Looking back at past halvings: The case for an immediate Bitcoin price surge is flawed

Past data suggests that the case for a surge in Bitcoin’s price immediately following May’s halving is flawed.

Bitcoin’s (BTC) block reward halving has long been seen as a bullish factor driving Bitcoin’s short-term price action in the first half of 2020. However, historical data suggests that a Bitcoin halving does not necessarily coincide with an immediate surge in Bitcoin’s price.

On the Bitcoin network, miners pack blocks that record Bitcoin transactions and use computing power to verify and confirm payment data. Miners consume a lot of electricity and pay extremely high maintenance costs to mine Bitcoin through large mining centers with ASIC mining chips and sophisticated equipment. Individuals or small miners can mine Bitcoin through mining pools, that is, a group of miners mine Bitcoin blocks by contributing their computing power.

The reward for mining Bitcoin is halved every four years, causing miners' income to drop by 50%. Miners usually prepare six to twelve months of cash reserves as a buffer to ensure that their business can be maintained even if the price of Bitcoin drops after the halving.

What does the historical data say?

The first halving of the Bitcoin network took place on November 28, 2012. At the time, only a few major cryptocurrency exchanges were available for Bitcoin trading, and it was still relatively difficult to buy Bitcoin. As a result, many analysts believe that market data before 2016 (when there were a limited number of exchanges) may not be reliable.

BTC USDT monthly chart. Source: TradingView

After the first halving in 2012, it took about 11 months for the Bitcoin price to enter a parabolic rise phase to ensure continued upward momentum. In November 2012, the price of Bitcoin on the Bitstamp exchange hovered around $12. In November 2013, the price of Bitcoin climbed to $1,100, an increase of 7,562%.

The second halving of the Bitcoin network took place in July 2016. After a sharp drop from $1,100, the price of Bitcoin stabilized at around $600. Then, the price of Bitcoin began to rebound strongly in May 2017, exactly 11 months after the halving (as in 2012). Therefore, the past two halvings show that the price of Bitcoin tends to rise vertically 10 to 11 months after the halving occurs, but not immediately after the Bitcoin halving.

Why Bitcoin Price Could Rebound Months After Halving

Large miners tend to reserve up to 12 months of cash as a buffer before the block reward halving, because there is always a risk of a drop in BTC prices after a reduction in mining revenue. However, small miners do not have the financial strength or resources to prepare for the halving in advance.

Various data, including the Digital Assets data 21-Day Miner's Rolling Inventory, indicate that miners have sold more BTC than they mined in recent weeks. As suggested by large investor Joe007 (probably the largest whale on Bitfinex), the possibility of miners selling BTC has not yet been priced into the market.

As small miners continue to sell their Bitcoin, the cryptocurrency exchange market faces increasing selling pressure. Some miners prefer to sell crypto assets through the over-the-counter market. However, over time, OTC trading data will also be reflected in the cryptocurrency exchange market.

In mid-March, Joe007 warned that as the halving approaches, “over-leveraged miners” will be incredibly hurt, which could lead some miners to capitulate and ultimately sell Bitcoin through exchanges and OTC platforms.

Why are investors predicting a rise in Bitcoin price after halving?

The main reason why Bitcoin’s price is widely expected to rise in the short term after the block reward halving in May is that the breakeven price for Bitcoin mining will rise to between $12,000 and $15,000, as John Todaro, head of research at TradeBlock, said earlier in 2020. Many investors speculate that since Bitcoin’s mining cost is $12,000, it is logical to increase the price of Bitcoin above $12,000 after the halving.

While the Bitcoin price may eventually move into the $12,000 to $15,000 range in the future, large miners are preparing large cash buffers to cope with a possible price drop in Bitcoin after the halving.

Todaro’s research also found that large companies such as Bitmain and Canaan have been developing newer mining equipment, which is also a variable in calculating the break-even price of mining. According to TradeBlock’s research, efficient mining equipment and cheaper electricity and resources can significantly reduce the break-even price of mining, even after the halving.

For large miners with the cash buffer and resources to quickly acquire new mining equipment, the eventual reduction in mining difficulty through automatic adjustments makes it possible to maintain their operations in the early months after the halving.

How will Bitcoin perform next?

If Bitcoin’s price trend follows historical performance, as it did in 2012 and 2016, then Bitcoin should rise significantly by mid-2021, 10 to 11 months before the halving in May. Therefore, there is a good chance that Bitcoin prices will remain well below the mining breakeven price for the next few months.

However, based on historical data and on-chain research, the Bitcoin network’s hash rate could reflect the decline in mining revenue, leading to a “death spiral” that would severely reduce the security of the Bitcoin network. This popular theory has not proven to be accurate. Despite the halving being a month away, the Bitcoin network’s hash rate has only fallen to December 2019 levels. Since the Bitcoin network’s hash rate has been setting new all-time highs over the past two years, the likelihood that the Bitcoin halving will have a significant, large, negative impact on the hash rate is low.

Source: Blockchain.com

A BitMEX study found various possible scenarios, such as: "The halving had a much greater impact on the network hash rate, resulting in a 47% drop in hash rate," or "The halving only resulted in a 12% drop in network hash rate."

This means that even if the price of Bitcoin remains below the cost of mining and remains that way for the next three to four months, and given that large miners tend to prepare in advance and hash rate rarely drops significantly, the hash rate of the Bitcoin network is likely to remain stable before the hash rate starts to reflect the cost of mining.

The Bitcoin halving may severely impact over-leveraged small miners in the short term, just as a Bitcoin price drop will severely impact over-leveraged traders, as the halving is unlikely to trigger an immediate Bitcoin price surge. However, in the medium to long term, the fundamentals of the Bitcoin network and mining ecosystem are expected to remain strong.

Despite the market downturn and stagnant cryptocurrency markets, both small and large acquisitions in the mining sector are still taking place, such as the acquisition of a Bitcoin mining center in Quebec, Canada for $2.8 million on March 30, 2020. This shows that miners expect the global cryptocurrency mining industry to decline in the short term, but to recover in the long term.

Original link: https://cointelegraph.cn.com/news/past-halvings-in-review-case-for-an-immediate-bitcoin-upsurge-is-flawed

Link to this article: https://www.8btc.com/media/578586
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