Bitcoin halving: what to expect?

On May 12th, mining the original cryptocurrency - bitcoin - will become twice less profitable. The previous two instances of halving led to a high volatility, and, in the end, to a higher BTC rate. However, this time the analysts see alternatives to the possibility of growth. Let’s look at three main scenarios.

Halving means cutting in half the speed at which new cryptocurrency units are released into circulation. Every halving also means smaller rewards for miners for successfully mined blocks. The periodic decrease of mining rate is built into the algorithm to control the inflation automatically—this feature distinguishes cryptocurrencies from fiat money.

Only two bitcoin halvings have occurred so far (total number built into the algorithm is 32). In 2012 and 2016 this led to a high volatility, followed by a dramatic rate growth caused by the sharp excess of demand over supply.

However, now the market participants and experts have different opinions. Some expect a hike in the bitcoin price, while others warn of a long period of fluctuation within the existing range, or even below it.

If the former base their prognosis on the previous behavior of the bitcoin price in dollars after the first two halvings, the latter consider the lower viability of mining at the current exchange rate and its difficulty ahead of the upcoming halving of the rewards.

As early as a year ago, Digital Asset Research predicted new historic highs in May 2020 based on the analysis of how the bitcoin rate behaved after the previous halvings: $60,595 per unit in May 2020 and $732,256 in 2024. A year later, Pantera Capital CEO anticipates a rate of $115,000 in August 2021. Such predictions are based exclusively on the analysis of price behavior after the previous halvings, without taking into account any other factors.

However, the mining equipment requirements are getting higher each year, and a cryptocurrency has to maintain a certain price for the mining to remain viable. Today, breakeven bitcoin mining requires the price to stay above $7,000, this figure is floating and average, since equipment of various power capacity can be used for the generation of bitcoins. Pessimists think that a drop in price will halt the operation of a significant number of miners. This will lead to a lower hashrate and a slower block generation. As a result, the miners will start unloading the cryptocurrency to pay the electricity bills, driving the bitcoin price even lower.

Among the cryptocurrency community, some think this halving won’t become a price-forming factor for the bitcoin. As the rewards for block generation were rising, the previous changes were a result of a number of factors: the difficulty of mining, news agenda, expectations of cryptocurrency investors. Moreover, the income of miners is only a small part of the global cryptocurrency volume: newly generated units make up only 3.6% of the overall issued coins annually. This means that with less mining, there will be no dramatic drops in supply, so no demand imbalance is expected.

Grand Capital analyst Semyon Kamensky holds a pessimistic view: “I think that the bitcoin halving will drop the price, or won’t affect it altogether. This event was announced 15 years ago, when the bitcoin launched, and it’s been long included into the current market price.”

He maintains that investors shouldn’t base their expectations on the previous halvings in 2012 and 2016, when bitcoin was rising all the time anyway, and any push, even an illusory one, was enough to trigger a new surge. Kamensky adds: “Right now the cryptocurrency market is a seller’s market, which means there are more of those who are willing to sell than those who want to buy, so any news will push the price down.”

The analyst reminds that some traders bought bitcoins expecting it to rise after the halving, and will immediately start selling it when they see no growth. Be it as it may, Kamensky thinks that the BTC is unlikely to go below $7,000 (a key level for miners), since it has consolidated today at $9,000.