What happens after the next Bitcoin halving
The next Bitcoin halving is upon us. Even if you might be uncertain about what it means, you will probably agree that it sounds like a rather momentous event. The short version: On May 12th, the cryptocurrency Bitcoin will undergo a halving process, whereby miner block production rewards (and thus the supply of new bitcoins) will be cut by half. So far, this halving protocol has occurred twice in Bitcoin’s relatively short but eventful life – in 2012 and 2016. As the supply of Bitcoin is finite, halving is a fundamental element of Bitcoin’s design and occurs approximately every four years. The number of bitcoins eventually in existence will never exceed 21 million (slightly less, actually).
The two halving events we have seen so far were both marked by substantial price increases within the 12-month periods that followed them. It is therefore only natural that many crypto investors are now expecting another price rise in the aftermath of next week’s third round of halving. And as the scarcity principle teaches us: When the supply of an asset decreases and demand rises (a consequence of the asset being perceived as scarce), asset value increases. So there should be another rally in the coming year, right?
With some delay yes, as many argue -and not just because of the supply side. There might be trouble in the short term, however. The price of Bitcoin is affected by miner efficiency levels. And the problem at hand in the immediate future may be miner-led selling pressure. This superb article by Kevin Lu and the Coin Metrics Team explains how miner revenue (denominated in crypto) will be cut in half after the halving event, while mining costs such as energy expenses (denominated and payable in fiat money) will remain constant. In consequence, many inefficient Bitcoin miners are expected to capitulate and cease mining operations in the months to come. Miner capitulation results in increased selling pressure in the short term and thus a lower Bitcoin price. In the middle to long run, however, -perhaps after only a few months, once the inefficient miners have been removed from the board-, selling pressure should disappear and a new bull market cycle may be likely to emerge.
But there are disagreeing opinions. Besides suspicions that the upcoming halving has already been priced in, it has been noted that today’s markets are quite different from 2016 and that the impact of crypto miners has decreased, in the sense that sell pressure from miners might no longer have such a powerful effect on total sell pressure. Moreover, we have seen a strong correlation between Bitcoin and equity markets in the past months, thus casting further doubt on the probability of a Bitcoin price rally after the halving (and at least temporarily damaging the notion of cryptocurrencies being good hedging instruments).
Bitcoin has seen an upward trend in recent days and weeks. While some argue that this might simply have been a result of FOMO -fear of missing out-, we should look ahead with an open mind. As for myself, I might get myself a coin (or at least a fragment of one).
Featured post image: Photo by Thought Catalog on Unsplash