With sideways trading, a bearish sentiment, and a slowing two months, Bitcoin has seen a slump from $14,000 USD highs to under $7,000 USD in recent weeks. With the Bitcoin Halviening less than 6-months away, will the market change pace and fuel the bull run that we’ve all been hoping for?
While camps are divided, here’s why we believe this Bitcoin halving will be beneficial for the market and help propel the industry to new heights.
Understanding the Potential Downside:
Bitcoin halvenings occur every 210,000 blocks. This is, on average, about every four years and was likely designed as a way to maintain a stable circulating supply and avoid hyperinflation.
When this happens, a miner’s reward per block is cut in half. As the reward level for a block decreases and difficulty for the block increases (as there are more miners competing for a smaller block reward), opportunistic miners are effectively priced out of the competition. The idea is, theoretically at least, that low-end miners cannot afford to continue mining.
As rewards for the block decrease, miners need an ever more efficient way of competing in the marketplace. Those that cannot compete, sell-off Bitcoin in an effort to cut losses and take their gains.
Historically this has only happened after Bitcoin halvenings after reward blocks are cut in half. The worry is that even with low prices now, after the halvening there will be additional selloff because of reduced block rewards, and there may not be a significant upward move for Bitcoin for months to come.
(source: Digital Asset Research – statistical model, not price predictions)
The above chart as an example shows what happens with the price (light blue line) after halvenings (dotted red lines) occur. What we’re seeing here, is that there was no price increase after the last halvening. Instead, the price started increasing in the middle of the cycle, suggesting that the increase may have already been priced in. Or said another way, that the price increase from $3,000 levels earlier this year, up to $12,000 levels already represent potential gains that might have otherwise occurred after the halvening.
But this is only part of the story.
Reviewing the upside:
Weeding out inefficient miners effectively helps boost the long-term health of the overall market. Both halvenings and low prices help drive this. With continued low prices, this might actually mean that we’ve already priced in ‘miner reduction’ simply because of the current sluggish Bitcoin prices. Only the most efficient Bitcoin miners can sustain a drop in price from $14k to current $7k levels. Many miners have already been forced to shut down their rigs.
Which could mean that the halvening may not force as much sell-off as initially thought.
If it does force additional sell-off, there could be a temporary downslide before a strong bullish movement forward. If it doesn’t force additional sell-off, the halvening will only support a strong bullish trend as supply is limited, rewards are halved, and only the strongest miners remain.
If we take a step back and look at long-term projections, both cases are more than positive for the industry as a whole. While short-term gains may suffer in the worst of cases, the Bitcoin halvening should help drive a long-term bullish trend.
A simple supply and demand scenario is the easiest explanation, although there are many more nuanced theories.
As halvening difficulty increases, supply is reduced. As supply is reduced the cost of each Bitcoin is likely to rise due to scarcity. Additional factors, such as global economics, increased awareness about cryptocurrency, and increased demand for Bitcoin itself should add fuel to a bullish rally.
It has yet to be determined, and the narratives surrounding the halvening are mixed at best. Yet when we look at the long term possibilities on the state of the industry, two things are very clear.
One – cryptocurrency is here to stay. And two – in the long-run Bitcoin will see a bullish movement forward.
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