One of the key characteristics of bitcoin as a currency is that it’s deflationary: it has a supply cap of 21 million base units, and the BTC block rewards paid out to miners to secure its network routinely decreases over time.
This automated, software-based supply management takes place as the Bitcoin blockchain’s block rewards are halved every four years, a phenomenon dubbed in the cryptoeconomy as the “halving.”
All eyes in the crypto ecosystem are thus on Bitcoin’s next halving, which is slated to occur in May 2020. Based on historical charts, some analysts in the space ascribe the halving as a considerably bullish driver of bitcoin price action.
Conversely, others argue that if the bitcoin price doesn’t double between now and the halving, then bitcoin miners will be performing the same amount of work — for the same amount of costs — as they were before, only for half the pay post-halving.
That’s obviously not a desirable dynamic, yet it’s one the cryptoeconomy is seemingly coming closer to facing on the heels of the major sell-offs seen in mainstream and crypto markets this week.
BTC Dragged Down with U.S. Equities
On March 12th, the U.S. stock market’s top three indexes — the Dow Jones, the Nasdaq, and the S&P 500 — all decisively sunk deeper past bear-market thresholds, indicating the end of an 11-year bull market for Wall Street.
The sell-offs in risk-on stocks this week, which has been precipitated by the breakout of a global coronavirus pandemic and an oil price war between Russia and Saudi Arabia, has led to a de-risking investment environment among risk-on cryptocurrencies, too.
Per crypto analytics site Messari, bitcoin has been hit particularly hard by this acute financial flight. At the time of writing, BTC was trading at ~$5,900 USD — down 26 percent on the day, down 38 percent on the week, and down 22 percent year to date.
Clearly, then, the bitcoin price is heading in the wrong direction if economic concerns around May’s halving are to be assuaged, so now there’s even more ground to make up.
Accordingly, skeptics like goldbug economist Peter Schiff have seized on BTC ‘s recent performance to jab at the halving factor. Upon the March 9th stocks-led cryptoeconomy sell-off, Schiff said:
“Looks like it’s Bitcoin’s price that will be halved! Not exactly the halving hodlers expected.”
The Litecoin Playbook?
We know that in two months’ time, Bitcoin’s block rewards will go from 12.5 to 6.25 BTC. What we don’t know, though, is how precisely this shift will play out.
One possible precedent to look to is Litecoin, which experienced its own halving last year. However, when the LTC price didn’t double in kind to make up for the new block reward shortfall, Litecoin miners left the network in droves, a dynamic that has led to the blockchain’s hashrate — and thus security — cratering ever since.
Bitcoin is seemingly facing a similar path forward, according to The Block analyst Matteo Leibowitz, who noted in a recent report that:
“Bitcoin … is currently going through a rather existential price discovery process: if prices fail to double within the next two months, miners will find their revenues cut in half. Mining operations will close en masse, network security will dive, and Bitcoin’s value proposition will be objectively worse off than it is today.”
However, there are proponents who think a Bitcoin halving boon could still be on for this year. For example, the pseudonymous PlanB, a pioneer of bitcoin’s “stock-to-flow” valuation model, said this week that BTC was still on track according to that model to see big growth post-halving.
— PlanB (@100trillionUSD) March 11, 2020
“The predicted market value for bitcoin after May 2020 halving is $1trn, which translates in a bitcoin price of $55,000,” PlanB has argued before.