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Exploding Three Myths About the Upcoming Bitcoin Halving

Posted 3/1/20 by Yan Pritzker

The next Bitcoin halving (aka halvening) is almost here. In May 2020, the reward for mining new blocks will be cut in half from 12.5 to 6.25 Bitcoins. 

A halving occurs after every 210,000 blocks (approx­i­mately every four years) until finally all 21 million Bitcoins have been released by roughly the year 2140. As the supply of newly released coins dwindles the price of Bitcoins could rise if demand remains consis­tent.

There are a lot of miscon­cep­tions around halvings. Let’s explore a few of them…

Myth #1: The halving is priced in

Some believe that because Bitcoin’s stock-to-flow model is already known, the halving is already priced-in correctly (i.e., already reflected in Bitcoin’s price). Joe Weisen­thal, editor at Bloomberg, noted: “you can’t simul­ta­ne­ously believe that markets are smart/efficient and also believe that events liter­ally everyone can see coming at the same time actually matter.”

Meltem Demirors of CoinShares, a cryptocur­rency investment/research firm, argued that due to the rise of Bitcoin and cryptocur­rency deriv­a­tives, which decou­ples these assets from their inherent value and supply-demand economics, “there is a very real possi­bility the price of bitcoin does not go up after halving.”

The truth:

It’s true that the halvings have been known since the incep­tion of Bitcoin. If this halving is priced in, that would imply that past halvings should have been priced in as well. Yet in the past two halvings, the price skyrock­eted in the two years following.

The halving impacts the future supply of Bitcoin. Since 95 – 99% of people world­wide are not in Bitcoin markets and will be entering after the halving, the future will bring more demand to an inflex­ible supply. When a supply shock like the halving takes place, one can’t predict where demand will meet the new-found supply.

It’s also worth mentioning that a large number of people who currently own Bitcoin, perhaps even the majority, do not know about the halving. A check of Google trends shows “Bitcoin halving” on the rise. The knowl­edge of the halving is still growing.

Pseudo­ny­mous Bitcoin analyst Plan B, the author of the stock-to-flow model, argues that while markets price in all infor­ma­tion, they sometimes misprice risk. He points out that assets gener­ally have returns corre­lated to their risks, but Bitcoin appears to be liter­ally “off the charts” on its risk to reward ratio. He says, “It seems that these risks have been overes­ti­mated by the market, and that bitcoin really was a great invest­ment oppor­tu­nity, in line with [stock-to-flow] model.”

Myth #2: Bitcoin will crash because other coins crashed after their halving

Some believe that since other coins dumped after their halvings, the same will happen with Bitcoin. They point to the example of LTC (Litecoin): “Hype Over Litecoin’s Halving Leaves Owners Holding the Bag.”

The truth

This belief ignores the other funda­mental issues that plague altcoins like LTC. Bitcoin’s trading volume is typically more than the next 30 largest altcoins by market capital­iza­tion combined. The smaller the market, the easier it is to manip­u­late. Traders use altcoin trading to accumu­late more Bitcoin, while Bitcoin itself is used as a store of value and not often moved. People make plans to pass Bitcoin on to their children, while it’s hard to find anyone who seriously considers this for any other altcoin. This makes sense, as only the coin with the highest liquidity and saleability across time and space can be consid­ered a monetary good; this is a self-reinforcing charac­ter­istic.

Other coins are neither scarce nor secure like Bitcoin. It is perhaps for this reason that gold and Bitcoin have strong price corre­la­tions with their stock to flow models, and other altcoins do not, indicating that we should not use altcoin behavior as a way to predict Bitcoin behavior.

Myth #3: The halving will cause a mining death spiral

Block rewards are granted to Bitcoin miners for performing the work of securing the Bitcoin ledger. The halving is a reduc­tion in mining rewards. If miners no longer receive as many block rewards, will they continue mining, or will they sell what they have and leave the market, driving prices and hash rate (calcu­la­tions per second performed by miners and adding to the security of the network) lower, and creating a “mining death spiral”? 

Ramak J Sedigh, founder and CEO of Plouton Mining, says, “The upcoming halving will force the small opera­tors and those running S9s out of the market, except in the unlikely scenario that BTC reaches a new all-time high by the end of May.”

Jeffrey Barroga, Digital Marketing Officer at peer-to-peer Bitcoin market­place Paxful, says, “Mining is already compet­i­tive and resource-exten­sive as it is, and when you combine that with the impending block reward reduc­tion in May, hobbyist miners and small players might find that whatever BTC they gain is insuf­fi­cient to pay for the overhead costs of running their rigs.”

The truth

Bitcoin has a built-in Diffi­culty Adjust­ment Algorithm. The process of mining is similar to throwing darts and trying to hit a bullseye of a partic­ular size. As the price of Bitcoin goes up, more miners want to partic­i­pate. In order to regulate how much Bitcoin is issued at any one time, the bullseye shrinks in order to make it harder to hit. The same thing happens in reverse if the price of Bitcoin falls or miners stop mining for any other reason. The bullseye grows in size, making it easier and more profitable to partic­i­pate in mining.

Fears of miners abandoning the network due to halvings are as old as Bitcoin itself, dating as far back as forum posts in 2011. About a year ago, Finance Magnates wrote an article spreading a lot of fear about a mining death spiral, which appeared to confuse GPU-based cryptocur­rency mining with Bitcoin mining, among other things. Nonethe­less, in the period that followed, Bitcoin massively added hash rate, rather than losing it.

While it’s true that without a rise in Bitcoin prices, the halving may make some miners unprof­itable, it’s impor­tant to realize that all miners have a different base cost depending on their cost of electricity and other operating expenses. If the price of Bitcoin does not rise, the most ineffi­cient miners will be forced off the network and more efficient miners will take their place.

Rather than following the predic­tions of journal­ists, it may be worth following the money. The industry has placed long term bets on Bitcoin’s future, ranging from the Peter Thiel backed Layer1, which is funded with $50M and will open on 30 acres in Texas, to the Whinstone project, which plans a giant 1GW mine in the same area. All over the world, in places like Mongolia and Paraguay, reports of mining are on the rise as people find new and creative ways to tap previ­ously unhar­nessed energy sources.

Conclusion

When it comes to the halving, there are plenty of miscon­cep­tions floating around. Make sure to examine all aspects of it and come to your own conclu­sions.

Photo credit https://www.flickr.com/photos/30478819@N08/46290404525

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This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week, month, or paycheck, starting with as little as $10. Sign up or learn more here.

Yan Pritzker

Yan Pritzker is the co-founder and CTO of Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Yan is also the author of Inventing Bitcoin, a quick guide to why Bitcoin was invented and how it works.[

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