BTC halving effect: Is it "metaphysics" or a real "effect" that will have a substantial impact on the market?

Editor’s Note: The original title is “BTC’s halving effect: ?”

There are still more than 30 days until Bitcoin halving, and Bitcoin's historic moment is gradually approaching. The crypto market crash in mid-March gave people ample reason to question these two things:

• Bitcoin’s “digital gold” narrative and its safe haven properties

• The Bitcoin halving effect

Blue Fox Notes has explained its views on "Bitcoin digital gold" in a previous article ("Is Bitcoin a safe-haven asset?"). Today, Blue Fox Notes will talk about the second question mentioned above: the halving effect of Bitcoin.

What is the Bitcoin halving effect?

Simply put, the reward of Bitcoin is halved every 210,000 blocks, which happens approximately every four years. There have been two halvings in history, in 2012 and 2016. The total supply of Bitcoin is 21 million, and the next halving will be at a block height of 630,000, which is expected to occur around May 14, 2020.

(There are still 37 days until the halving, source: buybitcoinworldwide)

At the halving time, the block reward will be reduced from 12.5 BTC to 6.25 BTC, which is equivalent to a sharp drop from 54,000 BTC per month to 27,000 BTC per month. According to the current price of BTC, the selling pressure will be reduced by nearly $200 million per month, that is, from the original $400 million selling pressure to only $200 million. This means a significant reduction in supply, and as long as the demand remains unchanged, it means an increase in the value of BTC.

It is based on such expectations that in the crypto market, articles about the Bitcoin "halving effect" have emerged one after another, and everyone hopes that the halving can boost market energy and bring about price increases. However, the sharp drop in mid-March surprised many people. The cruelty of the market is clear at a glance. The market has never had a predictable result that "will definitely be like this". It instantly hit the bulls and severely slapped the forecasters in the face.

So, how do you view the Bitcoin halving effect? ​​Is it "metaphysics" or a real "effect" that will have a substantial impact on the market? There are two questions that are of greatest concern:

• Has the Bitcoin halving effect been factored into the price of Bitcoin?

• Why is Bitcoin so volatile?

Has the Bitcoin halving effect been factored into the price of Bitcoin?

Many people believe that with the arrival of the halving, the halving effect has been factored into the price of Bitcoin. In mid-February, the price of Bitcoin exceeded $10,000, and some people believe that this shows that the halving effect has been factored into the price of Bitcoin. However, the subsequent plunge has put the price-integrated hypothesis in a dilemma, especially the so-called efficient market hypothesis, which believes that with the arrival of the expected Bitcoin halving, the price of Bitcoin has already reflected the halving market.

If we look at history, there is indeed a halving effect. And the halving effect has different results on different time scales. Because people's emotions are often susceptible to short-term price fluctuations, it is difficult to look at the halving effect of Bitcoin from a longer time scale, resulting in various controversies.

From the 2016 halving, according to CMC statistics, the price of Bitcoin on July 9, 2016, the day of the halving, was $666.52. In the year before the halving, the general trend of Bitcoin was upward, of course, there were constant fluctuations, which is also the norm for Bitcoin. Nevertheless, before the halving, the halving effect was slightly highlighted. About one and a half months before the halving, there was a significant rise and subsequent decline, and then a flat period of more than 4 months.

This obvious rise lasted for nearly a month, from May 20, 2016 to June 17. Its price rose from $438.72 to $763.78, and in less than a month, the price rose by more than 70%. However, more than half a month before the halving on July 9, 2016, the price adjusted downward to $666.52. Even so, it was more than 50% higher than a month ago. However, after the halving, Bitcoin has been in a relatively stable and slowly rising state, and did not break through the previous high of $763.78. It was not until the end of 2016, five months later, that it began to break through the new high of $1,000. Judging from the historical trajectory after this halving, the Bitcoin market began to enter a bull market after the halving, and it took nearly a year and a half to reach the peak of the bull market.

