In a few months, the time will come: the Bitcoin Halving is just around the corner. Whether trader, gambler (-> www.bestbitcoinbetting.com/) or top investor (-> www.investopedia.com), – the majority already sees the big pump on the horizon and bets on rising prices due to the upcoming event. But how realistic are these positive and bullish assumptions?
The Bitcoin Halving – a short introduction
In the following section I would like to briefly discuss the concept of Bitcoin halving, supply reduction and mining. So if you regularly read our articles, you probably already know what I mean and may skip this section.
Bitcoin Mining is performed using special mining equipment. These so-called ASICs (application-specific integrated circuit) are nothing more than ‘computers’ designed to execute the Bitcoin Mining algorithm as efficiently as possible. The machines solve the necessary mathematical problems to generate and verify blocks. In return, the miner receives Bitcoin as a reward for the effort (cost of ASIC, electricity, maintenance, installation, storage). So much for the basics.
The natural mechanism of supply reduction
When designing Bitcoin, however, it was already taken into account that this Mining Reward is halved every four years. So in 2009, the year Bitcoin was created, there was still a full 50 BTC as a reward. 4 years later, in November 2012, the number was reduced to 25 BTC. The last halving took place in July 2016 – in this year the Block Reward was halved from 25 to the current number of 12.5.
The next Bitcoin Halving is scheduled for this year; to be precise, in May. Now let’s get back to the question of the ‘Halving Pump’. At first glance, the following magic formula may sound logical:
The supply of new BTC is halved while demand remains at least constant. Since the price is the result of supply and demand, it must rise if supply is halved and demand remains constant.
As we could already see in 2019, many miners obviously followed this formula. Because the hashrate reached new heights last year. It is therefore reasonable to assume that many miners are speculating on a halving pump and do not want to miss out on ‘the licence to print money’.
How realistic is a Halving Pump? retrospective
- Yes, the past is the past. It is no guarantee that the scenario will repeat itself in the future.
- Nevertheless, it is often a good indicator for observing and learning from past trends and behaviour patterns.
- And if we look at the price or price movements after a Bitcoin halving, we see that an immediate halving pump is fiction.
- Let’s first look at the following graph from the colleagues at Longhash and then discuss it.
Bitcoin Halving and price movements in the past
We can clearly see that there has been no (!) immediate and significant price increase for both halvings in the past. After the first halving 2012 it took another 12 months until a new all-time high was reached. If we consider the distance between the second halving in 2016 and the all-time high in 2017, it even took 16 months. But with the latter we can already doubt the causality: was it really the Halving 2016 or the ICO boom and the blind naivety of many investors that pushed the Bitcoin price up?
Are rising difficulty and production costs a time bomb?
So to sum it up again: first of all, there is no guarantee that the Bitcoin Halving will lead to a higher price in May. However, there are rarely guarantees in life. Obviously there was (and is) a large number of investors who continue to invest in mining equipment, which leads to an increase in the hashrate. As a consequence, the difficulty increases and with it the production costs for BTC.
At the same time, however, the reduction in supply in May will also increase production costs for BTC. This is also the reason for the (justified) concern as to whether a Bitcoin mining disaster will occur in May. Because – as we said earlier – the price is nothing more than the result of supply and demand. If demand is low, the price will fall. Whether the production costs are more expensive or not.
Bitcoin Hashrate is rising tirelessly – an indicator?
Since June 2019 alone, the Bitcoin hashrate has increased by almost 100 percent – a doubling in just over 6 months. According to a CoinShares report, the increase in hashrate is said to be related to the fact that more and more mining equipment is being installed and used in China. Parallel to this, the fact that China now accounts for a good 2/3 of the mining power is also fitting. Apart from China, it is above all the USA, Russia and Kazakhstan that form further important hubs in the mining business.
But let’s come back to Bitcoin Halving and the possible mining disaster. I would like to conclude this article with a small impulse:
How Bitcoin Halving could actually lead to disaster. At the current time the hashrate is about 100 exahash. If the growth rate of recent months continues, we can expect an additional 10-15 exahash per month. This means that Bitcoin Halving could lead to a new all-time high of 130-150 exahashes in May.
Let’s now assume that the Bitcoin price will remain constant until then. This means that it will remain at a level of about 7000 – 7500 USD. The supply reduction in May plus the rising hash rate would thus lead to a reward for the miners that would be equivalent to a Bitcoin price of 3500 – 3750 USD. When BTC was last traded in this price range, there was still talk of the Crypto Winter. Specifically, we are talking about the period November 2018 – February 2019, but at that time the hash rate was just ~ 40 exahash. So just 30 – 40 percent of the current value.
When we consider this fact, it is easy to understand why Bitcoin Halving should not be viewed in a purely positive light. Because if there is no prompt pricing, the miners will no longer be able to bear the rising production costs. This in turn could lead to a reduction of the hashrate until the adjustment of the difficulty allows more profitable production. This would bring us to natural selection in Bitcoin style.