Bitcoin (BTC) is a decentralised cryptocurrency where transactions are made by broadcasting the intention to transact to volunteer “miners” around the world. These miners then compete to create a cryptographic signature which proves the transaction (and others) is valid and was initiated by a party in control of the funds. This signature and the transactions are then permanently committed to history on the blockchain. These miners are rewarded for the work of creating the signature with a fixed quantity of Bitcoin, the amount of which halves approximately every four years. This is called a “Halving”.
The next is scheduled to occur in May 2020 and will result in the block reward reducing from 12.5 BTC per block to 6.25 BTC. This could have a significant impact on mining profitability, the price of Bitcoin, liquidity and global transaction volume as this event will reduce the global revenue of mining by $7.3M USD (equivalent) per day. Some experts, analysts, and popular commentators speculate this will result in a significant increase in the price of Bitcoin, possibly more than doubling it over 12 months. This could add $146.6B USD equivalent at the current Bitcoin market capitalization.
Why does Bitcoin have an upper cap?
The bitcoin has an upper cap of 21 million. In other words, there will be only 21 million Bitcoins ever to exist. Let us first understand the reason for this upper cap.
- Fiat currency is by definition highly inflationary. The fiat currencies around the world are under the influence of the central banks which can easily pump more cash into the network, whenever they want to control the supply. This is seen by many as a highly unethical procedure.
- It wasn’t clear when Bitcoin was first developed whether or not it would be accepted in the first place. Through controlling the supply, potential buyers have been encouraged to buy Bitcoins before it runs out.
- Some way of distributing the currency was required. Miners would initially be transmitting Bitcoin using their computational power. After the mining of all the coins, transaction fees will take over to secure token economics for Bitcoin.
At the time of writing this report, these are some of the parameters of bitcoin.
|First Bitcoin Halving||November,2012|
|Second Bitcoin Halving||July,2016|
|Third Bitcoin Halving||May,2020|
|Total Bitcoins in Circulation||18,165,625|
|Total Bitcoins to be ever produced||21,000,000|
|Percentage of total Bitcoins mined||86.50%|
|Total Bitcoins left to mine||2,834,375|
|Total Bitcoins left to mine until next block half||209,375|
|Coin reward post halving||6.25 BTC|
|Current Bitcoin inflation rate per annum||3.68%|
|Bitcoin inflation rate at next halving event||1.80%|
Historically it has been observed that Bitcoin halving proves to be a catalyst that propels bitcoin into a new bull market and the trend begins at least a year before. The trend gets stronger a quarter before halving.
Effects of the Halving
Halving will be followed by a reduction in the inflation rate from 3.68% to 1.80%. After May 2020, the block reward will pay less for network security. This will heavily impact the economics of the mining business. The cost to mine one BTC depends on a variety of factors, such as electricity costs, mining difficulty and hash rate per unit of power.
A recent study estimated the cost to mine 1 BTC at an electricity price of $0.05/kWh to be around $5.6k. This cost will increase considerably post-halving, affecting especially miners using older mining gear and leading to the obsolescence of equipment with lower hash rate-to-power ratios. In the past, however, halving has not led to decreases in hash rate. After both instances, the subsequent price rallies ensured that miners remained profitable.
The time after the first halving also marked the advent of the ASIC (application-specific integrated circuits) mining which led to immense efficiency gains over older methods such as CPU, GPU or FPGA (field-programmable gate arrays) mining – a fact which left its footprint in the hash rate chart. A block reward halving drastically changes how much the protocol pays out to miners irrespective of network usage (i.e. transaction fees) – next time from 1800 BTC per day to 900 BTC per day. Currently, transaction fees only account for about 2 % of the total miner revenue. Since the total miner revenue is tightly correlated with the hash rate and hence the overall network security, there are three possible outcomes.
- The first is that the Bitcoin price will rally as it did after the first two halving – in this case, miners will remain profitable and the hash rate will continue to go up.
