Past Halvings in Review: Case for an Immediate Bitcoin Upsurge Is Flawed

The block reward halving of Bitcoin (BTC) has long been touted as an optimistic factor to drive the short-term price trend of BTC in the first half of 2020. Historical data, however, shows that the halving does not necessarily coincide with an immediate upsurge in the price of Bitcoin.

On the Bitcoin network, miners create blocks that record Bitcoin transactions to essentially verify and confirm payment data using computing power. Through large-scale mining centers filled with ASIC mining chips and sophisticated equipment, miners use a large amount of electricity and have high maintenance costs in order to mine BTC. Individual or small producers can mine BTC through pools — i.e., a group of miners that work together by contributing their computing power to mine Bitcoin blocks.

Every four years, the reward of mining Bitcoin halves, dropping the revenues of miners by 50%. Often, miners prepare for halvings by saving six to 12 months of cash as a buffer to ensure that even if Bitcoin’s price drops after the halving, their businesses can be sustained.

What does the historical data say?

The first halving of the Bitcoin network occurred on Nov. 28, 2012. At the time, there were only a handful of major cryptocurrency exchanges that facilitated Bitcoin trading, and it was still relatively difficult to purchase Bitcoin. For that reason, many analysts made the argument that market data prior to 2016 — when there were a limited number of exchanges — may not be reliable.

BTC USDT 1-month chart. Source: TradingView

After the first halving in 2012, the price of Bitcoin took about 11 months to enter a parabolic rally, securing extended upward momentum. In November 2012, the price was hovering at around $12 on Bitstamp. In November 2013, Bitcoin had climbed to as high as $1,100, recording a 7,562% increase in price.

The second halving of the Bitcoin network occurred in July 2016. Coming off of a sharp price decline from $1,100, the price of BTC stabilized at around $600. The price then started to see a strong rally in May 2017, exactly 11 months after the halving occurred — just like in 2012. So, the past two halvings show that Bitcoin’s price tends to see a vertical rally 10 to 11 months after the halvings took place, but not immediately after.

Why does the Bitcoin price rally many months after halvings?

Large miners tend to save a cash-buffer for up to 12 months prior to a block reward halving, as the risk of the BTC price going down subsequent to a mining revenue cut is always present. But, small miners do not have the financial means or resources to prepare for the halving in advance.

Various data points, including Digital Assets Data’s 21-Day Miner's Rolling Inventory, show that miners have been selling more BTC than they mine in recent weeks. As hinted by major investors such as Joe007, arguably the biggest whale on Bitfinex, the potential sell-off of BTC by miners has not been priced into the market.

When small miners continue to sell their Bitcoin, it applies increasing selling pressure on the cryptocurrency exchange market. Some miners tend to sell crypto assets through the over-the-counter market; over time, however, OTC data also gets reflected by the cryptocurrency exchange market.

In mid-March, Joe007 warned that “overleveraged miners” will be unbelievably hurt by the time the halving comes, which could translate to the capitulation of some miners and, ultimately, the sell-off of Bitcoin through both exchanges and OTC platforms.

Why do investors expect the Bitcoin price to increase after the halving?

The main reason behind the widespread expectation of a short-term increase in the price of Bitcoin following the block reward halving in May is that the breakeven price of Bitcoin mining increases to anywhere between $12,000 to $15,000, as TradeBlock’s head of research, John Todaro, stated earlier in 2020. Many investors theorized that since it costs $12,000 to mine Bitcoin, it would be logical to have the BTC price above $12,000 after the halving.

While BTC could eventually enter the $12,000 to $15,000 range in the future, major miners prepare large cash-buffers precisely as a countermeasure against a possible dip in the price of Bitcoin subsequent to the halving.

Todaro’s research also found that newer mining equipment is consistently being developed by major companies like Bitmain and Canaan, which also makes it a variable in calculating the breakeven price of mining. Efficient mining equipment, together with cheaper electricity and resources, can substantially decrease the breakeven price of mining, even after a halving occurs, according to research by TradeBlock.

For large miners that have the cash-buffer and resources to speedily obtain new mining equipment, the eventual drop in mining difficulty through automatic adjustments make it possible to sustain their businesses through the early months following a halving.

What’s next for BTC?

If the Bitcoin price trend follows historical performance, as seen in 2012 and 2016, then Bitcoin should increase significantly in mid-2021, 10 to 11 months out from the halving scheduled to be activated in May. As such, there is a strong possibility that price will remain well below the breakeven price of mining over the next few months.

However, the popular theory that the hash rate of the Bitcoin network could reflect the decline in mining revenues — and thus lead to a “death spiral” to severely downgrade the Bitcoin network security — has not been proven to be accurate, based on historical data and on-chain research.

Despite the halving being one month out, the hash rate of the Bitcoin network has dropped only to December 2019 levels. Because the network’s hash rate has consistently achieved new record highs throughout the past two years, there is a low probability that the halving would have a noticeably large negative impact on the hash rate.

Source: Blockchain.com

A study by BitMEX found a variety of scenarios that could play out, such as: “The halvening has a much larger impact on the network hashrate, causing a 47% decline” or one in which “the halvening only caused a 12% drop in the network hashrate.”

That means that even if Bitcoin’s price remains below the cost to mine BTC and stays that way for the next three to four months, and given that large miners tend to prepare in advance and that hash rate rarely drops by a large margin, the hash rate of the Bitcoin network is likely to remain stable until the BTC price begins to reflect the cost of mining.

The halving may shake out overleveraged and small miners in the near-term, the same way a drop in the price of Bitcoin can shake out overleveraged traders, as it is not likely to trigger an immediate price spike of BTC. But over the medium to long term, the fundamentals of the Bitcoin network and mining ecosystem are expected to remain strong.

Both minor and major acquisitions in the mining sector are ongoing despite the market dip and the stagnation in the cryptocurrency market, as seen in a $2.8 million acquisition of a Bitcoin mining center in Quebec, Canada on March 30, 2020. This suggests that miners expect a short-term drop-off in the global cryptocurrency mining sector, but a recovery over the long run.