Therefore, if we look at it from a larger time scale, the halving in 2016 marked the beginning of the bull market in 2017. There was a small increase for nearly a month before the halving day, but in the framework of the bull market that lasted more than a year, this can only be regarded as a minor episode.

In other words, judging from the halving in 2016, the actual price inclusion of the Bitcoin halving effect is not a matter of two months, but may be more than a year. One of the most important reasons behind this is the sharp drop in the supply of Bitcoin in the market, but it is not immediately reflected in the price of Bitcoin. Its underlying impact on the market will take more than a year to be fully digested.

Of course, the 2016 halving effect was not the first. The first was the halving event on November 28, 2012. There was an increase before the halving, but the increase was not very obvious. After the halving, it was sideways for about 5 months, which was somewhat similar to 2016. Then it began to climb significantly. However, it took less time to reach the peak of the bull market than in 2016, and it took more than a year to reach the peak. (The 2016 halving took about a year and a half to reach the peak of the bull market due to the large price base.) Assuming that according to this logic, the 2020 halving may take longer for the entire market to digest the halving. If it takes two years, then this means that the upward cycle that started in May 2020 may not start to show a significant improvement until the end of 2020, and it may reach new highs in 2021 and 2022.

One year before the first halving on November 28, 2012, the price of Bitcoin rose by more than 300%, but did not reach the previous high. One year after the halving, the price rose by more than 1,000%, completing the largest price leap in Bitcoin history, from the $10 level of Bitcoin to the $1,000 level of Bitcoin. One year before the second halving on July 9, 2016, Bitcoin rose by more than 100%, and one year after the halving, it rose by more than 280%.

Of course, the market environment and factors faced by each halving are different. From the perspective of Blue Fox Notes, this change will definitely not follow the predicted "script". All predictions are naturally watered. Therefore, we cannot make predictions based on historical scripts, and we must adjust our views at any time according to market changes.

In summary, from a one-year time scale, due to the overall upward trend of Bitcoin, its overall trend is upward both before and after the halving. From the perspective of Blue Fox Notes, even so, based on historical data, two characteristics can be seen:

1. The halving effect of Bitcoin is mainly gradually shown after the halving, rather than before the halving. Whether it is the first or second time, the price growth of Bitcoin after the halving exceeds the price growth before the halving.

2. Bitcoin halving effect takes longer to digest. The first halving took a year to reach the peak, exceeding $1,000. The second halving took a year and a half to reach the peak, close to $20,000. What about the third halving? What will happen?

Why is Bitcoin so volatile?

Bitcoin was still above $10,000 in mid-February this year, but it became $5,000 in mid-March, a 50% drop in one month. Maybe its volatility seems large, but this is the crypto market, and such things have happened repeatedly in history, and it is not uncommon.

How to understand the volatility of Bitcoin? With such large fluctuations, why do some people still call it "digital gold"?

There are definitely more than one or two factors that cause the volatility of the Bitcoin market, including macroeconomic factors, Bitcoin's own attributes, speculators manipulating the market, and the imperfect structure of the crypto market. The main factors that cause its fluctuations in each stage may not be exactly the same. Sometimes one factor dominates, and sometimes multiple factors are simultaneously driving it.

For example, the black swan in mid-February was related to the macroeconomic environment such as the outbreak of the epidemic and the competition in crude oil prices, as well as the overall structure of the crypto market. The macroeconomic environment at that time led to a liquidity crisis in the world, and Bitcoin and gold were inevitably involved. The triggering of these crises led to the decline of the crypto market. At the same time, due to the excessive leverage of the market, liquidation was triggered, which led to a rapid decline. The rapid decline made the imperfect structure of the crypto market clear. The current infrastructure of cryptocurrencies, especially the throughput and speed, cannot support large-scale crypto transactions in a short period of time. The natural dispersion of crypto trading venues has exacerbated this crisis. Liquidation cannot proceed smoothly, resulting in irrational price plunges.

At the same time, participants in the Bitcoin market, including investment funds, coin holders, short-term traders, and arbitrageurs, were unable to remain rational in the face of the plunge, which further exacerbated the decline. The combined effect of multiple factors directed the perfect storm of the 3.12 black swan.

