The much-anticipated bitcoin halving is upon us, an event that sees the BTC reward that miners receive for processing transactions on the bitcoin network divvy up for the third time in history. In theory, the value of the most prominent cryptocurrency should rise following the halving event since it means that new units would be harder to produce. That narrative has received support from the bull runs pre and post the first two halving events — 2012 and 2016.
Within a year after the first halving, bitcoin rose over 90X from the $10 region to a peak of about $1,180. For the second halving, bitcoin went as high as $2,800 from around $600 within a year before peaking at nearly $20,000 in Dec. 2017.
However, the crypto market has notably matured compared to 2012 and 2016. For one, bitcoin derivatives including futures and options are relatively more predominant these days, allowing for a more advanced price discovery among market participants. By implication, the narrative of a rally driven by the supply-squeeze might not play out so simply, at least not in the short term.
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“It is a very different world in 2020 than it was during the last two halvings, the derivatives market is much larger and more important,” said Garrick Hileman, head of research at
“One way I would say the market has changed is that historically the trading market was more lopsided toward upward transactions because there were not as many ways to speculate on the price going down, for example, the ability to borrow and sell short,” he added. “That’s something that now exists through futures and options. So all these products have created a more level playing field for people who want to bet on the price going down”
An example of how a more robust price discovery system can overpower the demand and supply narrative is the alleged role that the introduction of CBOE and CME bitcoin futures played in the sell-off from bitcoin’s high of nearly $20,000 in 2017. Although it’s yet to be proven, some believe that the introduction of CBOE and CME futures afforded cash-flush institutional traders an opportunity to bet against BTC, influencing spot market behavior in the process.
Diego Gutierrez Zaldivar, CEO of IOV Labs, the company behind bitcoin smart contract platform RSK, argues that the possibility of this dynamic playing out makes this halving event different from the first two.
“While the reduction in bitcoin’s renewed supply due to the halving introduces the possibility of a sharp rise in BTC price,” he said “it is possible that smart institutional money will push prices down in the short-term, as it did when CME and CBOE introduced their futures in Dec. 2017.”
BTC currently has a bearish market sentiment despite halving
In the meantime, certain bitcoin market data shows that traders have a bearish sentiment around the halving event. Hileman pointed at the high demand for put options.
“When you dig into the options data, it looks like the market is placing a premium on contracts that are below the current prices,” he said. “The options market seems to be suggesting that there is more concern over prices moving downwards.”
The Bitcoin BTC put-call ratio data from crypto analytics firm Skew echoes to this sentiment. As indicated in the chart below, the ratio has been trending north. A rising put-call ratio suggests that there is a mounting demand for put contracts.
Emmanuel Goh, the CEO and co-founder of Skew, which recently raised $5 million and launched a trading product, explains that bitcoin options skew, another metric that tracks the price of put options relative to their call counterparts, is also worth monitoring.
With regard to the halving period, “if the options skew is positive for a sustained period of time, it indicates more concerns in the marketplace on the mining being potentially negative for mining companies and potentially having a negative impact on the price of bitcoin,” said Goh.
The BTC skew metric provided by Goh’s firm shows a positive trend.
And there may be some real-world proof that miners aren’t particularly optimistic in the short-term post-halving.
Meltem Demirors, the chief strategy officer at CoinShares, in a Zoom call, referenced her firm’s observations of miners’ activities.
“I think miners are looking to opportunistically offload some of their bitcoin inventory to add operating capital to their balance sheet,” Demirors said. “We’ve been talking to a number of miners on CoinShares’ capital broker-dealer side who are looking at raising capital to build out new facilities, to buy new machines and to extend their capacity.
“And we’ve seen a lot of miners engaging with our capital market trading desk looking for ways to manage and hedge their risk and lock in sort of an OPEX and develop a risk hedge portfolio strategy for the bitcoin they have on their balance sheet so that they can meet their operating cost and reduce some of the inevitable volatility that is going to come to miners around this event.”
SFOX, a Y Combinator-backed digital assets trading platform that provides a single point of market access to institutional participants, have seen similar trends. Some miners are despondent on holding crypto in order to cover their overhead costs, the startup’s head of growth Daniel Kim said.
For context as to why miners might be more cautious, consider that the bitcoin halving event would typically raise the breakeven price for miners.
John Todaro, the head of research at institutional trading tools provider Tradeblock, said mining breakeven price for bitcoin will rise nearly 100% post-2020 halving, citing internal research.
“We have current mining breakeven price between $5,000 and $6,000 per BTC, but immediately after the halving, assuming hashrate stays where it is today or even rises a little bit, you’re going to see the average mining breakeven jump to about $10,000 to $13,000 per BTC,” Todaro said. “You need to see the market price of bitcoin get above those levels or miners are going to be unprofitable, which could see a decline in hashrate, as miners exit the space.”
The changes coming to mining operations could spur some bearish narrative in the short-term based on the mining death spiral story. Therefore, this could potentially be the first time in the network that the market price of bitcoin would stay below mining breakeven points for a considerable amount of time, Todaro added.
BTC also remains correlated to stocks
There’s been wide media coverage on how the price of bitcoin is tied closely to equities. Demirors, Kim and Todaro all believe bitcoin is indeed tracking stocks right now and that it is probably a bigger driving force than the halving event in the short term.
Kim’s firm, SFOX, recently published a report, saying that BTC has sustained a “notably positive” correlation of 0.40 with the S&P 500 — despite the increased focus on the block reward halving event.
The long-term outlook for bitcoin post-halving remain positive
Given the somewhat docile market reaction to the halving event at present, it raises the question of if the event has been priced in. The answer depends on who you ask. That said, most of the experts interviewed believe that the market hasn’t fully priced the halving event, with expectations of higher BTC prices over the long term.
Based on a positive outlook for the three D’s of depletion (halving-driven supply cut), demand and dollars, CoinShares believe that the market price for BTC will be “materially higher” than present levels in 12 to 18 month, Demirors added, cautioning that the timing of a sustained bullish run will depend on soon the bitcoin decouples from the macro narrative.
On the qualitative aspect of things, RSK’s Zaldivar believes that the strength of the bitcoin network is underappreciated and expects that more people will realize this with time.
“Bitcoin is fundamentally strong with an unmatched security thanks to its computing power, financial incentives and network effect, and it is the most reliable and scarce digital asset in the world,” Zaldivar added. “With the economic uncertainty we are witnessing today, it would be no surprise to see the bitcoin ecosystem grow to attract institutional investors who perceive it as a store of value and a hedge.”
With regard to demand, U.S. based digital asset manager Grayscale Investments reported in the first quarter that it saw a record of over $500 million in new investments from its clients. Michael Sonnenshein, the firm’s managing director said during a call that his firm is finding that more people are looking to diversify their portfolio to tap into the potentials of blockchain.
“We are seeing that more investors are eager to either have some exposure for the first time or increase their exposure to bitcoin in a world that is characterized by quite a bit of economic uncertainty,” said Sonnenshein. “I think there is a large group of investors that are excited by the long-term potential of the applications being built around bitcoin weather it’s payments or leveraging the bitcoin blockchain for cost savings.”
I am a financial, cryptocurrency and blockchain writer. I have nearly a decade of experience covering the financial markets and about three years of experience demystifying the world of cryptocurrency and blockchain. My work has appeared on leading online financial publications including Investopedia, TheStreet, Motley Fool and Cointelegraph just to name a few. I previously worked with trade bodies to help industry executives save time by curating the stories they should care about in daily newsletters. Disclosure: I occasionally hold and trade Bitcoin and Ethereum.