With Bitcoin off on an upward rally, many are pointing to the upcoming halving, due on May 12, as the underlying reason. Not unfairly, either. Precedent demonstrates that Bitcoin’s (BTC) price usually ends up higher after a halving, even if it takes several months.
The halving was programmed into Bitcoin’s source code from the very beginning as Satoshi Nakamoto specified that there would only ever be 21 million BTC issued. Every 210,000 blocks, the block reward is cut in half. Therefore, at 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, miners will see their rewards cut in half once again.
After the first halving, the price rose from $12 in November 2012 to a peak of $1,100 in November 2013. Similarly, the second halving saw a sharp increase 11 months later, rising from around $650 in July 2016 to over $2,500 in May 2017. The most straightforward interpretation of this is that the halving introduces a constraint on supply, driving demand.
However, the last halving was in 2016, before the initial coin offering mania, before the evolution of cryptocurrency derivatives, and a long time before the coronavirus started disrupting the global economy. Thus, because Bitcoin’s price is rumored to strongly correlate with the hash rate of the network, can the previous halvings be an indication of what to expect from the next one?
Downward pressure on mining profitability
The hash rate is an indicator that’s worth watching in the period around a halving. A higher hash rate indicates more computing power in the network — or, in other words, high participation from miners.
Hash rates around previous halvings tended to show similar trends to price. For example, in the 2016 halving, the hash rate showed a steeper increase a year later, indicating that more miners were attracted by the increase in Bitcoin’s price.
However, from the chart above, it’s evident that there was no significant drop off in the hash rate after the 2016 halving. In fact, the hash rate stayed steady immediately post halving despite the obvious drop in mining profitability.
Mining rewards are only one component of overall mining profitability. Transaction fees are another way that miners generate income, and looking at transaction fees around the last halving, there was also no significant change following the event. Like price and hash rate, transaction fees went up 11 months after the last mining event in 2016.
Lennix Lai, the director of financial markets at OKEx, told Cointelegraph that miners may be put off by the prospect of diminishing rewards and only earning income from transaction fees:
“With the expected cut in block rewards, I think the industry would start by questioning the basic assumption of halving — whether or not the transaction fees alone would be sufficient to sustain the entire Bitcoin network.”
Is Bitcoin’s hash rate the key indicator?
There are more immediate precedents for halvings as Bitcoin Cash (BCH) and Bitcoin SV (BSV) both recently underwent halving events — and both saw a drop-off in hash rate immediately afterward. Diego Gutierrez Zaldivar, the CEO of IOVlabs, which operates the RSK network, told Cointelegraph that there’s an explanation for this:
“These networks share the hashing algorithm with Bitcoin, so hashing power continuously migrates among them. When the two minor networks reduce their mining subsidies, miners likely moved to BTC, looking for more profitable grounds. When the Bitcoin halving occurs, no such alternative network exists, so we will likely see miners whose operating costs are higher than the price of BTC drop off altogether.”
Does this mean that contrary to the previous halvings, a drop in the Bitcoin network hash rate post-halving is on the table? Zaldivar doesn’t believe so, elaborating: “Bitcoin has around 50 times the economic security of Bitcoin Cash and around times the economic security of Bitcoin SV, so even in the case of a big drop in hashing power, Bitcoin will remain the safest decentralized network in the world.” Joel Edgerton, the COO at bitFlyer, agreed that there’s a risk to smaller miners:
“I expect the miners will have a tough time with weaker, less capitalized miners exiting the business. Their revenue mix will move more to transaction fees, which could have an interesting impact and open up possibilities for firms using Bitcoin to compete based on transaction processing speed.”
The Bitcoin halving is unlikely to follow the BCH and BSV examples. As Zaldivar pointed out, the Bitcoin network is far more secure, to begin with. Secondly, many of the experts Cointelegraph spoke to believe that the unprecedented nature of the current economic conditions puts Bitcoin into a stable position right now.
Central banks are now using quantitative easing to pump fiat money into their economies, which will ultimately cause inflation. Edgerton pointed out to Cointelegraph that many bought into Bitcoin during the recent crash, and so the drivers for the current halving may be different:
“The critical differentiator in this halving is that coincides with a massive increase in money supply as governments react to the economic fallout from the COVID-19 health crisis. Since Bitcoin was born from the fallout of the last economic crisis, this plays very well to its strengths as a store of value.”
Samson Mow, the chief strategy officer of Blockstream, agreed, telling Cointelegraph: “This Bitcoin halving is unique because of the unprecedented amount of money being printed. It’s very bullish for Bitcoin.” He went on to say:
“I think we’ve yet to see the full extent of economic uncertainty and COVID-19 impacting Bitcoin. The average person is only just starting to realize that Bitcoin is the only real safe haven for their money.”
Aside from COVID-19, there are other influences at play here, too. Bitcoin differs from many other cryptocurrencies due to the vast market for derivatives. Meltem Demirors, the chief strategy officer of Coinshares, has previously warned that this ability to speculate on Bitcoin’s price without touching the underlying asset indicates this halving will be different from the others.
A Journey into the Unknown
On balance, there are too many other factors at play with this halving to make a fair comparison with the previous two events, as almost all variables have changed, even for the miners and the hash rate they output. The presence of derivatives and the vastly inflated size of the Bitcoin market and network since 2016 are significant enough.
However, the black swan of the COVID-19 crisis and all the economic uncertainty it brings is unprecedented for all assets, including Bitcoin. Overall, most experts seem to agree that the outlook for the network and the ecosystem, in general, is bullish. Therefore, it seems that the best advice for this halving is to sit back and enjoy the ride.