After this black swan event, more than $1 billion of USDT and USDC stablecoins are quietly lying on crypto exchanges. Some of them are safe-haven funds. It can also be seen that stablecoins are still the safe haven for assets at present. (It is worth noting that if the current price is followed, these funds are enough to absorb the amount of new tokens in the five months after the halving. This potential is still sufficient.)

(Data source: tokenanalyst)

Putting aside these almost unpredictable market environments, black swans and other factors, why is Bitcoin volatility always so erratic? There is a fundamental factor here, that is, Bitcoin's own design mechanism determines its volatility.

The game mechanism of Bitcoin is an important reason for its price volatility. The ultimate goal of Bitcoin is to be digital gold, a safe haven for assets, or to provide a settlement layer for the world. Before reaching its ultimate goal, the huge volatility of Bitcoin prices will definitely accompany it. In a sense, this comes from its own attributes, not its own defects.

Bitcoin’s monetary policy has two most important designs:

First, there is a fixed upper limit of only 21 million coins.

Second, the reward is halved every 210,000 blocks.

Bitcoin's currency issuance mechanism determines that all miners can only compete for a fixed amount of tokens. This is a completely zero-sum game mechanism. What one miner gains means what other miners in the market lose. This game mechanism, on the one hand, causes miners to desperately increase computing power in order to obtain rewards in order to obtain a larger share of rewards. However, the core behind computing power is the efficiency of mining equipment and electricity costs. In particular, electricity costs account for the vast majority of mining costs. In a sense, the competition for electricity costs determines the life and death of miners.

Therefore, for miners, mining has always been a brutal battle of costs. This is determined by the game mechanism of Bitcoin itself. The inelastic issuance mechanism of Bitcoin leads to incentive competition among miners.

Bitcoin is very rigid in monetary policy and has no flexibility at all. Interestingly, Bitcoin is very flexible in another aspect. Bitcoin's difficulty adjustment brings sufficient flexibility to Bitcoin. Difficulty adjustment itself is also a necessary mechanism design to achieve its fixed token issuance. In any case, difficulty adjustment is one of the greatest designs in Bitcoin's game mechanism. It brings continuous security to Bitcoin and can also continue to maintain the elasticity of the spiral.

The game mechanism of difficulty adjustment is essentially a self-adjustment of the Bitcoin price itself. When the Bitcoin price is artificially high, Bitcoin miners will flock in, including many inefficient miners, who can also make money from it because the price of Bitcoin is enough to support the low efficiency relative to the cost.

However, in order to achieve its fixed issuance, Bitcoin will increase the difficulty when miners compete fiercely, which will cause losses to the miners who were originally profitable. In order to maintain the mining cost, inefficient miners have a stronger demand to sell Bitcoin. If there are other triggering factors at this time, such as the 3.12 black swan event that caused the price of Bitcoin to fall by nearly 50%, inefficient miners will not be able to survive at all and can only sell or shut down. This further brings about a downward adjustment in the market. The price market of Bitcoin is in a bearish state. As inefficient miners exit the market, the difficulty of Bitcoin is too high and it is difficult to produce blocks, which creates a demand for difficulty adjustment. With the arrival of the difficulty adjustment, the computing power ratio is redistributed, and the surviving efficient miners can obtain more BTC benefits. These miners do not have a strong demand to sell, which is conducive to stabilizing the price of Bitcoin.

It can be said that as a market entity that can generate $400 million in selling pressure every month, the fierce competition among them will bring about continued fluctuations in the price of Bitcoin. If coupled with other factors in the market, such as macroeconomic adjustments and excessive leverage of speculators, this will further accelerate market fluctuations.

In short, before Bitcoin reaches its final mission, its own attributes determine that it will inevitably be accompanied by fluctuations. ------ Risk warning: All articles in Blue Fox Notes cannot be used as investment advice or recommendations. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct in-depth research on the project and make your own investment decisions carefully.

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