Halving of Bitcoin rewards could herald a price drop

For most investors who have holdings in cryptocurrency, 2019 was a pretty good year. Overall, the majority of the most-used coins either held their value or increased – with some doubling within the year. For all of the good news, though, there remains a fair amount of skepticism that the good times are going to continue. One recent analysis has even suggested that Bitcoin, the bellwether for the crypto market, is heading for a significant fall in price.

One of the underlying issues that’s causing analysts to worry is the fact that Bitcoin is about to undergo another “halving” this May. That’s a predetermined event where the rewards that miners receive for each new block are cut in half, and it happens every four years. The mechanism is baked into the system and is designed to mimic actual gold mining, where diminishing returns are always the norm. It’s also the primary method that allows Bitcoin to keep rewarding miners as it nears its pre-set limit of 21 million total coins.

What’s interesting about it is the fact that the two previous halving events have produced upticks in the value of Bitcoin, not losses. So, it’s odd that speculators are predicting the opposite this time around. Here’s what’s going on, and what may actually play out in the market this May.

A Short History

First, to understand why the upcoming halving is such a big deal to analysts, you must understand the effect that the previous instances have had on the market. That means taking a look at Bitcoin’s price movements in November of 2012 and July of 2016. On both of those occasions, the price of Bitcoin began to rise in anticipation of the upcoming halving and tended to continue on an upward trend afterward.

The main problem this time around, if you can call it that, is the fact that Bitcoin’s price doesn’t seem to be doing the same thing in anticipation of this halving event. In fact, while it’s still on the rise, it isn’t making gains of the same magnitude that previous halvings produced. It’s that deviation from the historical norm that has analysts spooked. But that still doesn’t mean Bitcoin’s going to suffer a fall.

Where’s the Boost?

In reality, there’s a good case to be made that the price boost that analysts expected has already occurred, and is already priced in. It’s easy to understand the reasons this could have happened this time around. One big reason is that the cryptocurrency market today has some fundamentally different characteristics compared to the past.

Today, traders are more apt to engage in CFD trading rather than direct crypto purchases and sales as an investment strategy. In fact, investors have their pick of multiple pairings of cryptocurrency and fiat currencies to choose from, which has changed the dynamics of the market. There’s also a whole lot more professional investors in the mix, who have already modified their portfolios in anticipation of a coming price spike.

If that’s what’s happening, it’s reasonable to believe that the massive price recovery that Bitcoin saw in the middle of last year was the result of traders trying to buy low prior to the upward pressure of the halving this year. In previous instances, casual investors weren’t likely to move that far in advance, but it’s exactly what you’d expect from institutional investors and professional traders – especially since the exact date of the next halving is knowable and represents an obvious opportunity.

The Case for a Selloff

The simple truth is that Bitcoin hasn’t existed long enough for anyone to make accurate predictions of how the market will move based on past performance. That’s why you’ll see so many analysts looking to external events to try to explain what appear to be seasonal swings in price.

This time around, though, the analysts who see Bitcoin on the downswing are looking at the effect that the halving will have on the miners that operate the transaction network. Some believe that a cut in rewards to miners will lead to a great many of them abandoning the work because it’s going to get much harder to make the economics work. Others think the ownership of the mining nodes will become more centralized and come to threaten the security of the network. Either outcome would exert downward pressure on prices, which explains the doom-and-gloom predictions.

Where Bitcoin’s Heading

At this point, it’s only natural to wonder if the two outcomes mentioned here are the only possibilities. The fact is, though, nothing could be further from the truth. If Bitcoin had a central mission statement, it’d likely include a reference to decentralized control being a central tenet of the cryptocurrency. That reality means that neither the large investors and speculators or the analysts have the power to move the market on their own.

Since Bitcoin is, for all intents and purposes, sentiment-driven and without tangible financial constraints, investors may yet pull off a price rally as more coverage of the halving hits the internet. The kind of demand that coverage could create is the only thing that has the power to move the Bitcoin market one way or another. So, the best course of action may be to measure the tone of the coverage and use that as a guide on what to do. If you start to see plenty of anticipation of a halving-fueled rally, buy-in. If analysts set the narrative that Bitcoin can’t hold its value, get out early.

Either way, a savvy investor can still turn the upcoming halving to his advantage – the key is in divining what mood the market is in early enough to take appropriate action.

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(Featured image by MichaelWuensch from Pixabay)

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