The halving effect of BTC: is it "metaphysics", or is it a real "effect" that will have a substantial impact on the market?

Editor's note: The original title was "Half effect of BTC:? 》

More than 30 days before Bitcoin is halved, the historic moment of Bitcoin is gradually coming. The crypto market crash in mid-March gave people good reasons to question these two things:

  • Bitcoin's "digital gold" narrative and its safe haven characteristics
  • Bitcoin's halving effect

In a previous article, Blue Fox Notes has explained its views on "Bitcoin Digital Gold" ("Is Bitcoin a safe-haven asset?"), Today Blue Fox Notes will talk about the second question above : The halving effect of Bitcoin.

What is the halving effect of Bitcoin?

To put it simply, Bitcoin's rewards are halved every 210,000 blocks, about once every four years, and there have been two halvings in history, in 2012 and 2016, respectively. The total supply of Bitcoin is 21 million, and the next block height halved is 630,000, and the expected time is around May 14, 2020.

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(37 days before halving, from buybitcoinworldwide)

By the time of halving, the block reward will be reduced from 12.5btc to 6.25btc, which is equivalent to a new increase of 54,000 btc per month and a sharp reduction to 27,000 btc per month. According to the current price of btc, the monthly selling pressure of nearly 200 million US dollars will be reduced, that is, the original selling pressure of 400 million US dollars will become a selling pressure of only 200 million US dollars. This means a substantial reduction in supply, and as long as demand remains the same, it means an increase in the value of btc.

It is based on this expectation that in the crypto market, articles about Bitcoin's "halving effect" are emerging one after another, and endlessly emerge, and everyone hopes that the halving can increase market energy and bring prices up. However, the plunge in mid-March caused many people to fall below their glasses. The cruelty of the market can be seen at a glance. The market has never had a predictable result of "it must be so." It instantly hits bullish people and slaps the forecasters hard.

So, how to see the halving effect of Bitcoin? Is it "metaphysics" or a real "effect" that will have a substantial impact on the market? There are two issues that are most concerned about:

  • Has the Bitcoin halving effect been included in the price of Bitcoin?
  • Why are bitcoin fluctuations so volatile?

Has Bitcoin's halving effect been included in Bitcoin's price

Many people believe that with the arrival of the halving, the halving effect has been included in the price of Bitcoin. In mid-February, the bitcoin price used to exceed $ 10,000. Some people think that this shows that the halving effect has been included in the bitcoin price. However, the subsequent plunge made the hypothesis of price calculation seem to be in trouble, especially the so-called efficient market hypothesis, which believed that with the arrival of the Bitcoin halving expectation, the price of Bitcoin has been reflected in the halving market.

If viewed historically, there is indeed a halving effect. The halving effect has different results on different time scales. Because people's emotions are often susceptible to short-term price fluctuations, it is difficult to view the halving effect of Bitcoin on a longer time scale, which has generated various controversies.

From the halving in 2016, according to CMC statistics, the price of Bitcoin on the day of the halving on July 9, 2016 was $ 666.52. In the year before the halving, the general trend of Bitcoin was upward, of course, the fluctuations were constant, which is also the normal state of Bitcoin. Nevertheless, before the halving, the halving effect was slightly highlighted. About a month and a half before the halving, there was an obvious pull-up and subsequent decline, and a gradual period of more than four months after that.

This apparent pull-up lasted for almost a month, starting from May 20, 2016 to ending on June 17. Its price rose from US $ 438.72 to US $ 763.78. In less than a month, the price rose by more than 70%. However, in the more than half a month before the halving on July 9, 2016, the price adjusted downwards to $ 666.52. Even so, it is more than 50% higher than a month ago. However, after halving, Bitcoin has been in a relatively stable and slowly rising state, and did not break through the previous high of $ 763.78. It did not break through to a new high of $ 1,000 until the end of 2016 five months later. Judging from the historical trajectory after this halving, the bitcoin market only started to enter the bull market after halving, and it will take nearly a year and a half to reach the peak of the bull market.

