Is the Halving priced in? An analysis
Written by: Brandon M.
- First I would like to thank you for reading this article. I hope to spark cordial discussion and I look forward to everyone's constructive criticism.
- In this article I am discussing the Bitcoin halving, Supply & Demand, and my take on some interesting metrics.
- Lastly; The Content below is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
I want to start off by giving a brief summary of the Bitcoin Halving for those readers who need a refresher or for those who are not too familiar with the topic. The Bitcoin Halving is an event that takes place on the Bitcoin network every 210,000 confirmed blocks or approximately every 4 years. This event is known as the “Halving” because it cuts the block reward, or supply of new Bitcoin, in half. The block reward is the amount of Bitcoin that miners receive when they successfully add a block to the blockchain, a new block is added to the chain approximately every 10 minutes. Currently the block reward is 12.5 BTC but once the Halving takes place the block reward will be cut in half resulting in a new block reward of 6.25 BTC.
According to BeinCrypto, The break-even point for Bitcoin miners is currently near the $6,000 dollar level (beincrypto.com). This means that at the current market price of $7,100, mining profit margins have been cut significantly from the high months of June - October, when prices hovered from $9,000 - $12,000. This loss in profits will cause most miners to sell the vast majority of Bitcoin mined and could continue to do so in the near term. With all that said, I have considered it safe to assume that the entire block reward (12.5 BTC) mined per block are absorbed/purchased by the market. And if not exactly all 12.5 BTC, the amount differential is so minuscule that it will be negligible once the halving takes effect.
With the assumption that the 12.5 BTC rate of absorption by the market, approximately every 10 minutes, stays constant, when the halving cuts the block reward to 6.25 BTC demand will be 2 times as great as the supply, causing a supply shock. Economics tells us that when supply lessens and demand stays constant or increases, the price will also increase. Below I am going to discuss a few different metrics that I find interesting that I think could help increase Bitcoin usage and therefore demand.
- There are currently over 45 Million unique Bitcoin wallet addresses and that number is still quite steadily climbing by the day. There were over 13 Million wallet addresses created in 2019, with more and more users joining the network that require access to the network(Bitcoin). This creates a higher demand for Bitcoin and the limited supply will continually be broken down into fractions of whole Bitcoin spread across the millions of users on the network. Single transactions of multiple Bitcoin could soon become rare due to the high value that a single Bitcoin holds. More users join the network more demand is created for Bitcoin.
- Transaction (Tx’s) volume increases across the Bitcoin Network is a signal of growth on the network. This leads to higher usage of Bitcoin and a potential increase in demand.
- Capital inflow and outflow are important metrics to keep an eye on as well. Capital inflow and outflow in layman terms is the amount of money or Bitcoin moved onto exchanges (Inflow) versus the amount of money or Bitcoin that is moved off of exchanges and stored on wallets etc. (Outflow) While for the month of December we have a higher inflow than outflow, I am optimistic that this trend will soon reverse.
- After the Halving ~50% of newly mined Bitcoin will be absorbed by two companies: Grayscale Bitcoin Trust (GBTC) and Square’s Cash App. Much like they have in previous quarters, In quarter 3 of 2019 both of these companies increased their amount of supply absorption Square reported $148 million dollars of revenue from the sale of Bitcoin through their mobile application Cash App and GBTC reported an addition of 13,197 Bitcoin to their Assets under management. With this addition, GBTC’s total Assets under management increased to 238,649 Bitcoin as of September 30, 2019.
Something else that I think is important to mention is the relationship that rising mining difficulty and lower block rewards share with Moore's Law. With rising mining difficulty and lower block rewards comes narrower profit margins for miners and in some cases can cause miners to stop mining activities, also known as capitulation. If you’re unfamiliar with Moore's Law, it is the theory that the number of processors on a microchip doubles every two years. According to Tim Draper, $1000 worth of mining compute power on a mining rig doubles every 14 - 18 months (CryptoFinder). This can prevent miners from capitulating because new miners can enter the market with new machines, processes, and activities that allow them to remain competitive.
Supply and Demand economics of Bitcoin
With the market consistently absorbing the current supply, I am confident that after the next halving the market will have no problem maintaining demand two times greater than supply. This is only considering the possibility that demand stays constant. If demand, usage, and network growth continue to rise then this will further drive the price of Bitcoin higher. As of now, I do not believe that the halving is priced into the current market price of Bitcoin.
The above metrics and hypotheses are those that I find interesting and thought would be unique topics of discussion. Nothing is financial advice and none should be construed as such.
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“Bitcoin's Price Drop Threatens Mining
Hardware Break-Even Prices - BeInCrypto.” Google, Google, https://www.google.com/amp/s/beincrypto.com/bitcoins-price-drop-threatens-mining-hardware-break-even-prices/amp/.
“Tim Draper predicts the price of Bitcoin after the halving!”,Crypto Finder, YouTube, https://youtu.be/H6Xz4luFb2c.