The Bitcoin halving event, which is set to happen within the next week is probably the most important topic in the cryptocurrency market right now. The Bitcoin halving event is a deflationary method that Satoshi Nakamoto included in Bitcoin’s source code. Unlike fiat currencies, Bitcoin has a fixed supply of 21 billion coins, but the algorithm is designed to release the coins in a mathematical sequence that will ensure that the last Bitcoin is not mined for the next 100 years at least.
The halving will reduce the amount of new Bitcoin introduced into the market, and many people expect that the reduced supply will cause the price of Bitcoin to rise. However, while most people expect a bullish rally, the reality is that the actual performance of Bitcoin is dependent on a number of known and unknown variables. In this post, I explore four possible scenarios that are likely to play out on how Bitcoin trades after the halving event happens.
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1. Bitcoin may record a massive price rally
The predominant market expectation is that the halving will lead to a price rally that could propel Bitcoin to previous record-highs or beyond. The case for the expected rally is rooted in the basic economic principles of demand and supply. When the supply of a commodity is lower than the demand, the market forces always find equilibrium by pushing the price of the commodity higher. The Bitcoin halving effect will shrink the supply of Bitcoin by reducing mining rewards from 12.5BTC for every block mined to 6.25BTC.
Historically, the last two Bitcoin halvings resulted in bull runs that lasted for up to 12 months. After the first rally in 2012, the price of Bitcoin soared by more than 9000% from $12 to about $1,100 within one year. After the second halving in 2016, Bitcoin’s trading price soared 284% from about $650 to about $2500. One could also argue that it surged as high as 2800% when the $19,000 price at the peak of the 2017 ICO rally.
Hence, if history repeats itself after this third halving, the price of Bitcoin could soar to the figurative moon. This is a sentiment held by many influencers in the crypto industry. For instance, Jake Yocom-Piatt, co-founder and project lead at Decred in a chat with Coin Telegraph says he expects the price of Bitcoin to double in the short-term. Also Twitter crypto analyst, PlanB says he expects the price of Bitcoin to touch $288,000 based on his Stock-to-Flow Model analysis.
2. Pre-halving rally could end in a selloff
In the year-to-date period, Bitcoin has scored almost 25% in price gains, despite COVID-19 and the recessionary pressures on the global economy. In the same period, Gold, the traditional safe-haven asset has only managed to score an 11% price gain. Equities, however, are bleeding red with the S&P 500 and Dow Jones Industrial Average down 11.22% and 16.31% respectively in the same period.
However, much of the rally in the price of Bitcoin this year might be traced to speculative positioning from traders who are looking forward to benefiting from the expected upside from the halving. It is an established fact, that most people buy Bitcoin for speculative purposes rather than the transactional purpose that Satoshi envisaged. Hence, it won’t be surprising if many traders decide to take their profits as soon as the halving happens after realizing their target gains.
If such a profit-taking activity happens, it might result in a selloff triggered by FUD when fair-weather investors and traders start exiting their speculative positions.
3. Miners could become disincentivized to continue supporting Bitcoin
The halving will see mining rewards being slashed from 12.5BTC per block to 6.25BTC per block. In essence, miners will earn fewer Bitcoin in return for doing the same (or more) work to mine the cryptocurrency. For instance, miners will still need to incur costs for the hardware, depreciation over the lifetime of the hardware, and energy bills, and other ancillary expenses while earning much lower ROI in terms of BTC quantity.
Hence, if miners find it difficult to breakeven with the reduced mining rewards, some of them might be forced to scale down or shutdown their operations. The shutting down of mining operations would, in turn, reduce the hashrate and slow down the pace at which new blocks are produced. Such an event (while highly unlikely) could return into a vicious cycle that leads to a downtrend from which Bitcoin may never recover.
4. The halving might end up as a non-event
There’s also the possibility that the halving won’t move the price of Bitcoin either way. Bitcoin has been rallying since the market opened for trading this year and much of that uptrend could be traced to sentiments about how the halving could trigger a price surge. Hence, it is possible that the halving is already priced in and that there won’t be a significantly fast uptrend in the price of BTC.
According, to Bloomberg Intelligence analyst, Mike McGlone the efficient market hypothesis has already baked in the halving into Bitcoin’s price. In his words, the halving is a “complete non-event, it’s for amateurs. Since when do known knowns matter in markets?”
It is instructive to remember that Bitcoin is a highly-volatile asset, and price moves of 5% to 10% within a session are considered normal. Hence, for a rally to be attributed to the halving, the market will be expecting to see daily price gains of up to 20% or more.
Conclusion
Nobody can predict how Bitcoin will perform after the halving with any degree of certainty especially considering the fact that the global economy is facing unprecedented challenges with COVID-19. In the short-term, the value proposition of Bitcoin is still subject to speculative forces. However, the medium to long-term outlook suggests that Bitcoin has a role to play in the global economy.