Deep Dive: Is the Upcoming Bitcoin (BTC) Halving Priced In?

The Bitcoin (BTC) halving event, when the pseudonymous cryptocurrency’s supply will be cut in half, is approaching. It should take place on May 11, 2020, which is when 210,000 blocks of BTC transactions will have been processed since the last halving event that took place four years ago in 2016.

The Bitcoin (BTC) network and its underlying blockchain technology are essentially a collection of computing nodes spread across the globe.

All full nodes, or BTC transaction validators, have downloaded Bitcoin’s entire transaction history since the digital currency’s genesis (very first) block was generated back in early 2009.

In other words, each of these nodes has stored the complete state of the Bitcoin blockchain, which is the world’s largest, immutable, uncensorable, decentralized record of financial transactions completed using BTC.

Because every full node stores the full Bitcoin transaction history, it becomes extremely difficult, if not practically impossible, to cheat the system as every computing node would reject potentially bad blocks, or fraudulent transactions.

Bitcoin transactions are transparent because they can be viewed by anyone who has access to a block explorer.

There has been a lot of hype as the global Bitcoin community prepares for one of the most significant events in the history of the cryptocurrency and blockchain industry: the BTC halving when the leading digital asset’s supply will be cut in half.

Grayscale Investments, a subsidiary of Barry Silbert’s Digital Currency Group (DCG), notes that Bitcoin is “verifiably scarce.”

Grayscale, the largest institutional holder of BTC, states:

“While Central Banks can print more of their currencies, as we’re seeing in real time with the trillions of new US Dollars entering circulation this month, the total amount of Bitcoin that will ever enter circulation is limited to 21 million.”

However, the total number of BTC in circulation that will ever be accessible is closer to 16 to 17 million. This, as many Bitcoin holders have irresponsibly lost their private keys or seed, which is the only way to access one’s cryptocurrency holdings. Without it, the funds are lost forever.

Each day, more Bitcoin enters circulation via an energy-intensive process known as mining. At present, there are over 18 million BTC in circulation, with each Bitcoin having been minted through an algorithmic and predictable supply schedule that has been running almost non-stop for over 11 years.

Miners play a key role in Bitcoin’s supply schedule, as they provide the computational power to the cryptocurrency’s blockchain, which is needed to confirm BTC transactions that are carried out between independent network participants. Miners are rewarded with newly minted BTC in exchange for their computing resources which are needed to validate transactions.

As explained by Grayscale, a key economic and technical aspect of the open-source Bitcoin protocol is that the amount of BTC given to miners per block is reduced by 50% after every 4 year period. Or, to be more precise, the supply is cut in half after every 210,000 blocks of BTC transactions have been processed on the cryptocurrency’s network.

The first BTC halving occurred back in 2012, which reduced mining rewards from 50 BTC to 25 BTC. The second halving took place in 2016, which cut rewards down further to 12.5 BTC.

At the time of the third halving, which will be around May 11, 2020, the BTC rewards will be reduced to only 6.25 coins.

Grayscale notes:

“Economic theory tells us that if demand for an asset remains constant while supply decreases, the value of the asset will rise.”

Because the BTC halving is a certain and predictable event, it’s easy to check when and by how much the mining reward, and the circulating supply of new BTC, will be reduced.

Many social media users have been asking: Has the Bitcoin halving been priced in?

According to Grayscale and most other analysts:

“Past performance is not indicative of future returns.” 

However, it’s worth noting that in the one-year periods right after the first and second BTC halvings, the censorship-resistant cryptocurrency’s value surged by about 81x and 3x, respectively.

it’s worth noting that in the one-year periods right after the first and second BTC halvings, the censorship-resistant cryptocurrency’s value surged by about 81x and 3x Click to Tweet

The researchers at CoinShares have published a detailed blog post in which they attempt to clarify some of the most confusing or misunderstood concepts related to the Bitcoin halving.