- The second scenario in which on-chain transaction volumes and total transaction fees would strongly increase leads to the same outcome.
- If neither of the two happens, however, then the hash rate could be expected to decrease due to miners with the highest production costs per BTC becoming unprofitable.
Another interesting fact to note is that both Bitcoin Cash and Bitcoin SV are projected to undergo their block reward halving in April 2020 – one month earlier than Bitcoin. Since all three chains also share the same hashing algorithm, much of the hash rate of BCH and BSV will most likely switch over to Bitcoin for a month (until its halving has also happened).
Supply and Demand
The supply/demand equation states that if everything else remains constant, the price of a particular product will differ in a competitive market until it reaches an economic equilibrium in which the quantity produced is equivalent to the quantity supplied. Therefore, this leads to two situations.
- High supply and low demand resulting in a decrease in asset/product price.
- The supply is low, and the demand is high, leading to an increase in the asset/product price.
If the miners were allowed to mine Bitcoins indiscriminately it would increase their circulating supply exponentially, crashing their price in the process. This is why the Bitcoin halving function for controlling the circulating supply was hard-coded into the protocol. Before the halving, while all blocks yield a 12.5 BTC reward and a block is mined approximately every 10 minutes, the global production of Bitcoin is approximately 1800 BTC per day. This figure will reduce to 6.25 BTC per block and production will drop to approximately 900 BTC per day. The halving of mining block rewards will result in a halving of the number of Bitcoins entering circulation on a daily basis. This downward pressure on the circulating supply is estimated to drive the price of bitcoin higher.
Analysis of the Previous Halving
During all three Bitcoin halving events, the price has consolidated or increased gradually before each halving. Afterwards, the rate of increase accelerated. In the second halving, a strong decrease preceded the acceleration.
Halving-1: November 2012
Upon analysing the major bull and bear markets pre and post halving we observe that prior to the first bitcoin halving that took place on 26 November 2012 we observed a low of $2.01, 378 days prior to the halving and a high of $270.94, 135 days post halving which resulted in a rally of 13000 %, post reaching an all-time high of $270.94 bitcoin crashed by 80%.
Halving-2: July 2016
Upon analysing the major bull and bear markets pre and post halving we observe that prior to the second bitcoin halving that took place on 11 July 2016 we observed a low of $164.01, 544 days prior to the halving and a high of $20,074.04, 524 days post halving which resulted in a rally of 12000 %, post reaching an all-time high of $20,074.04 bitcoin entered a bear market.
Awareness in the Market
The market has become significantly more aware of Bitcoin Halving leading up to the 2020 Halving when compared to the 2016 halving. This can be evidenced through Google search trends leading up to the halving.
Here there is a significant spike of Google searches on the day of, and the week leading up to 2016 Halving. There is also the significant interest being generated from mid-2019, a full 11 months before the projected date of the halving mid-May 2020. This has not prevented the market from trading derivative products such as futures and options which expire post halving.
Bitcoin halving and Altcoins
There were no other coins other than Bitcoin in 2012 when the first halving took place thus the second halving which occurred in 2016 is the only observation available to analyse the movements of Altcoins at the time of Bitcoin halving. The table below observes the price movements of various altcoins for 3 months prior to the halving event and 3 months post the halving event. The percentages calculated are with respect to the closing price of BTC on the day 3 months prior to halving, on the day of halving and day of 3-month post halving.
Bitcoin Halving-2: July 2016
Bitcoin halving should fundamentally not have any impact on other coins but since the cryptocurrency world is still in its very nascent stage with no perfect valuation frameworks to determine its price, the market participants derive confidence from the price action in Bitcoin which tends to further increase or decrease the price of altcoins. The other probable reason for the movement in prices of altcoins is the perception of the movement in price of BTC, i.e. if the participants believe that due to halving the price of Bitcoin will rise then they will lock their investments in BTC but if they perceive that prices are going to fall then they may either exit from the market or might invest in altcoins which will increase their price. Follow TradeDOG dashboard at login.tradedog.io to execute trades based on thorough market analysis.
