Bitcoin Halving 2020: What to Expect in the Long Run
On May 11, 2020, the third Bitcoin halving took place. It became one of the main events in the cryptocurrency industry and made a splash on social networks such as Twitter, where the number of Bitcoin mentions was skyrocketing. Today we focus on the reasons for halving and its impact on the prices and mining of cryptocurrencies in the future.
The Bitcoin mining algorithm is built on the Blockchain, meaning that the next mined block is built into the chain of the previous ones. Blocks contain data on:
- the hash of completed transactions;
- the number of transfers;
- addresses of wallets participating in the transaction.
Halving means reducing the remuneration for a new block by 50%. The cryptocurrency algorithm requires such an event after receiving every 210,000 blocks. It is aimed at reducing the possible inflation of the token to make it more stable. When the last block is mined, inflation will drop to 0%. The reduction also slows down the coins extraction and delays the day when the last Bitcoin is generated.
Throughout the history of Bitcoin, three halvings took place. The first occurred in 2012, reducing the mining reward from 50 to 25 coins per block. After the second halving in 2016, the miners’ profit was 12.5 coins. The third halving, which reduced the reward to 6.25 BTC, took place on May 11, 2020.
Limitation of Bitcoin emission is one of the fundamental differences between this asset and fiat currencies. This factor is becoming increasingly important as the financial institutions of many countries are increasing monetary emissions enormously to solve economic problems due to the quarantine.
For example, the US money supply increased from $3.45 trillion in January 2020 to $4.84 trillion in April 2020. This amount has become the highest in the history of the United States.
How will the halving 2020 affect the cryptocurrency market?
What can miners expect?
Given the current BTC cost of $9,735, the reward for the new block is $60,843. Before halving on May 11, this amount was $121,687. The reduction will not have a global impact on the network. However, the changes will affect small miners. Since profitability dropped significantly, a 30% decrease in the number of miners is expected due to the unprofitability of equipment. For example, Antminer S9 equipment will cease to be profitable. Estimates show that miners’ revenues decreased by more than 40% — from $16 to $9 million after the halving. Small players can switch to the mining of cryptocurrencies with higher returns. Even with a lower token value, it can be more profitable due to the less complicated algorithms.
The chart above shows that since the third halving, mining profitability has declined significantly. If on May 9 this indicator was 0.161 (USD/Day for 1 THash/s), on May 19 it fell to 0.095.
Nevertheless, it is essential to note that the mining industry has been actively developing in the run-up to the halving. The most significant increase in hashing power can be observed in North America and Canada. A growth in the Bitcoin hashrate in March, when the indicator reached 133.29 EH/s, is evidence of the increase. Active investments in mining on the eve of halving indicate that new companies expect an increase in the asset’s value since even new equipment risks losing profitability if the price drops.
Bitcoin hashrate
Although the Bitcoin hashrate did not change significantly in the first days after the third halving, we are now observing a significant drop in this indicator.
Until May 11, it was 137.57 EH/s, but in the first five days after the halving, the value plummeted to 87.1 EH/s. Thus, the hashrate decreased by more than 36%. As of May 19, 2020, the indicator is 98.55 EH/s. This decrease shows that many miners and pools began to turn off their mining equipment due to loss of profitability.
Block time
The third halving also influenced the block time. Immediately after the event, analysts reported that the indicator decreased to seven minutes. Usually, the block time is around 10 minutes. So, as of May 9, the block time was 8.47 minutes. After an unexpected decline, it increased by 65% as of May 17. Now we are experiencing a decrease of the indicator: on May 18, it dropped to 11.25 minutes.
It is expected that the indicator should stabilize soon and return to the average rate.
Transaction fee increase
Expecting the third halving, many experts said that with a decrease in the reward for the new block, one should also expect an increase in transaction commissions. We experienced a gradual growth in fees level one month before the event. So, in mid-April, the average commission was $0.39. Days before the halving, the indicator increased to $3.19. A sharp jump occurred immediately after the event when the fee was as high as $5.16. Thus, the miners’ profit from commissions has increased significantly and is now equivalent to 17% of total income. At the moment, the rate continues to grow, and on May 19 reached $5.82. As the chart illustrates, from mid-April 2020, the average transaction fee increased by 1392%.
How did 2020 halving affect the Bitcoin price?
To accurately assess the 2020 halving impact on the further development of Bitcoin, we need to analyze the price changes of this asset during the previous two times. The first two halvings led to a price increase for several months, and then to its fall. At the time of the 2012 halving, the price for one coin was $12.12. However, it grew to $988.63 (+8057%) in the next year. During the second halving in 2016, the price for one BTC was $657.56. In July 2017, it rose to $2,525 (+283%). In December of the same year, the cost of Bitcoin reached a historical high and amounted to $19,783 per coin. Thus, after the second bitcoin halving, the asset value increased by 2908% in 1.5 years.
Despite the high volatility, the overall Bitcoin price rose both times. The main reasons are:
- the psychological effect of deficiency;
- a real inflation decrease of the first cryptocurrency.
Many factors influence the value of an asset. For example, the current demand and supply in the market are primarily formed by the outcomes of the economic crisis and the high inflation of fiat currencies.
