The Bitcoin Halving — some trading thoughts

I’m sharing some thoughts about the current bitcoin market and what might happen in the coming months, particularly off the back of some good third-party research — I’ll expand below.

I’d like to show you the supply and demand challenges of the bitcoin market and why the medium-term odds are stacked in the favour of the trader who buys and holds bitcoins.

There are essentially three groups of bitcoin market participants;

• Miners
• Longer-term holders/ believers
• Institutional Investors

The Sellers: Miners are naturally bitcoin sellers. Their business is all about being the fastest miner to solve the ‘challenge’ hence being able to validate the most recent block on the blockchain thus receiving the current block reward of 12.5btc. Given miners business models are structured around hardware costs, data centre contracts, etc, they are locked into the bitcoin ecosystem long term as sellers and holders.

The Buyers: We can consider the other two groups largely bitcoin buyers as most institutional investors trade long only (some products now exist to go short, but the vast majority trade more simply), and the long-term bitcoin holders who often believe in the decentralised thesis and/ or simply believe that bitcoin as an investment will be higher in the future than today.

A mining supplies organisation, Blockware Solutions, recently produced some very deep research from many deep discussions with their clients and understanding of the mining community that goes way beyond most of our exposure or comprehension.

The result was a very high-quality report (can be read here) and I’ll summarise the key parts of it in my discussion below.

There are two main components we must consider to understand a miner set up. Firstly, 95% of their costs come from electricity, so clearly the lower the cost of electricity the higher the opportunity to make a nice profit. The second key component is the hardware they run in their farm (often data centre). Until the middle of last year, most miners were using the Bitmain S9 mining rig but many (mainly from outside of China) have upgraded to Bitmain S17 rigs which use up 50% more energy however generate 3 times more hash power than the S9. Once up and running, miners will take on average eighteen months to breakeven. Through their business journey they must navigate bitcoin miner reward halvings (next one occurs around May 2020) and changes in hashing difficulty which makes it easier or more difficult to ‘mine’ (generate) bitcoins, and hence revenues. From block number 630,000 miners will be paid 6.25btc per block mined.

Ahead of the halving its possible to mine 54,000 bitcoins per month between all mining participants and we can assume that miners will have to sell a certain percentage of bitcoins every month to pay for their electricity costs — this is where lower cost energy is crucial. Looking at a simple table below (copied) from the Blockware solutions report, we can see miners costs to mine bitcoins and hence how many are likely to be sell orders in the market each month and how many are likely to drop into the miners treasury account (assuming they don’t sell more bitcoins to cash out)

At $7,500 bitcoin price (before the halving), 53% of bitcoins must be sold to pay for their costs, over $200 million of natural selling pressure. As the bitcoin price moves higher then miners need to sell less of their bitcoins (storing more in their Treasury), hence there is less selling pressure in the market, combined with the natural demand should also help the price move higher.

Historically after halvings, the bitcoin price has risen quite sharply over the preceding six months, however, we have only witnessed two halvings before, so we can’t base our judgement purely on that statistic. We’ve seen Bitcoin Cash and SV recently undertake halvings which haven’t gone well for their prices. Their sell-off’s are simply because some miners can no longer make money by mining BCH or SV, so walk away, likely turning to mining bitcoins BTC, combined with a lack of faith in those two coins. Neither challenge should get in Bitcoins way in the weeks ahead.

In the next post I’ll explore other view points and measures that may have an influence on the price of bitcoin before and after the halving.

I’m Chris Thomas, Head of Digital Assets at Swissquote Bank. Swissquote have been in the crypto markets since 2017 and a fully regulated Swiss Bank for over twenty years.

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