The 2020 Bitcoin halving

Since the start of the year traders and market analysts in the crypto-market are facing a growing volatility despite a relatively stable environment raising as such concerns and questions among outsiders and market observers. Indeed, looking at the BTC price during the past two weeks, this latter was subject to some strong volatility making its price fluctuate in a range going from $8,047 to $9,600.

However, even though from a mainstream market point of view, this situation could appear as a red flag for investors, in the case of the crypto-market and especially in the case of bitcoin, the current situation appears somewhat academical and could very well represent a golden opportunity to take a position given the ongoing pricing by the market of the upcoming bitcoin halving and the relative low price on the market at the moment.

But, first what is a bitcoin halving ?

A Bitcoin halving is an event where the reward for mining new blocks is halved, meaning miners receive 50% fewer BTC for verifying transactions. These major events in the Bitcoin ecosystem are scheduled to happen approximately every 4 years, the next one happening in the third week of may 2020, when the number of blocks will hit 630,000. At this occasion, the block reward will fall from 12.5 to 6.25 BTC causing as such a restriction on the market supply and most likely some actions on the BTC price as shows the below illustration of previous halvings :

However, the supply & demand is not the only important explanation for those price fluctuations, that is why it appears interesting to fully understand the dynamic at play during this event before taking any actions on the market.

BTC halving inner working

It works thanks to the network's underlying blockchain software, which dictates the rate at which new bitcoins are created. Indeed, the software requires computers to verify blocks of transactions through a process called mining and rewards them with a number of new bitcoin, halved every 210,000 blocks, when they are able to prove that their selected transactions are valid.

Consequently, knowing that most miners reimburse their hardware and electrical cost through mining and selling BTC, each halving can either, if the price is falling, increase the portion of the mined BTC sold by the miner after each reward and as such add a downard pressure on the price or else if the price is skyrocketing put additional fuel to a bullish trend if, during the halving, the BTC the price is surging high enough to allow miners to retain a bigger proportion of their BTC reward.

The potential impact of the 2020 halving

Nowadays, the amount of bitcoin mined is minuscule compared to the global volume traded on the different exchange across the world. In comparison, back in 2012 and 2016, the ecosystem was way smaller and the ratio wasn't this skewed however, today, millions of BTC are traded daily around the globe rendering anecdotal the halving of the miners reward by two in may.

Moreover, the growing presence of financial institutions on the market place and their tendency to trade on futures to avoid buying directly real assets on the market is also a new factor lessening the importance of the halving on the price action even more so when we consider that more and more new comers are entering the market through theses institutions and take de facto part into this new emerging future market for BTC.

Finally, as in 2016, we can see through the current volatility of the market that traders are currently anticipating and factoring in the coming halving. In this sense, it will not be surprising if the price action post 2020 halving isn't in the end that surprising and that as in 2016 we'll need another catalyst to trigger the next bull run even though we can see that the interest is building again around the halving on google.

To conclude, given the historic price evolution around and especially after the previous halvings it could be interesting to go long if we break the resistance around the $10,000 mark and play the market sentiment since by then a lot of new money is likely to enter the market and fuel an hypothetic emerging bull trend thanks to the community belief of growth in the BTC market post-halving and the fresh money from investors trying to make a quick buck from the halving event.