Why does Bitcoin always fall during halving? When will the halving effect be reflected?

If you are attracted to read this article because of the title, I guess you probably already know what Bitcoin "halving" is.

If nothing unexpected happens, the Bitcoin block reward will be reduced by 50% in eight days (around May 12). As part of the Bitcoin issuance, miners can get a certain amount of BTC tokens for each block they produce, but after eight days, the reward amount will drop from 12.5 BTC per block to 6.25 BTC, which means that about $8 million worth of Bitcoin "disappears" every day. And as time goes by, the amount of "disappearance" may become more and more.

What impact will the “halving” have on the price of Bitcoin?

In the cryptocurrency space, discussing prices is like an unwritten taboo, because people don’t seem to want to make people think that they are in this industry for the sake of making money. In fact, many people in the industry seem very excited about new technologies and humanitarian use cases, but pretend to be uninterested when the topic of price is brought up. However, this reluctance to admit the importance of price is likely to mislead the development of the industry. In this regard, Marc Andressen, founder of a16z, explained in his 2014 article "Why Bitcoin Matters", he wrote:

At this stage, it may be true that the monetary value of Bitcoin is based more on speculation than actual payments. But it is also true that speculation is helping Bitcoin build a high enough price that it will also make Bitcoin's payment function possible. Bitcoin must be worth something before it can match other payment services in the real world by an order of magnitude. Any new technology will encounter a "chicken and egg" problem: new technologies always seem to be worthless until they gain great value. From this perspective, part of the reason for the increase in Bitcoin's value is speculation, but this is not a bad thing. It is precisely because speculation makes its value rise so quickly that Bitcoin's practical application will be much faster than other new technologies.

People always talk about how to time the market or how to beat the market, but the chances of success through these low-yield methods are extremely low. We believe that what really matters is to understand price fundamentals and empirical behavior.

It is generally believed that the price of Bitcoin will rise after the block reward is halved, but in fact, the price of Bitcoin does not usually rise immediately after the halving. With the third halving in Bitcoin's history approaching, we think it is time to re-share our previous analysis of the "halving" event.

What can we learn from the last Bitcoin block reward halving?

First of all, according to the rules set by Satoshi Nakamoto, it is obvious that the supply of Bitcoin will be continuously compressed by halving. By analyzing the price changes caused by the two Bitcoin block reward halvings on November 28, 2012 and July 9, 2016, it may help us better understand the impact of the third block reward halving on the price of Bitcoin. Of course, our analysis may be opposed by some people in the market who believe that it is impossible to infer the trend based on only "two data points". But in fact, these opposing "voices" have not noticed one thing: these two data points have now spanned 12 years, and no contrary evidence has appeared in these 12 years.

The following two tables show the changes in Bitcoin’s 30-day average price index in the year before the block reward halving and in several time nodes in the year after the block reward halving. These time nodes include:

• 1 month, 3 months, 6 months and 12 months before the halving;

• 1 month, 3 months, 6 months and 12 months after the halving.

From this we can easily see that compared with the price trend in 12 months, the price trend of Bitcoin is not so drastic, whether it is 1 month, 3 months and 6 months before the halving, or 1 month, 3 months and 6 months after the halving. This means that the impact of the "halving effect" on the price will take a long time to manifest.

Moreover, the second Bitcoin halving had a much smaller impact on price changes than the first halving over the same period. This is likely due to the decline in market inflation between the first and second Bitcoin block reward halvings. After the first block reward halving, the median Bitcoin inflation rate dropped from about 60% to about 10%, while after the second block reward halving, the median Bitcoin inflation rate dropped from 10% to about 4%. When market demand levels are similar, smaller inflation shocks take longer to adjust prices and respond to changes.

The above picture is from TradingView, using the BTC/USD trading pair data from Bitstamp.

If around two-thirds of Bitcoin price movements over the next year follow the same trajectory (median inflation change from around 4% to around 1%), then we may have to wait until mid-2021 to see a dramatic change in Bitcoin prices.

Wait, why?

While there are multiple factors that can affect the price of Bitcoin, we believe this article provides a good summary of the important factors that affect the price of Bitcoin due to the block reward halving.

Patrick O'Shaughnessy, CEO of asset management firm O'Shaughnessy Asset Management, quoted an unsigned private message on Twitter, which talked about the reasons for being bearish on the Bitcoin block reward halving:

As the new supply of Bitcoin is cut in half, miners' income will drop sharply and the difficulty of mining will be partially reduced, but this approach cannot completely alleviate market problems. The most efficient Bitcoin miners can gain more market share, and the least efficient miners will be out of the game. Because of these additional competitive pressures, miners need to invest more money in ASIC mining machines and other operating costs to ensure sufficient competitiveness, so they need to sell some Bitcoin in exchange for legal currency. The financial situation of miners will become more unstable, making miners less willing to take risks, and this situation will also cause miners to sell their Bitcoin for legal currency.

If miners were making huge profits now, then nothing would matter. But many mining companies are making little profit. We have been in a bear market for 2 years and 3 months, and the overall financial situation (balance sheet) of miners is not very good.

All that said, this may only be part of the story, and while I personally feel that the Bitcoin block reward halving will lead to a price drop, this may not happen, after all, there are a lot of unrelated bullish forces in the market.

As we get closer to the third block reward halving in Bitcoin’s history, no matter what the final price trend is, we must remember one thing: paradigm shifts often take decades to complete, and the changes triggered by decades of accumulation cannot be measured in “days”.

Source: Lianwen