As Bitcoin (BTC) halving approaches, there’s been a great debate over the results of the past two halvings compared to this third. Digital asset management firm CoinShares looked into the most popular BTC halving hypotheses to see how likely are they to occur in their opinion, and what their impact on the price of BTC would be.
1. The halving will result in positive supply-side impact over the mid- to longer-term
Likelihood: Highly likely
This is the CoinShares research team’s choice of what is most likely to occur. If there’s no significant price rise once halving happens, the equipment of all but “a tiny handful of the most extreme low-cost electricity miners” will become obsolete, and as these make the switch over the next year or so, the overall cost-basis for the mining industry will be “significantly lowered,” according to Christopher Bendiksen, Head of Research at the company. Miners will, therefore, be able to sell less of their ongoing production to cover costs. “The pairing of a 50% reduction in available new supply with a reduction in the proportion of ongoing supply offered for sale in the market might drastically reduce the persistent selling pressure caused by miners.” Bendinksen concludes that these dynamics, in combination with the macroeconomic tailwinds presented by global governments, and the existing and growing inflows into passive bitcoin investment products, could cause a perfect storm for the bitcoin price over the mid- to long-term.
2. The halving will be a big fat nothing-burger (at least initially)
Unlike sudden price crashes, halvings are known in advance giving time for miners to prepare. If we take that daily volatility between 1% – 5% in BTC price is ordinary, then it’s likely no major immediate impact on the price will be noticed, while any effect on the supply and demand balance may take time to be seen. There may be a short-term downwards pressure on prices as miners use reserves to cover potential revenue losses, but “this pressure should be more steady and well-balanced than what we observe during large drawdowns in price.”
Likelihood: Somewhat likely; more impactful in combination with #4
If BTC price is higher than miners’ return on investment-breakeven mining costs, there’s no need to sell their coins continuously which can have a positive impact on BTC price. It BTC price is lower, however, miners have to continue selling the coins they mine, and even dip into their reserves, and this can result in additional selling pressure. But, as said, all halvings are known already. Unlike a sudden 50% crash, the halving “reduce[s] new flow by 50%, thereby providing significant relief on persistent selling pressure even if miners must dip into reserves during a limited transition period.”
4. Traders who have been buying the rumor will sell the news
Likelihood: Somewhat likely
Per this hypothesis, the current price has “significant speculative demand” added to it, given all the bullish expectations of halvings. Yet, the Litecoin (LTC) halving in 2019 saw two thirds of its pre-halving price shaved off – though, importantly, BTC too went through a large sell-off then, and LTC correlates with BTC. There’s simply not enough data for this scenario. CoinShare’s believes it to be likely that there is “at least some speculative demand” added by the halving narrative, but “that flipping this demand into supply in and of itself is unlikely to cause a large price decrease.”
5. Bitcoin’s post-halving stock-to-flow ratio will cause upwards price pressure
Likelihood: Plausible, but major questions remain unanswered
Impact: Very positive
According to the stock-to-flow (S2F) model, when a halving happens, the stock-to-flow ratio doubles and the model price increases. While the model may potentially be accurate, and the supply reduction is likely to impact BTC supply-side positively, Bendiksen is “not convinced that the supply reduction in itself is enough to materially impact the bitcoin price.” As reported, a new twist of the S2F model has recently been published by the model’s pseudonymous creator Plan B. And judging from the updated model, S2F believers may now hope that BTC will hit almost USD 300,000 in a few years.
6. The halving will cause a mining death spiral
The theory goes like this: a large reduction in mining reward leads to mining unprofitably and to miners immediately capitulating, while the reduction of hashrate, or the computational power of the network, causes the block frequency to grow until the next block is many hours or forever away; the system becomes less useful, and the price drops further, eventually reaching zero. Though a truly scary scenario, “we’ve already seen two halvings and several price drops of more than 80%, we can be fairly certain it will likely never actually happen.” If nothing else, then shutting down the large mining enterprise would take weeks or months to happen. The logistics simply wouldn’t allow an immediate shutdown. “In the absence of a large spike in bitcoin prices, a [mining] difficulty decrease is a highly likely outcome of this halving,” the Head of Research concludes, adding that “a mining death spiral, under any actually realistic scenario, is not,”
The third Bitcoin mining reward halving is estimated to happen on May 11 or May 12. At pixel time (11:49 UTC), BTC trades at USD 9,185 and is up by 3% in a day and 13% in a week. The price increased by 29% in a month and 54% in a year.
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