Inferences from the past
The similarity across both the halving is that Bitcoin rallied 12000%-13000% from the bottom of pre-halving bottom to its post halving all-time high. There are various other factors like the new entrance of Chinese exchanges and miners in 2012 which led to the uptrend and the Mt Gox story which led to the downturn post halving and similarly prior the second halving it was the time when Bitcoin began to get traction around the world with the entrance of new exchanges and increase in the number of ICO’s which led to the increase in demand and hence the prices and post the halving we saw a negative regulatory environment in major countries like China and India which led to the decrease in demand and hence the prices declined post halving. But since then the awareness level has increased, community engagement has been ever-increasing thereby leading to growth in adoption. TradeDOG estimates that this upcoming halving will lead to a bull rally in Bitcoin, giving a high return to the investors.
Although, there are some views in the community which compare Bitcoin to traditional financial theories. If we look at this event from an economist’s view and consider the “Efficient market hypothesis”, an investment theory popularized by Eugene Fama. According to the “semi-strong efficiency” theory of Fama’s hypothesis, all publicly available information is reflected in the prevailing market price. As the event of halving is a publicly known event the investors must be pricing the coin based on the information available. But it is a well-known fact that crypto assets have not been performing as per these theories and hence the applicability of these hypotheses seems to be irrelevant.
We have a message for all those investors who have a strong belief in fiat currency and have been investing in equity markets only. They will definitely agree with us in the fact that Portfolio management has certainly produced high return in the past and diversification hedges against any shocks in the market. Considering the present state of the economy, major indices are down, inflation is high and currencies are devalued, it’s high time to expand your horizons to digital assets. Let’s look at the table below which intends to find the correlations between Bitcoin and other asset classes.
Bitcoin returns have been different from all other asset classes and hence it is an important asset for your portfolio.
Halving bitcoin is at the very heart of the protocol. Only think about it. Halving ensures the deflationary efficiency is conserved. It means it remains ideologically opposed to fiat currency, which by its very definition is centrally regulated and inflationary. Satoshi Nakamoto had ensured that the internal token economics will still support the network even after all the Bitcoins have been mined out. Although past two halving events are not a big sample to arrive at any conclusion we can conclude one thing with certainty that Bitcoin halving reduces the inflation of Bitcoin and thus reduces the rate of supply which makes the asset scarce, which will result in an increase in the price of Bitcoin if the demand increases.
There has been a bull market previously for both Bitcoin and altcoin market prior to the halving and there are several other market factors which may have led to this uptrend, but crypto ecosystem still works largely on the sentiment indicators. The sentiment analysis algorithm used at TradeDOG indicates a Bull Run pre and post halving. Already 86% of the bitcoins have been mined and less than 10% of the total circulating supply will be available in the next 4 years before the next halving and we are talking about a chain which has grown in its transactions numbers since the last halving in 2016.
This number does not even consider the parallel transactions on Sedwig’s chain, lightning network and private consortium transactions like blockchain info and other large wallets. This clearly gives us a hint that the chain is easily observing transaction numbers close to 200x which will further increase in number in the next 4 years. From a technical perspective, BTC/USD is showing signs of Golden Cross (50 Day moving average crossing 200 Day moving average) which indicates a potential Surge in the price of Bitcoin, the last time this happened Bitcoin gained more than 200% in its value.
So to conclude, increasing transaction numbers, downward pressure on supply and ever-growing awareness gives a clear indication of price appreciation. TradeDOG estimates that the price will very soon rally to $100,000 i.e a 10x return from today’s prices. Investors who want safe investment and do not intend to trouble their portfolio with regular volatility can stick to just bitcoins. Along with this one other aspect which we want to highlight is that the next three months would witness high liquidity in the market and to make more bitcoins for your portfolio, you can follow TradeDOG advice regularly.