Therefore, if viewed from a larger time scale, the halving of 2016 is the beginning of the bull market in 2017. Before the halving day, there was a small increase of nearly a month, but in the bull market framework of more than a year, this can only be regarded as an episode.

That is to say, from the halving in 2016, the real price of Bitcoin's halving effect is not a matter of two months, but may be a matter of more than a year. One of the most important reasons behind it is the sharp decline in the supply of the Bitcoin market, but it is not immediately reflected in the price of Bitcoin. Its impact on the bottom of the market will take more than a year to truly digest.

Of course, the halving effect in 2016 is not the first time. The first was the halving event on November 28, 2012. There had been an increase before the halving, but the increase was not very obvious. The halving was about 5 months after the halving, which was partially similar to 2016. After that, the process of climbing obviously began, but the time to reach the peak of the bull market was short It took more than a year to reach its peak in 2016. (The halving in 2016, due to the large price base, reached the peak of the bull market in about a year and a half.) Assuming this logic, the halving in 2020 may require longer digestion of the halving by the entire market. If it takes two years, then this means that the upward cycle that started in May 2020 may not be noticeable until the end of 2020, and 2021 and 2022 may reach new highs.

The year before the first halving on November 28, 2012, the price of Bitcoin rose by more than 300%, but did not reach the previous high. The price rose by more than 1000% a year after the halving, completing the largest price in Bitcoin history. Leapfrogging from 10 USD level bitcoin to 1000 USD level bitcoin. The second year before the halving on July 9, 2016, bitcoin rose by more than 100%, and the year after halving rose by more than 280%.

Of course, the market environment and factors facing each halving are different. From the perspective of the Blue Fox notes, this change will not follow the predicted "script". All predictions are naturally moist. Therefore, we cannot fully predict according to historical scripts, and we must adjust our views at any time according to market changes.

To sum up, from a one-year time scale, due to the upward trend of Bitcoin as a whole, the overall trend is upwards no matter before and after halving. From the point of view of Blue Fox Notes, even so, according to historical data, two characteristics can still be seen:

1. The halving effect of Bitcoin is mainly displayed gradually after the halving, not the cashing before the halving. Whether it is the first time or the second time, the price increase after the halving of Bitcoin exceeds the price increase before the halving.

2. The time for digesting the halving effect of Bitcoin becomes longer. It took a year for the first halving to reach its peak, exceeding 1,000 US dollars. The second time it took a year and a half to reach its peak, close to $ 20,000. How about halving the third time? What will happen?

Why are bitcoin fluctuations so volatile?

Bitcoin was still above US $ 10,000 in mid-February this year, and by mid-March it had become US $ 5,000, a 50% drop in a month. Perhaps its volatility looks great, but this is the crypto market, and such things have happened repeatedly in history, and it is not uncommon.

How to understand the volatility of Bitcoin fluctuations? The volatility is so great, why do people still have the title of "digital gold"?

There are definitely more than one or two factors that cause the volatility of the Bitcoin market. There are factors of the macroeconomic environment, factors of Bitcoin's own attributes, factors of speculators manipulating the market, and factors of the imperfect structure of the crypto market. The main factors that cause it to fluctuate at each stage may not be exactly the same, sometimes it is one of them, and sometimes it is compounded by multiple factors at the same time.

For example, the black swan in mid-February is related to the large economic environment such as the outbreak of the epidemic and crude oil price competition, as well as the overall structure of the crypto market. At that time, the economic environment led to a liquidity crisis around the world, and Bitcoin and gold were inevitably involved. The triggering of these crises led to the decline of the crypto market. At the same time, due to the high market leverage, liquidation was triggered, which led to a rapid decline. The excessively rapid decline revealed the characteristics of the imperfect structure of the crypto market. The current infrastructure of cryptocurrencies, especially throughput and speed, simply cannot support large-scale encrypted transactions in a short period of time, and the naturally decentralized encryption trading venues exacerbate this crisis, and liquidation cannot proceed smoothly, leading to irrational prices plunges.

