The history of Bitcoin halvings: What will happen based on hashrate?

Editor's note: This article comes from Cointelegraph Chinese (ID: CointelegraphChina), author: NIKOLAI KUZNETSOV.

As BTC rallies, many are pointing to the upcoming halving on May 12 as the underlying reason. Precedents show that the price of Bitcoin (BTC) typically rises a few months after a halving.

Satoshi Nakamoto programmed the halving into BTC’s source code from the beginning. Satoshi Nakamoto indicated that only 21 million BTC would be issued. Every 210,000 blocks, the block reward is halved. So, in the genesis block in 2009, miners received 50 BTC as a reward. This was reduced to 25 BTC in 2012, and again to 12.5 BTC in 2016. Now, the miner’s reward will be halved again.

After the first halving, the BTC price rose from $12 in November 2012 to a peak of $1,100 in November 2013. Similarly, 11 months after the second halving, the BTC price rose sharply, from $650 in July 2016 to over $2,500 in May 2017. The most straightforward explanation for this is that the halving limits supply, thereby driving demand.

However, the last halving was in 2016, before the ICO boom, before the emergence of cryptocurrency derivatives, and long before the coronavirus began to disrupt the global economy. So, with BTC’s price rumored to be highly correlated with the network’s hashrate, could the previous halving be a sign of what will happen next time?

Mining profitability faces downward pressure

Hashrate is a metric worth watching during the halving period. A higher hashrate means more computing power in the network. In other words, miners are participating more.

Hashrates after previous halvings have tended to show similar trends to prices. For example, in the 2016 halving, hashrates saw a sharp rise a year later, suggesting that the rise in BTC prices attracted more miners.

However, it is clear from the table above that there was no significant drop in hashrate after the 2016 halving. In fact, hashrate remained stable after the halving despite a clear drop in mining profitability.

Mining rewards are only one component of mining profitability. Transaction fees are another way for miners to generate income, and judging by the transaction fees after the last BTC halving, there has been no significant change after the halving. Like price and hashrate, transaction fees rose 11 months after the 2016 halving.

Related article: Looking back at past halvings: The case for an immediate BTC rush is flawed

Lennix Lai, director of financial markets at OKEx, told Cointelegraph that miners may be upset by the reduction in rewards and only receiving income from transaction fees:

“With the anticipated block reward halving, I think the industry will begin to question the underlying assumption of the halving — whether transaction fees alone will be enough to sustain the entire BTC network.”

Is Bitcoin’s hash rate a key metric?

Both BCH and BSV recently experienced halvings, after which the hashrate of both dropped rapidly. Diego Gutierrez Zaldivar, CEO of IOVlabs, which operates the RSK network, shared his thoughts with Cointelegraph:

“Both networks share the same algorithm as Bitcoin, so hashrate can be constantly transferred between them. When mining revenue from these two networks decreases, miners may turn to mining Bitcoin in search of more profitable opportunities. When Bitcoin halves, no such alternative network exists, so we are likely to see miners whose operating costs are higher than the price of Bitcoin exit mining altogether.”

Does this mean that, contrary to previous halvings, the hashrate of the BTC network will decline after the halving? Zaldivar doesn’t think so, saying: “BTC’s economic security is about 50 times that of BCH and about twice that of BSV, so even in the event of a significant drop in hashrate, BTC will remain the most secure decentralized trading network.” Joel Edgerton, COO of bitFlyer, believes that there are risks for smaller miners:

“I expect miners to face a tough time as weaker, underfunded miners exit the mining business. Their revenue mix will shift more toward transaction fees, which could have interesting effects and open up the possibility for companies using BTC to compete based on transaction processing speed.”

It is unlikely that the BTC halving will be like the BCH and BSV halvings. As Zaldivar pointed out, firstly, the BTC network is much more secure. Secondly, many experts interviewed by Cointelegraph believe that the current unprecedented economic conditions put BTC in a stable position at present.

Central banks are now using quantitative easing to pump fiat money into their economies, which will eventually lead to inflation. Egerton pointed out to Cointelegraph that many people bought BTC during the recent BTC crash, so the drivers for the current halving may be different:

“The key difference with the halving is that the money supply will increase significantly as governments respond to the economic impact of the COVID-19 health crisis. Since BTC was created in the aftermath of the last economic crisis, this plays well to its strengths as a store of value.”

Samson Mow, chief strategy officer at Blockstream, agreed, telling Cointelegraph: “The BTC halving is unique because the amount of money central banks are printing is unprecedented. This is very bullish for BTC.” He continued:

“I think we have yet to see the full impact of economic uncertainty and COVID-19 on BTC. Average Joes are just beginning to realize that BTC is their only real safe haven.”

There are other impacts besides COVID-19. BTC is different from many other cryptocurrencies due to the large derivatives market. Coinshares Chief Strategy Officer Meltem Demirors previously warned that this ability to speculate on BTC without touching the underlying asset suggests that this halving will be different from previous halvings.

Unknown Journey

Overall, there are too many other factors at play this time to make a fair comparison with the previous two halvings, as almost all variables have changed, even miners and their hashrate. The existence of derivatives and the greatly increased size of the BTC market and network since 2016 are significant enough.

However, all the economic uncertainties brought about by the “black swan” COVID-19 crisis are unprecedented for all assets, including BTC. Overall, most experts seem to agree that the outlook for the BTC network and ecosystem is generally positive. Therefore, the best advice for this halving is to sit back and enjoy it.