CoinShare researched on the 5 most widely accepted theories about the halving today. There are expectations that the halving will positively affect Bitcoin’s price in the medium or long term.
On May 4th, CoinShare conducted a study that explains the 5 most mentioned theories about what could happen to Bitcoin after the halving.
The first theory says that “the halving will cause a death spiral in Bitcoin mining.” Christopher Bendiksen, author of the study, explained that there will be a halving of the reward or a drop in Bitcoin’s price, decreasing the miners’ profitability dramatically.
Miners would disconnect their equipment, leading the network hash rate to decrease, which would cause the confirmation of transaction blocks to occur over very long periods. Even though this scenario merits concern, it is highly unlikely to occur, according to Bendiksen.
Bitcoin mining difficulty is adjusted every 2,016 blocks, so in a scenario like the one described users would only have to wait for the difficulty to fall. Another reason to consider the thesis unlikely is that Bitcoin has already experienced 2 sharp drops in its price, but the network is still operating.
Expected Positive Scenario
The second theory says that the ratio of stock to flow will cause upward pressure on the price. Bitcoin’s stock-to-flow ratio is the inverse of inflation, that is, the cryptocurrency’s current reserves divided by its annual output.
Statistically speaking, the said ratio and Bitcoin’s price history are 95% correlated. Safedean Ammous popularized this theory in the Bitcoin context, and anonymous quantitative researcher “PlanB” formalized it as a statistical model.
Until now, no studies can falsify the results obtained by the stock-to-flow ratio. When putting it into practice, the theory says that after each halving the ratio doubles, along with the price of the model. Currently, the model states that Bitcoin’s price will reach USD 100 thousand, at least once, in 2021.
The third theory indicates that “traders who have been buying the rumors will sell the news.” This hypothesis indicates that there is a speculative demand in Bitcoin’s current price due to bullish expectations after the halving.
Traders would seek to encourage bearish sentiment in the market so that Bitcoin reaches a low price. Upon meeting their goal, traders would buy large amounts of the cryptocurrency waiting for Bitcoin to regain bullish momentum.
Possible Combined Scenarios
The fourth theory suggests a drop in Bitcoin’s price due to the additional sale of bitcoins by miners. When Bitcoin’s price is high enough, miners can cover mining costs without having to sell their coins. When Bitcoin’s price does not allow them to cover these costs, they can sell the mined coins and even their stock reserves.
This scenario, together with a sudden drop in Bitcoin’s price like that of March, could be the catalyst for bearish momentum. However, the halving is a known event, so miners can prepare in advance to interact with the market.
Another important aspect is that a sudden drop in price does not offer relief to miners’ continued sale. However, the reduction by half of the flow of coins by 50% does.
The fifth and last theory implies that the halving will be “a big fat-free hamburger,” at least initially. With this last scenario, users state that nothing unusual will happen in terms of price fluctuations or Bitcoin technical terms. According to the analysis, the daily volatility of Bitcoin’s price is between 1% and 5%. Consequently, any volatility in those ranges would not be considered out of the ordinary.
CoinShare considers that the halving is unlikely to have a major impact on Bitcoin’s price in the short term. Furthermore, they note that any change in the balance between supply and demand will take time to occur.
By Alexander Salazar