Another milestone in the crypto calendar is upon us with the upcoming bitcoin halving, a key feature in Satoshi’s blueprint for creating greater scarcity every four years by halving the new bitcoins available per block to miners and reducing the bitcoin supply.
This will be the third halving since Bitcoin’s inception in January 2009 and from a price perspective, both of the previous events were very bullish for the cryptocurrency, triggering price rises of 81 times and 30 times in the 18-month period after the 2012 and 2016 halvings respectively.
Bitcoin Cash’s halving on April 8th ended up being a bit of a non-event but does that mean bitcoin’s halving will also be just another day in the salt mines? Experts are making their predictions but it is difficult to read much into the BCH halving. Since nothing really happened, no spike or crash, experts are now split on what will happen with the BTC halving.
The global impact of COVID-19 has destroyed traditional economic and trading models and we are in uncharted territory across all asset classes. In the second week of March when equities were tanking, so was bitcoin and even safe harbor assets like gold – cash was king. Following the Cares Act, the S&P 500 has rallied and is now highly correlated to both bitcoin and gold with a correlation coefficient of 0.6 and 0.8 respectively.
James Harris of CryptoCompare says “While we see real reasons to be bullish about bitcoin from both a macro and micro economic perspective, the fact is that the market ecosystem is markedly different from the previous two halvings. Previously, miner selling was a far greater proportion of overall trading flows, so a net decrease in their activity may have had a greater impact in the past.
“Another important factor is the emergence of derivative platforms, virtually non-existent two or three years ago, whose trading volumes now dwarf spot exchanges, though it is difficult to predict whether these exchanges will increase or reduce volatility in the longer term.”
Many see spot prices as the be-all and end-all for valuing cryptocurrencies and digital assets. BTC briefly soared past $ 9,000 and many altcoins including Ethereum (ETH) have spiked in the past week which has caused some debate as to whether or not the halving is already priced in.
Much of the increased demand came from retail investors, according to a recent research note from Bequant’s Denis Vinokourov, which can be harder to predict than professional and institutions traders that tend to use a combination of derivatives and HODLing.
More sophisticated investors are likely part of the spot market surge, especially as they seek to take advantage of the opportunities afforded by volatility, however, volumes from buying and selling actual bitcoins are up only a fraction of the increased action in the futures market.
Options positioning is often used in equities markets to hedge or risk adjust a position by offsetting it to the future price of the stock the shorter-term. As digital asset derivatives mature and become more liquid, we can start to apply similar logic to their underlying assets.
The recent BTC run-up led to a spike in options call selling and Vinokourov observed in a separate note, “there is plenty to suggest the option call selling to fund downside protection… that the market is skeptical of a significant bullish run.”
This comes at the same time that futures and perpetual swaps have lagged behind spot markets, according to publicly available data. This often means that sophisticated investors are hesitant to use leverage, which helps amplify returns. Highly leveraged traders often cause wild swings in BTC spot markets, and these individuals appear eager to avoid losing their shirt should markets head south.
This is not to say the market is expecting a significant pullback. In fact, having a more robust derivatives market means traders have more options for hedging against downside risk. In other words, markets may retreat but the pullback should be limited.
Harris adds, “It is interesting to note that going into this halving, traders appear to be less leveraged than they were before the March correction despite prices being at similar levels. This suggests that prices could have further to run.
This is supported by data indicating that more and more wallets are being opened each week, and that there’s an increasing number of so-called “whales” – traders that hold 10,000 or more bitcoins in a single wallet.
Hash rates, which measure bitcoin miners ’activity on the blockchain, are flirting with all-time highs as block rewards get set to halve. Ultimately, the halving will cause a number of miners to drop off the blockchain as they cease to be profitable because they run out dated processors that can’t mine enough bitcoin to make them profitable versus their cost of operation. This would cause the hash rate to drop, at least temporarily, which has historically led digital assets to lower.
Analyts are making these assumptions and assumptions in the COVID-19 bubble. The world is facing significant health crisis which is creating an unprecedented financial crisis as governments struggle with the coronavirus pandemic and central bankers boast of an “infinite amount of cash” as panacea.
“In the face of the Fed printing more dollars, and bitcoin going into the halvening next month, [traders] better understand the contrast between bitcoin and the current system, ”Joe DiPasquale, founder of crypto fund of funds Bitbull Capital, recently told The Block’s Frank Chaparro.
Bitcoin was originally created to insulate one’s self against systemic risk caused by geopolitical shocks. Though most indicators point to at least a short-term drop in bitcoin prices around the halving, the whole world is in a once in a generation crisis people tend to seek out safe havens in times of crisis.
We know bitcoin is not immune to corrections and crashes, and previous halving events saw prices rise immediately afterward. Bitcoin was created for exactly the sort of despairing crisis we are all witness to – an elegant decentralized digital currency that is an antidote to a deteriorating sovereign state and central bank.
Only time will tell if bitcoin becomes the digital gold safe harbor it was designed to be and we won’t have to wait long.