With So Many ‘Halvings’ Coming Up, is a Price Explosion in Crypto Imminent?
By AAX on The Capital
Most investors in crypto are likely to know that in May 2020 the Bitcoin (BTC) halving will be taking place. It’s a recurring event sometimes referred to as the ‘Halvening’. It has historically been associated with impressive price rallies and it is therefore not surprising that since December last year, globally, Google searches for the term ‘Bitcoin halving’ have spiked.
Less commonly known is that 2020 will also see halvings happen for:
- Ethereum Classic (ETC), March
- Bitcoin Cash (BCH), April
- Bitcoin SV (BSV), April
- Dash (DASH), May
- Zcoin (XZC), September
- Zcash (ZEC), October
But while we can reasonably expect strong price action throughout the year, the assumption that halvings automatically lead to significant upswings leaves out too many other factors.
A sudden reduction in supply should theoretically drive up a coin’s value. In reality, however, there are more factors that determine the impact of a halving. For example, some miners may stop their operations as they face a reduction in income. This may jeopardize network security which in turn may lead to a sell-off. The outcome of any halving also depends on the coin we’re dealing with and social support structures.
Every halving tells a different story
The halving refers to the moment when block rewards, granted to miners who successfully add a block to the blockchain, are cut in half. From that moment onwards, less newly minted crypto is fed into the market.
As mentioned in a previous article, the Bitcoin blockchain’s first halving took place on November 28, 2012. In the year leading up to the event, from November 28, 2011, the BTC price climbed by 341.90%. In the year that followed the halving, up until November 28, 2013, the price of Bitcoin increased by a staggering 7,976%.
Similarly, in the year preceding the second halving, between July 2015 and July 2016, BTC’s price rose by 111%. More importantly, in the rally that followed the halving, the price of BTC further increased by 2866%, which led the coin to reach its all-time high of $19.891.
Such historical results, of course, do not guarantee similar outcomes in the future and each coin can be expected to behave differently. For example, if we look at the year around Litecoin’s (LTC) halving, which occurred on the 5th of August, 2019, we can see that LTC’s price followed a different trajectory.
The price of LTC did start rising at the start of 2019, from $30 on January 1st to $141 on June 23rd. But after June, prior to the halving itself, LTC’s value sharply declined again, falling back to $37 on December 18th.
In this case, it’s interesting to note the correlation between LTC’s market cap and LTC-related tweet volume. It shows clearly how excitement around the halving drove up the price but also how the halving itself — from a technical standpoint — was not perfectly reflected in the price chart.
In an attempt to explain this outcome, some commentators pointed out that unlike BTC and Ethereum (ETH), which both enjoy a large, loyal following, LTC cannot count on the same level of community support.
Following LTC’s reward-reduction, miners allegedly began abandoning their work. This raised concerns over the network’s security and the coin’s utility and, as such, it is highly likely that the early rally was mostly driven by expectations around the rally itself — i.e. a self-fulfilling prophecy — rather than a direct effect of the halving.
Wider considerations
The reality for each coin then is likely to be different, and when preparing for any halving, investors must take multiple factors into account, rather than just the mathematical logic of the ‘halving’ event alone.
Bitcoin SV & Bitcoin Cash
Miners for both BSV and BSH currently struggle to break even and most even operate at a loss — some reports go so far as to claim BSV owes much of its relevance today to a form of ‘altruistic mining’. What prompts these miners to continue their work at a loss is not exactly clear, but both coins do enjoy a relatively committed core of supporters.
In January 2020, after hovering around the $100 mark for a couple of months, BSV steeply climbed from roughly $90 to $400 within two weeks. BCH, although slightly up from the start of the year, showed no such rally. The halving for both coins will happen in April 2020.
Zcoin
The situation with privacy coin ZEC is slightly different. Unlike miners of Bitcoin, miners of ZEC only keep 80% of earned block rewards; 20% is divided among the ZEC founders, developers, and investors.
The problem with ZEC’s upcoming halving is that in addition to a reduction in block rewards, the 20% founder’s reward allocation is due to expire as well. As this means that ZEC will soon find itself without funds to finance research and development, the ZEC community is currently discussing various proposals to ensure the coin’s continuity.
Dash
With DASH, the halving is not really a halving at all. Instead, coin emissions for DASH are reduced by 7.14% every 210,240 blocks (+/- 383 days). This makes for a much smoother transition over time, giving both miners and investors more space to adapt their strategies. This policy also pushes the coin’s developers to keep innovating to drive value, rather than expecting the protocol itself to do the magic.
Conclusion
As we look ahead and prepare for various halvings, it’s important to study the situation for each coin separately.
Even with BTC, despite historical results, we must consider carefully what the upcoming halving means for miners, and how they might respond as they are faced with a rewards reduction. Similarly, it’s also good to take into account how high-net-worth investors in BTC, or ‘whales’, might go about driving up the price in anticipation of the halving and at what point they are likely to rake in their profits.
Finally, since the last BTC halving a lot has changed. For one, the market has become more mature which means price rallies may be less extreme than previous ones. Also, investors now have the opportunity to expose themselves to BTC’s price action with futures contracts. This may influence traders’ behavior and the way the halving will impact the market.
If anything, understanding how you can leverage perpetual futures contracts to maximize exposure and creatively hedge against risk may be key to your success in 2020.
Originally published at https://blog.aax.com on January 31, 2020.