The chart below illustrates that since February 2020, the Bitcoin price has fluctuated significantly. A sharp decline occurred in mid-March when the asset value fell by 48%. After that, the price gradually increased and in the run-up to the third halving was at the level of $10,000. On May 11, it fell to $8,900. After halving, the asset’s value began to gradually grow. As of May 20, 2020, the price is $9,767. Thus, it has increased by 9.7% since the third halving.
Although in the first two days after the block reward was reduced to 6.25 BTC, we expected a decrease in volatility, the price is currently subjected to constant fluctuations. After the first halving in 2012, volatility declined for some time and then increased markedly. The same pattern was observed after the second halving: the decline occurred before a sharp price increase in December 2017. As for the impact of the third halving, we are experiencing an increase in the volatility level. If before May 11, the indicator was 3.05%, as of May 17, it increased to 4.01%.
Many analysts are confident that similar to the first two halvings in 2012 and 2016, the value of the asset will increase. Due to the global economic crisis caused by the COVID-19 quarantine and the oil market instability, interest in cryptocurrencies will grow According to bold forecasts, the Bitcoin price will increase to $50,000 by the end of the year. Some analysts are convinced that by 2022–2023, it will reach $250,000.
How did 2020 halving affect the altcoins?
Since Bitcoin is the leading cryptocurrency, its development sets the vector for all altcoins. The correlation coefficient of Bitcoin and other cryptocurrencies is represented in the chart below.
The Bitcoin dominance index is 67.85%. It is worth noting that the value has increased by 37.85% since 2018. With the price of Bitcoin rising (which happened in 2017, for instance), investors begin to actively put money into other cryptocurrencies, which in turn can reduce the level of dominance of the main asset. Before 2020 halving, the index was at the level of 69–70% but soon fell to 67%.
Although with the growth of the Bitcoin price interest in other cryptocurrencies also increases, it is not enough to reduce their dependence on the leading crypto asset. A high correlation indicates that altcoins are of lesser value to investors on their own. The decrease in Bitcoin dominance can be more likely caused by significant changes in the development of altcoins themselves that can increase their value in the cryptocurrency market. After the second halving, the alt season was mainly due to the users’ faith in the prospects and vast opportunities for cryptocurrency technologies. Today, on the other hand, significant breakthroughs in the projects of altcoins are needed. But it is worth noting that the growth of other cryptocurrencies began a year after the second halving. Consequently, if the same scenario repeats, altcoins still have enough time to prove their worth.
Litecoin
Before the second halving in 2016, Litecoin increased from $4.15 to almost $9 but returned to its previous mark soon after the event. Nevertheless, during the next year, the cost of LTC increased several times and by mid-2017 amounted to $53, which is associated with a Bitcoin sharp price increase. On the eve of 2020 halving, Litecoin was trading in the $47 range. Hours before the event, the price fell to $40. As of May 20, the cost of one coin is $45.47.
The BTC/LTC correlation coefficient is 0.87/1. Thus, if the price of the leading increases, Litecoin will also grow with a high probability.
Ethereum
At the time of the second Bitcoin halving in 2016, the ETH price fluctuated slightly. But a year after the event, it increased 27 times. The BTC/ETH correlation coefficient is 0.89/1.
On the eve of the 2020 halving, the price of one coin increased to $211, but it soon began to decline and reached $199. Nevertheless, as of May 20, 2020, the price is $213.24. Ethereum value growth is expected in the future if the Bitcoin price increases as well.
Bitcoin Cash
The 2020 halving contributed to an increase in fork’s security. A month before the leading cryptocurrency halving, Bitcoin Cash also cut the reward for miners by 50%. Many were forced to switch to Bitcoin mining due to loss of profitability. However, the situation changed after the Bitcoin halving on May 11, 2020. Shortly after the event, there was a double jump in the Bitcoin Cash hashrate, which helped to restore mining capacities. The BCH price has also changed. Before the Bitcoin halving, there was a decrease in value from $267 to $233. As of May 20, the price is $246.52 per coin. Since the BTC/BCH correlation coefficient is 0.85/1, the growth of the Bitcoin Hash price is also expected soon.
Summarizing
Bitcoin 2020 halving became one of the most resonant events of 2020 in the cryptocurrency industry. Hundreds of crypto experts consistently tracked the event and made their predictions.
It is not yet possible to say with certainty what Bitcoin and altcoins will face in the future due to the volatility of the cryptocurrency market. Many analysts expect Bitcoin growth based on the scenario of two previous halvings in 2012 and 2016. According to forecasts, the leading cryptocurrency price can reach $50,000 by the end of this year. Also, the global economic crisis due to the quarantine and the instability of the oil market may increase interest in cryptocurrencies.
2020 Halving will significantly affect the mining industry as a whole. We are already experiencing a reduction in miners’ numbers due to the unprofitability of the equipment with a reduced reward. A hashrate decreasing, which started shortly after the halving is an additional illustration of such a tendency. But it is worth noting that many companies in the USA and Canada actively invested in mining on the eve of reducing the reward. It proves that an increase in the asset price is expected.
One of the halving results is an increase in transaction fees, which grew from $0.39 to $5.82. We are also experiencing growth in the block time, but this indicator should stabilize soon.
Although it is impossible to give an accurate forecast of the behavior of cryptocurrencies on the market, we are convinced that the industry will continue to develop actively. The high interest in Bitcoin and altcoins shows that the demand for decentralized currencies with limited emission is growing.
