As Bitcoin's Halving Finally Arrives, a Price Retreat Deflates the Hype

MARKET MOVES

A pullback in the bitcoin market over the past few days has rattled traders on the eve of the blockchain network's third halving, which had been tabbed by some bullish investors as a catalyst for higher prices.
The cryptocurrency fell for a third straight day to about $8,500 as of late Sunday, off 15% from the May 7 price of $10,000. The cryptocurrency exchange Coinbase suffered a temporary outage on Saturday, too, as prices tumbled 10% in a span of just 30 minutes.
The sell-off threatened to dampen trader spirits ahead of the halving, an occurrence that takes place roughly once every four years, when the pace of new bitcoins produced by the blockchain network automatically gets cut in half.
Open bitcoin futures contracts on the Chicago-based exchange CME rose to record highs last week, and market enthusiasm swelled after the hedge-fund magnate Paul Tudor Jones disclosed plans to nose into the market.
"While the bulls finally managed to push bitcoin above the $10k level, yet again there was a distinct lack of follow-through action, which suggests hesitation and market nervousness ahead of a key risk event," Denis Vinokourov, head of research at BeQuant, a cryptocurrency exchange and brokerage, said in emailed remarks.
Some analysts and investors say the halving could help send prices soaring to $100,000 or higher. Others say the halving is so clearly understood and anticipated that any impact is probably already baked into the market price.
The rallies that followed the 11-year-old cryptocurrency's two prior halvings played out over years and may have had more to do with the cryptocurrency's increasing popularity and adoption, or simply speculation.
And it's possible that the growing belief among some investors that bitcoin could serve as an inflation hedge – "digital gold" – may play a far greater role in determining the cryptocurrency's price. That's especially the case now that the Federal Reserve and other central banks are injecting trillions of dollars into the global financial system as part of their emergency response to the coronavirus-induced recession.
Bitcoin is still up 19.5% in 2020, contrasting with a 9.3% loss for the Standard & Poor's 500 Index of large U.S. stocks.
Officially, the halvings occur every time the Bitcoin blockchain clears 210,000 data blocks. With block times of roughly 10 minutes, the halvings were originally supposed to be spaced four years apart. But occasional accelerations in the network's speed since its launch in 2009 has shortened the time interval.
That's why the third halving, at block 630,000, is happening now, about two months shy of four years since the last such event in July 2016. As of Monday at 09:45 UTC, the halving was an estimated 9 hours and 44 minutes away — putting it soon after 19:30 UTC tonight.
Source: Messari
The reality is that past halvings have proven to be somewhat anticlimactic affairs, in stark contrast to the hype that has built up within the cryptocurrency community over the past few weeks.
One apt comparison might be to the obsessive scramble that preceded "Y2K" at turn of the new millennium, when governments and businesses worried that computer clocks might not be able to handle the date rollover. New Year's Eve 2000 came and went with lots of fanfare, reflection and predictions about the future, but little actual disruption .
Indeed, prior bitcoin halvings have had little immediate impact on the market price. When the first halving took place, on Nov. 28, 2012, bitcoin's price slid by 0.5%. And on July 9, 2016, the second halving, prices fell by 2.3%.
According to the data firm Messari, a bull market that saw prices increase more than 80-fold followed the 2012 halving, but it took about a year. After the 2016 halving, prices rose 30-fold over the next 1.5 years to an all-time-high around $20,000 in December 2017.
Even at the current price level, bitcoin is changing hands at roughly 13 times what it did at the time of the 2016 halving, around $648.
Source: TradingView.com
"Each of the past two halvings were followed by bull runs that saw price rise thousands of percentage points," Messari wrote this month in a report. "Although the data to support this relationship is limited given bitcoin has only undergone two halvings, it has been enough to convince some people that halvings are a leading cause of bitcoin bull runs."
At the current issuance rate, the blockchain produces about 1,800 bitcoin a day as a reward to computer operators for securing the network, worth about $5.6 billion a year at current prices. Post-halving, the issuance rate will drop to 900 bitcoins a day, so annual demand – ostensibly from new investors – would simply have to exceed $2.8 billion to keep the price on an upward trajectory.
"Assuming constant buy pressure, this reduction in selling should lead to at least a marginal rise in price," according to the Messari report.
Industry executives say that the impact will likely be felt more immediately on bitcoin miners, as computer operators on the network are known.
The miners will see their daily revenue cut in half – that is, until those with higher electricity costs or slower, less-efficient, older-generation machines begin to operate at a loss, and they drop off the network. When that happens, an automatic adjustment mechanism known as "difficulty" should theoretically kick in, helping to restore some of the industry's profitability.
John Rim, chief financial officer of publicly traded Canadian bitcoin-mining company BitFarms, said in a phone interview that bitcoin's coronavirus-fueled 38% price plunge on March 12 offered a glimpse of how the network might respond following the halving. The reasoning is that the price plunge that day was tantamount to a revenue reduction on a scale similar to the halving.
The so-called "hash rate" – a gauge of the speed at which operators are sending computations known as "hashes" to the network – had climbed on March 7 to a record 123 exahashes, or quintillion hashes, per second, based on the seven-day average. But as prices fell over the next two weeks, the seven-day average fell by about 24% to 94 exahashes on March 21.
The hash rate has since crept back up toward the record as bitcoin prices recovered from the mid-March crash.
All things being equal, Rim estimates that the halving could lead to a roughly 15% reduction the network's total hash rate.

Bitcoin hash rate chart showing drop from record in mid-March following the coronavirus-triggered price plunge. Source: Blockchain.com
The first indication that miners are dropping off the blockchain network en masse might come from looking at the time it takes to mine the first few blocks after No. 630,000. Since block times are supposed to average 10 minutes apiece, an unusually drawn-out span between them could signal a sudden drop in the number of miners working to confirm transactions.
That might represent the extent of the drama on halving eve – aside from the ersatz thrill of counting down and maybe a few bitcoiners popping a cork or two.

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