How does Bitcoin Halving Affect Mining?
One of the most important stakeholders in the Bitcoin ecosystem are the miners. They secure the network against attacks and produce the blocks that hold all Bitcoin transactions. Mining bitcoin started with Satoshi running the first mining software and mining the first one million or so Bitcoin. As bitcoin started to gain value, more participants joined the network and started competing to solve blocks and win the mining reward. As the difficulty increased, the computing power required to remain competitive also increased. Today, mining is only economically feasible in the long run when it is done using special computers known as ASICs. Electricity cost is the single biggest variable expense for a miner. Capital expenditures on the hardware and buying or renting warehouse space are also important factors to consider.
The mining industry is maturing rapidly and tends to follow a cyclical pattern around the halving schedule. A halving refers to the supply of newly minted Bitcoin getting cut in half. As with any other industry, if revenues, in this case mining rewards, get cut in half only the most efficient and cost-effective players will be able to continue to mine. The inefficient ones will have to turn off their miners until the price of Bitcoin reaches a point where it is feasible to mine again.
Halving Causes Miners to Hoard and Sell
The following is a generalized example of how miner decisions and price interact during a typical halving cycle.
Again, only the best run mining operations can afford to continue to mine after a sudden 50% drop in revenues. These miners that remain are usually able to save a larger share of their mined Bitcoin than the inefficient miners would have been able to. They sell a portion to cover capital and operational expenses, while ‘hoarding’ as much as possible in their treasuries. This hoarding of new supply tends to start an uptrend 3 to 6 months after the halving event as supply dries up and demand remains constant or even increases a bit.
How Will Halving Affect Bitcoin in 2020 & 2021?
Over the next 12 to 18 months, the Bitcoin price eclipses the previous all-time high and soars towards new highs. New miners enter the industry as profit expectations increase. Incumbents also start to sell more to lock in profits, expand mining capacities, and upgrade hardware. The increased difficulty coupled with added selling creates downward pressure on the price. The price 2-2.5 years after the halving tends to stagnate and even drop significantly off the new all-time highs as demand cannot keep up at these inflated prices. The cycle begins again four years later as another halving event occurs right on schedule.
History never repeats, but it often rhymes. It is impossible to say if Bitcoin will continue this trend exactly but it is highly likely that it will continue a strong upward trend strongly influenced by the mining business cycle. We hope you come along for the ride!