The CoinShares research team writes:

“Even if [we assume] … that markets are … efficient in that … all knowable information is integrated into the price (but to be clear, bitcoin markets can not really be argued as broadly efficient), the future balance of supply and demand in bitcoin markets depend on unknowable information and can therefore not be fully priced in. [Also,] …no one knows the full constitution of the global mining industry and therefore no one fully knows the complete structure of the mining cost curve.” 

The company’s blog specifically addresses the following statement:

“Traders who have been Buying the Rumor Will Sell the News.”

CoinShares argues that this hypothesis suggests that there is “significant speculative demand” factored into the current Bitcoin price, mainly because of “bullish narratives” leading up the highly-anticipated halving event.

One could argue that the event is somewhat comparable to equity markets, where there are often rumors of mergers or takeovers.

A widely-employed strategy among traders is attempting to anticipate retail sentiment well before an event and then trying to aggressively buy and/or sell into retail supply and demand when the event actually takes place.

The CoinShares team states:

“This scenario is particularly hard to analyze on merit because it requires access to information that very few traders are likely to share. It is likely in our opinion that at least some speculative demand has been added by the halving narrative, but that flipping this demand into supply in and of itself is unlikely to cause a large price decrease.”

Another common assertion is that the halving will lead to greater selling pressure from Bitcoin miners, which could drive prices down.

When BTC price is greater than miners’ ROI-breakeven mining costs, they don’t need to sell all their Bitcoins that they’re minting on a regular basis. This may lead to a “positive feedback loop on the upside to bitcoin prices during periods of rising prices,” the CoinShares team explains.

When miners have to deal with the BTC price below its ROI-breakeven levels, they are forced to sell all of the Bitcoins they’ve been mining on a regular basis. They also have to, in many cases, use up their reserves, which results in “additional selling pressure on top of their persistent sales,” the researchers at CoinShares argue.

This effect might be “extra pronounced” if the Bitcoin price falls abruptly and unpredictably, as we saw when the leading cryptocurrency crashed by over 50% on March 12-13, 2020, due to uncertainty created by the COVID-19 pandemic.

However, the CoinShares team points out:

“The halvings … are known in advance. And while the mechanics from the perspective of miners are effectively the same from a 50% price drop and a 50% supply halving, knowing about the event in advance at least offers miners the opportunity to more effectively interact with markets ahead of time.”

It’s worth noting that a price drop doesn’t reduce the actual BTC production rate, and “therefore does not offer any relieving effects on the persistent selling of miners,” the CoinShares team notes.

They add:

“The halving on the other hand does reduce new flow by 50%, thereby providing significant relief on persistent selling pressure even if miners must dip into reserves during a limited transition period.”

Before the current rally, and at a time when the Bitcoin price was significantly lower (late March 2020), the Coin Metrics team had predicted:

“It is concerning that miners are in a state of capitulation even before the halving. Once the block reward halves, miner revenue will be cut in half while miner costs will remain constant, so we expect even more miners to capitulate in the months ahead.”

The argued:

“Miner capitulation increases selling pressure until inefficient miners are forced off the network, but in the long run these events are supportive for prices. Culling inefficient miners allows only the most efficient miners with the lowest cost of production to remain.”

After inefficient miners have left the network, profit margins should begin to improve for the miners who’ve managed to survive. This, the CoinMetrics team claims, helps to lower selling pressure, and then “increases prices, and should repeat in a virtuous cycle.”

They assert that “… eventually, if prices bottom and recover, the pro-cyclical behavior of remaining miners should support further price increases.”

The Coin Metrics team had pointed out that “miner-led selling pressure” for Bitcoin was high and is “likely to increase further in the coming months” as the BTC halving event gets closer.

Coin Metrics’ report, published on March 31, 2020, had stated that they expect miners to “follow a cycle of decreased profit margins, increased selling, capitulation, and a culling of the least efficient miners from the network.”

They concluded:

“Once this cycle is complete, the miner industry should return to a healthier state that is supportive of future price increases.”


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