to the impact of the local and global economy, and of course, investor emotion. Just think about the devastating impact that the recent coronavirus pandemic has had on the price of bitcoin. But all things considered, the halving event should be a good thing in the long run.
The History of Halvening
Bitcoin has had two halvenings so far, but even so, it is hard to say what comes next. Regardless, the implications are interesting since the first 80 percent of bitcoin supply was mined in the first year. But the rest will continue to be mined until 2140. This means that there will still be an incentive for miners to mine. Additionally, the masses will have a little bit longer to get used to the idea of online currency.
For those trading, it is important to keep in mind the dates of these events. This is because a reduction in the number of bitcoins generated by the network will limit the supply. With increased demand, this might mean increased prices. But is this always the case?
Please keep in mind that these are all potential outcomes based on historical research. The suggestions brought out in this article should by no means be constituted as complete financial advice.
Big Price Increase
While we can’t say for certain, most traders continue to believe that history will repeat itself as it has for every other halvening. Many crypto traders say that we can expect big price increases as a result of halvenings. This might make sense since the supply has dropped and the demand would theoretically remain the same. As Economics 101 would state, lower supply and higher demand means an increase in price. That said, we haven’t been able to pinpoint just what that price increase will be. Investors and active community members have suggested the price increase could be anywhere from $12,500 – $400,000. This is a pretty substantial range. As we said before, there are many factors that can come into play and we only have the historic to work off of.
That said, many people look at the halvening with the expectation that the price will go up. This means everyone might just have the same idea to jump into the Bitcoin game. This, in turn, might just be the self-fulfilling prophecy that drives the price up.
These beliefs aren’t based on nothing though. Some might recall the example of Litecoin which is seen as an example for Bitcoin today. This cryptocurrency underwent their halving in August of last year. Afterwards, the price quadrupled. This suggests that Bitcoin might easily follow in LTC’s footsteps. While we can expect a price increase, this typically will not occur for a couple of months afterwards. So don’t worry if you are just hearing about the halvening now. There is still time to act on this news!
Huge Price Swings
Following the increase in price, it is not uncommon for there to be some pretty major price swings to follow. Again, following Litecoin’s example, after seeing a price increase there was a massive tumble over the rest of the year.
Prior to this halving, Bitcoin had seen its biggest monthly gain since May 2019 when bitcoin rallied by 62 percent. So far this month, it is up more than 36% on a month-to-date basis. As the price of bitcoin rises in anticipation of the halving though, we also see a rise in the number of put options for bitcoin. Put options are essentially a bet that the price of the crypto will decrease and acts as a hedge against a price drop.
The increase in activity shows that investors may be expecting a price drop after the halving event. This may be a good pre-emptive move, as we see from history that the first halving in 2012 was followed by an immediate price drop of 10%. The second halving event in 2016 resulted in a 30% price drop.
This very well might be the result of miners taking advantage of the uptake in expectation of the halvening. After all, if they got in when prices tumbled after the last halvening this might be the time to take some of the profits from new investors who are excited to enter the Bitcoin market.
Sorry Small Blockchain Networks
One analysis firm states that the result will actually be an immediate drop in profits for smaller blockchain networks. Think of Bitcoin cash (BCH) and Bitcoin SV(BSV). It is likely in this event, computer operators will make the switch to mining on the bigger, more profitable bitcoin network. While this doesn’t jeopardize the bitcoin network itself, it does make these other networks more susceptible to hacks.
You see, computing resources or hash power is crucial for keeping a network secure and free from abuses. Without enough of it, anyone can launch a hostile attack on the network with what is known as a 51 percent attack. In such an attack, one can co-opt the entire network by amassing enough computing power to do so. This is easier to accomplish when there are fewer miners on the network. And if investors feel that a network is not secure, they may withdraw their investments in these networks.
Already, we have seen Bitcoin’s hash rate, or computing power dedicated to bitcoin mining, rise to an all-time high of 121 exahashes per second, ahead of the halvening. This may be due to miners hoping to capitalize on the higher rewards prior to the event.
Higher Trading Activity
“I expect bitcoin will see more trading activity around the halving—most likely ‘buy the rumor, sell the news,’” shares Demirors.
Halving has been hailed as a bullish event for the price of bitcoin. As a result, we have seen a recent spike in trading activity. As you know, emotions play a big part when it comes to investing, and bitcoin is no exception.
It would seem that much of the increased interest in bitcoin is likely the result of the fear of missing out on expected price gains. It doesn’t help that this has been fueled by the wildly optimistic forecasts of some analysts of prices as high as $400,000. The network itself has experienced some of the highest traffic in over two years. This suggests an increased interest in bitcoin.
Having said that, though, there are also analysts who believe that the halving event has already been reflected in the price of bitcoin. If you are a bitcoin investor, you may wish to err on the side of caution, as it could be a classic case of the old adage, “buy the rumor, sell the news.” If this is true, we have already seen the biggest price increase prior to this event. Which may then be followed by a price drop once the event has taken place.
Bitcoin Will Remain Static
Another possible scenario is that we could see the price of bitcoin remains static. Consider that the competition in the cryptocurrency world continues to increases. Not only that. Other forms of crypto continue to mature. Together these two factors can take away some of bitcoin’s hold as the most widely used cryptocurrency. The decrease in supply may cause users and investors to turn to other up-and-coming forms of cryptocurrencies such as Ethereum or Litecoin.
Also, when one considers the effect of a lower number of bitcoins entering the supply pool relative to the number of bitcoins that get traded on the exchanges, the effect of halving is actually quite negligible. Of greater importance on the price of bitcoin is the impact of other macroeconomic catalysts such as the monetary policies of central banks. The effect of quantitative easing by the U.S. Federal Reserve, for example, will create inflation and drive investors to look for a deflationary asset such as bitcoin. For large traders of bitcoin then, the halving event may be considered a non-event in their eyes.
Lower Hash Rate
With mining rewards being cut in half, one likely outcome will be a diverting of computing power to more profitable ventures. As the number of bitcoins mined daily drops from about 1800 to 900 units, mining operators will see their revenues drop by half. The breakeven costs of mining is projected to be between $12,500 and $15,000. With bitcoin currently trading at around $8600, just after the halving event, miners will be operating at a loss for several months.
The reduced rewards mean that, for operators using older, less efficient technology, mining will become an unprofitable venture. Already we have seen a number of these miners shut down their operations prior to the halving event. The result is an overall lower hash rate for the bitcoin network as miners are forced out.
In the past, however, for miners who are able to stay afloat, the lower rewards are usually offset by a corresponding surge in bitcoin prices. Whether this will play out this time around is hard to say, as economic conditions are far from normal. This halving event is taking place during unprecedented times when the coronavirus pandemic has affected every segment of the global economy. Crypto miners are facing more pressure than ever before in the short term.
Let’s Wait And See
Needless to say, even with all of these predictions it is hard to say for sure what really will happen. Bitcoin is a new industry and determining how a halvening will play out is difficult. Since this is a predetermined event many wonders if the price has been somewhat predetermined as well. That said, for those who aren’t big cryptocurrency traders you may want to avoid buying as much bitcoin as you can. Although we can analyze historic until we are blue in the face, we can never really be sure what the prices of bitcoin will do. As an investor, this means we should still be doing research and only making investments in bitcoin as a part of a diversified portfolio. Jumping on the same trends as everyone else isn’t a foolproof strategy.
Although we may never know, unless Satoshi Nakamoto comes out of hiding, we can always just wait and see. After all, the halvening has just occurred. The time to make predictions is now!