At the same time, participants in the bitcoin market, investment funds, currency holders, short-term traders, arbitrageurs, etc., were unable to remain rational in the face of the plunge, which further exacerbated the decline. The combination of various factors directed the perfect storm of 3.12 Black Swan.

After this black swan, on the crypto exchange, more than 1 billion USDT and USDC stable coins were lying quietly. Among them, a part is the funds for hedging. It can also be seen from the current view that the stable currency is still the asset haven. (It is worth noting that, at current prices, these funds are sufficient to digest the amount of new tokens that will be added five months after the halving. This potential is still sufficient.)

The halving effect of BTC: how is it included in the price?

(Data source tokenanalyst)

Putting aside these almost unpredictable market conditions, black swans and other factors, why is Bitcoin fluctuations always capricious? A fundamental factor here is that Bitcoin's own design mechanism determines its volatility.

Bitcoin's game mechanism is an important reason for its price volatility. The ultimate goal of Bitcoin, whether it is digital gold, a safe haven for assets, or to provide a settlement layer for the world. Before reaching its ultimate goal, the huge volatility of bitcoin's price will surely accompany it. In a sense, this comes from its own attributes, not its own defects.

Bitcoin ’s monetary policy has two most important designs:

First, the fixed cap is only 21 million.

The second is to halve the reward for every 210,000 blocks.

Bitcoin's currency issuance mechanism determines that all miners can only compete for a fixed amount of tokens. This is a complete zero-sum game mechanism. The acquisition of a miner means the loss of other miners on the market. Such a game mechanism, on the one hand, leads miners to increase their computing power in order to obtain rewards, in order to obtain a larger share of rewards. But the core behind the computing power is the efficiency and electricity cost of the mining equipment. In particular, the cost of electricity accounts for most of the cost of mining. In a sense, competition for electricity costs determines the survival of miners.

Therefore, for miners, mining has always been a brutal cost war. This is determined by Bitcoin's own game mechanism. The mechanism of inelastic issuance of bitcoin leads to incentive competition among miners.

Bitcoin is very rigid in monetary policy and has no flexibility. What is interesting is that Bitcoin is very flexible in another aspect. The difficulty adjustment of Bitcoin brings enough flexibility to Bitcoin. The difficulty adjustment itself is also a necessary mechanism design to realize its fixed token issuance. Regardless, difficulty adjustment is one of the greatest designs in the Bitcoin game mechanism. It brings continuous security to Bitcoin, and it can also continue to maintain the spiraling elasticity.

The game mechanism of difficulty adjustment is essentially a self-adjustment of the bitcoin price itself. When the bitcoin price is artificially high, bitcoin mining miners swarm in, which also includes many inefficient miners, they can also make money from it, because relative to the cost, the price of bitcoin is enough to support low efficiency.

However, in order to achieve its fixed circulation, Bitcoin will increase the difficulty when the miners are highly competitive, which will cause the original profitable miners to lose money. In order to maintain mining costs, inefficient miners have a stronger need to sell bitcoin. If at this time, there are also other triggering factors, such as the 3.12 Black Swan event, which caused the price of Bitcoin to fall by nearly 50%. In this case, inefficient miners simply cannot survive and can only sell and shut down. This further brought down market adjustments. The Bitcoin price market is in a bearish state. With the inefficiency of miners withdrawing from the market, the difficulty of Bitcoin is too high, and the difficulty of producing blocks has created a demand for difficulty adjustment. With the difficulty adjustment, the proportion of computing power is redistributed, and the surviving high-efficiency miners can get more btc benefits. This part of miners do not have strong selling demand, which is conducive to stabilizing the price of Bitcoin.

It can be said that as a market subject that can generate a $ 400 million monthly sell-off, the fierce game among them will bring continuous fluctuations in the price of Bitcoin. If coupled with other factors in the market, such as macroeconomic adjustments, Speculators too high leverage, etc., will further accelerate market volatility.

In short, before Bitcoin reaches its final mission, its own attributes determine that it must be accompanied by fluctuations. —— Risk warning: All articles in Blue Fox Notes can not be used as investment advice or recommendation. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct an in-depth investigation of the project and carefully make your own investment decisions.