EFFECTS OF BITCOIN HALVING
Come May 2020, how will the next Bitcoin halving affect its price?
Some call it halving, and others halvening, but any conversation about Bitcoin in the next six months will likely see these terms pop up. It is an event where the reward for mining new blocks is halved. In short, miners receive 50% less for verifying Bitcoin transactions. The reason for this is to manage inflation as the Bitcoin blockchain was programmed with a maximum supply cap of 21 million units. Halving takes place once every 210,000 blocks, or roughly every four years, mimicking the increased difficulties in mining commodities such as gold when supplies are reduced.
Historically, Bitcoin halving events have been extremely bullish. Bitcoin’s price generally trends steadily upwards in the months leading to the event with the upward trajectory usually persisting thereafter. In the first halving on 28 November 2012 when block reward fell from 50 to 25 Bitcoins, prices more than doubled to US$12 on the day itself and subsequently rising over the course of the following year to almost US$1,000.
A similar trend occurred in the second halving on 9 July 2016, when block reward declined from 25 to 12.5 Bitcoins. By then, Bitcoin’s price had already increased by about 50% to US$650 from US$434 at the start of the year. The cryptocurrency continued on its steady ascent towards US$2,540 a year later, before peaking at US$19,401 in December 2017.
Bitcoin Economics
Scarcity begets value. Just look at anything from Rolex Daytona watches to conservation shophouses in Singapore. In the same vein, the 2012 halving event reduced supply by around US$43,000 a day and over the subsequent year, Bitcoin grew by more than US$12 billion in market value. The second halving event lowered supply by around US$1.2 million a day which led to the market capitalisation ballooning by US$42 billion over the ensuing 12 months. For the upcoming 2020 halving, and assuming Bitcoin stays around US$8,200, the reduction in supply will amount to US$7.3 million a day where the reward is reduced from 12.5 to 6.25 Bitcoin, making the next halving the most dramatic yet.
A popular crypto analyst by the name of Plan B further expands on this narrative by using the stock-to-flow (S2F) model – which divides current stockpiles by annual production – thereby predicting Bitcoin’s price based on the relationship between S2F and market value. This model, which displayed a high degree of accuracy with gold and silver as benchmarks, has predicted the market value of Bitcoin post-May 2020 weighing in at US$1 trillion, thereby translating to a Bitcoin price of US$55,000.
Is History An Indicator?
That said, sceptics argue that the halving factor has already been priced with the Bitcoin rally from US$3,000 to US$12,000 earlier this year. Most attributed this rebound to an anticipation of the 2020 halving. Furthermore, there has only been two data points for reference, which seems insufficient to validate the correlation between historical halving events and price.
In addition, Bitcoin’s mining difficulty (the time it takes for miners to add new blocks of transactions to the blockchain) fell for the first time this year. A lower difficulty level makes it easier for miners to solve algorithms and mine blocks. With recent price weakness in Bitcoin, small miners have started shutting down their operations, selling off their coins and mining hardware. This could potentially lead to a vicious downward Bitcoin price cycle where price continues to weaken from marginal miners dumping their coins, hence squeezing out larger miners, who in turn will also offload more coins.
The Internet Of Money
It is anyone’s guess where Bitcoin’s price will end up come May 2020. As a former banker sitting on the trading floor, I would only invest with an appreciation of the investment’s value drivers, downside risks and liquidity. More importantly, investments should be done from a complete asset allocation standpoint that is in accordance to one’s investment objectives, risk tolerance, and time horizon.
Other than the halving event next year, there are external macroeconomic factors that will potentially drive Bitcoin inflows. These include countries with negative interest rates (Japan and Europe); countries that suffer from elevated inflation (Venezuela, Argentina, Turkey); illiquid traditional stored of values (gold, silver), high net worth individuals hedging against quantitative easing; Hong Kong’s political turmoil; the US-China trade war and Brexit. With the institutionalisation of the cryptocurrency sector, institutions will also soon be able to deploy their funds through regulated channels, especially when Bitcoin has been the best performing asset class in the past decade.
We cannot deny the endless possibilities the blockchain protocol can bring to the world. The protocol went from being Chinese President Xi Jinping’s favourite technology to Alibaba using it for its blockbuster US$30 billion Singles Day. While the cryptocurrency market exhibits extreme volatility, there is much potential in the development of Bitcoin and its future as the Internet of money.
Opinions expressed are solely the writer’s own and do not express the views of his employer.
About The Writer
Eugene Ng is currently Head of Sales and Business Development at Matrixport, a spin-off from Bitmain, the world’s largest cryptocurrency mining business. Matrixport is a global full service digital financial services firm that provides leading financial solutions the latest industry insights as well as strong connectivity to the ecosystem to help institutions invest, navigate and safeguard their digital assets with the most secure and compliant offering. He has 10 years of experience in institutional trading, financial derivatives and sales at Citibank, Barclays Capital and Deutsche banks. Eugene started investing in cryptocurrencies in 2017, and has since advised multiple projects worldwide, raising more than US$50 million. He has been featured on Bloomberg, Forbes, Straits Times and Yahoo.
This article was first printed in MillionaireAsia Issue 54 - December 2019
