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Analysis: The halvening effect will be a long term event. Not a short term pump.

By Allen Walters | Publish0x posts | 11 May 2020


Basic introduction.
Bitcoin (BTC) works through a consensus mechanism called Proof of Work (PoW). To understand what this has to do with “The halving” or “The halvening” I give a (very) short explanation of what is important to understand what is about to happen: To run the PoW for BTC, people are running a computer that makes calculations to verify transactions. These people are called miners. Anyone can start mining. You just need the right hardware and software. As an incentive to get people to mine, the BTC protocol gives mining rewards. At this point of time, with each block (so every 10 minutes) a total of 12.5 new Bitcoins are rewarded. These are brand new Bitcoins that are created. So every block, the total circulating supply of BTC is growing with 12.5 BTC extra. On the 15th of May 2020, mining rewards for Bitcoin will be halved

So instead of 12.5 new Bitcoins, 6.25 new Bitcoins will be issued every 10 minutes. This halving is predetermined and is fixed to happen. There have been two halvings in the past: one in 2012, and one in 2016.

Halvening in relation to the supply and demand.
How is this related to the price of BTC? To understand this, you have to realize that miners sell (part of) their rewards. Mining costs money. You need to pay the electricity bill and you need hardware that needs to be replaced after a certain amount of time. Some miners will sell a bigger part of their rewards than others. Some may hold all, hoping to sell at a higher price, some may sell all. Fact is, issuing these mining rewards, creates pressure on the price over time: supply vs demand. The suppliers are always there (miners selling rewards), certainly during price spikes.
The pressure on the price due to miners selling their rewards will be twice as little after the halvening, since only 6.25 extra BTC will be for sale every 10 minutes instead of 12.5.
Obviously, there will always be people selling (miners/ traders/ long term holders), but after the halvening, one group (miners) will have only half to offer compared to what they used to be able to offer. With supply lowering, the price will rise even if the demand stays the same. Therefore the halvening is quite likely to cause an increase in price. But.. Today, the halvening is being hyped as some sort of huge event that takes place at a precise time and will cause a guaranteed price pump. History tells us this is not very likely. It will be a long term effect.

Halvening history:

Only twice before, there has been a halvening.

The first halvening was November 28th 2012:
New BTC Per Block Before: 50 BTC per block
New BTC Per Block After: 25 BTC per block
Price on Halving Day: $12.35
Trading volume: 101.869 BTC / 24h

(Source) Bitcoin Clock.

Short term price action (2 months before and 2 months after):

2585719512416bc319197ec67323ad1bd4e66902d8967c94b9bdb2233e4bd12c.png

-Source 

The second halvening was July 9th 2016:
New BTC Per Block Before: 25 BTC per block
New BTC Per Block After: 12.5 BTC per block
Price on Halving Day: $650.63
Trading volume: 305,065.00 BTC / 24h

(Source) Bitcoin Clock.

Short term price action (2 months before and 2 months after):

db108a8ed762b8159f02974d88efa6be62731f19b93c59f16be04886a7a3000e.png

-Source

So after the first halvening there was a price increase, but not straight after the halvening. And after the second halvening the price actually declined in the months after the halvening. Now if we take the past price action in account and look at todays numbers, we can conclude that an immediate price increasement is not to be expected just because of the fact that blockrewards are halved. Today's tradingvolume is much higher than during the past two halvenings and the amount of BTC that is taken out of the added supply is obviously less than in the past two halvenings:

2020:
New BTC Per Block Before: 12.5 BTC per block
New BTC Per Block After: 6.25 BTC per block
Price today: $8,821.77
Trading volume today: 6,802,017.33 BTC / 24h

So today there are 12.5 BTC added every 10 minutes. That is 1,800 BTC every 24 hours. After the halving, his will be 900 BTC every 24 hours. We have a 24 hour tradingvolume of 6.8 million BTC. So there will be a 900 BTC less available every 24 hours on a 24 hour tradingvolume of 6.8 mill BTC. It's a drip in the ocean. It didn't have an immediate effect in the past two halvenings while tradingvolume was lower, and it won't cause an immediate effect this time either. But drips add up. So long term there should be an effect. The biggest effect will be a psychological effect though. "Sell the news" as they say. The downside of selling news like this could be that, if there is no immediate price increase, inpatient people will sell and a price decrease instead of an increase will be the result. 
Long-term the story doesn't change though. Scarcity grows steadily and cryptocurrency as a whole will see more and more adoption. Crypto value is very volatile and there is some profit to make short-term, but the real life-changing profits are made long term. Hold is the name of the game. 

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Allen Walters
Allen Walters

Fascinated by blockchain and future proofing cryptocurrency. Discover the tech before it gets relevant. Twitter: @IgnoranceIt


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