Will 2020 be a year of “production reduction”, a surprise or a shock?

Text | Hoho

Editor | Wen Dao

2020 is the year of concentrated outbreak of "production reduction" in the native networks of crypto assets. In March and April, ETC, BCH and BSV will enter the halving cycle; in May, the much-anticipated BTC will have its production reduced, and DASH will also have its production reduced this month; in October, the production reduction will extend to ZEC.

Except for Bitcoin, the other major crypto networks are all halving their mining rewards for the first time. Judging from the past price trend of BTC, its price will rise after each halving. However, if estimated based on the current currency price, after the production reduction, the cost of BTC miners will double in a short period of time. On the eve of the production reduction, every miner will face a "gamble", and the key to winning is the rise of Bitcoin.

Wang Ruixi, founder of Hufu Wallet, believes that the reduction in production is not a sufficient reason for a certain currency to rise. He told Fengchuang Finance, "One of the factors affecting the price of Bitcoin is the supply. In fact, in a fully free market, it is difficult for us to judge the change in the supply and demand relationship."

“After all, Bitcoin only depreciates by half a year once every four years. I plan to adjust my monthly fixed investment pocket money from 3,000 yuan to 6,000 yuan.” On January 9, Weibo user “Bitpie Wallet” increased his fixed investment in Bitcoin, which resonated with many commentators.

There are still about 4 months until the third Bitcoin block reward halving. According to estimates by Bitcoinblockhalf.com, as of 18:00 on January 9, there are still 124 days until the third Bitcoin halving, and the official halving time is expected to be 6:30 on May 13, 2020. On Huobi Global, the current BTC price is $7,900.

Simply put, "halving" refers to "reduction in block rewards". Bitcoin has undergone two halvings in history. The first occurred on November 28, 2012, when the block reward was reduced from 50 BTC to 25 BTC. On the day of the halving, the BTC price was $12.22. One year later, on November 30, 2013, the BTC price reached its highest point of $1,175 after the first halving, which lasted 367 days.

The second halving occurred on July 10, 2016, when the block reward was reduced from 25 BTC to 12.5 BTC. On the day of the halving, BTC was quoted at $648. On December 16, 2017, BTC hit a new all-time high of $19,891, which lasted 525 days.

From a long-term perspective, prices will rise after each halving, and the cycle to reach the peak is also lengthening. Usually, prices are determined by market supply and demand. The halving of rewards every four years will undoubtedly break the original supply and demand balance of the currency and stimulate the rise in the price of the currency. In August last year, Litecoin took the lead in kicking off the reduction of production of mainstream currencies. From the low of $22 at the beginning of 2019 to the high of $145 on June 22, the increase was more than 500%, leading the currency market for a while.

Much like the World Cup held every four years, the halving of Bitcoin is also a major event in the cryptocurrency community, awakening the enthusiasm and cheers of fans. Unlike previous years, this year, in addition to Bitcoin, other mainstream crypto asset networks such as BCH and ETC will also embark on a halving journey, and all of them will be halved for the first time.

Among them, in March, the block reward of Ethereum Classic (ETC) will be reduced from 4 to 3.2; in April, the block rewards of BCH and BSV will be reduced from 12.5 to 6.25; in May, the block reward of DASH will be reduced from 3.6 to 3.34; in October, the block reward of ZEC will be reduced from 12.5 to 6.25.

Therefore, some people call 2020 the "breakout year" of halving for crypto assets.

The six major currencies that will be reduced in 2020

Guo Hongcai, an investor who has experienced Bitcoin halving twice, told Fengchao Finance that among the digital currencies that will be reduced in production this year, he is still most looking forward to Bitcoin. "Only when Bitcoin halves will its price skyrocket. Other altcoins may not rise even if they halve. As for Bitcoin, my idea is very simple, that is, it will rise when it is supposed to."

Liu Changyong, director of the Blockchain Economic Research Center of Chongqing Technology and Business University, holds the same view. He told Fengchao Finance that the reduction in the production of currencies with smaller market capitalization will have little impact on the price because they are too substitutable. If the price rises slightly, funds may flow to other currencies. "The key is still the halving of Bitcoin."

Although the industry is generally optimistic about the future of the production cut, no one can guarantee the rise. If estimated based on the current currency price, the cost of miners will double in a short period of time.

Based on the computing power of the Antminer S11, the theoretical daily income of the 20.5 T S11 is 0.00037351 BTC, which is 21 yuan per day (BTC is calculated at 7,900 US dollars). Assuming the electricity cost is 0.5 yuan per kilowatt-hour and the power of the S11 mining machine is 1435W, the electricity cost of the S11 is 17.22 yuan per day. This means that the current daily income of the Antminer S11 mining machine is 3.78 yuan.

If the price of Bitcoin remains at $7,900 after the production cut and the mining difficulty remains unchanged, miners using Ant S11 mining machines will lose 6.72 yuan a day.

Therefore, some media have predicted that in May, after the reduction in Bitcoin production, "an unprecedented mining disaster" will break out, and even regard 2020 as the "year of life and death" for the mining industry.

On December 23, 2019, LongHash, a crypto data analysis platform, said in an article titled "How Bitcoin's halving causes mining accidents" that due to people's general expectation that "Bitcoin's halving will drive up prices", many people have joined the mining industry and purchased mining equipment, which will lead to a continuous increase in Bitcoin's computing power. The article believes that according to historical records, there is no direct and clear correlation between Bitcoin prices and halving, but the continuous growth of computing power has increased the mining costs of miners.

On January 6 this year, the mining machine giant Bitmain laid off a large number of employees, and some media reported that "one-third of the staff will be optimized." People familiar with the matter revealed that one of the reasons for Bitmain's layoffs was related to the upcoming Bitcoin halving in May this year. Founder Wu Jihan was not optimistic about the halving, and the company was streamlining to "survive the winter."

Amid the anxiety, some miners are optimistic. "As long as the price of the currency goes up, there is nothing to worry about."

In addition, many industry insiders have previously expressed their predictions about the rise in Bitcoin prices. PlanB, a well-known crypto analyst on Twitter, speculated based on macroeconomic models that when Bitcoin is halved in 2020, its price is expected to exceed $10,000, or even $100,000.

On March 1, 2019, Ethereum completed the "Constantinople" and "Saint Petersburg" hard forks. The upgrade involved five different improvement plans (EIPs), of which the most popular improvement plan was to reduce the existing block reward by 33%, from 3 ETH to 2 ETH. On the day of the reduction, Ethereum was quoted at $135.33. Three months later, it reached its highest value in 2019 at $366.5, a 170% increase from the price on the day of the reduction. After that, it started a downward trend. As of now, nine months have passed since the first reduction, and the price of ETH has stabilized at around $138, close to the price on March 1.

Within 9 months, Ethereum showed an inverted V trend after the production cut

Wang Ruixi, founder of Hufu Wallet, believes that one of the factors affecting the price of Bitcoin is supply. If the demand remains unchanged, the price will naturally rise if the supply decreases. He told Fengchao Finance that the halving in 2020 will not have a significant impact on the market. "In fact, in a fully free market, it is difficult for us to judge the change in the supply and demand relationship." He believes that the halving is not a sufficient factor for Bitcoin to "must rise".

"Based on the characteristics of Bitcoin, demand will become stronger and stronger, and bubbles will continue." Wang Ruixi believes that 2020 may be the "darkness before dawn". Overall, it will bring more benefits than disadvantages to practitioners.

Expectations and concerns are like two sides of a coin. The same is true for the Bitcoin halving. Many industry veterans believe that the halving event should be viewed cautiously and rationally.