So, “The Halving” came and went and, as I anticipated a couple of weeks ago, it was not exactly earth-shattering for Bitcoin. The price did drop slightly as a result of a somewhat predictable “buy the rumor, sell the fact” kind of pattern, but the drop was well within the range of normal for the volatile currency. From a price perspective, the fact that there was a drop at all is actually quite interesting, and would seem to set up BTC for a sustained period of gains.

Logically, according to basic economic theory, the halving should result in an increase in price. After all, its very purpose was to reduce the rate of supply of coins and economics 101 tells us that, all other things being equal, a reduction in supply leads to an increase in price.

With Bitcoin, though, it is not quite that simple. The rate of supply is controlled by the reward offered to miners for “discovery” of bitcoin by solving complex computing problems. In this case, the reward for discovering one block was cut from 25 bitcoin to 12.5, but there are two ways for miners to make up for that cut.

One is by way of a price increase, which would conform to conventional economic theory as supply is reduced, but the other is by reducing the cost of mining. For that to happen, what is known as the “hash rate” will have to fall. At the risk of oversimplification, the hash rate can be thought of as a measure of the difficulty of problems that must be solved to discover a block, and therefore get the Bitcoin reward.

The more sought after Bitcoin are, and the higher the price goes, the higher the difficulty of finding them rises; the hash rate increases automatically as a product of demand. This is in keeping with the gold pricing model used in Bitcoin. As demand for gold rises, and the price with it, miners seek production from more difficult, expensive mines.

When the last halving occurred in 2012 the hash rate dropped pretty significantly as miners gave up, discouraged by the smaller reward. That reduction in the computing power needed to solve a problem and the consequent drop in the amount of electricity needed, reduced costs for miners and kept them afloat as the price increases resulting from the supply restriction worked into the market.

As the one year chart above (from blockchaininfo.com) shows, however, although there was a drop in the hash rate that corresponded with the halving it was well within the bounds of normal fluctuation. If we look at the chart for the 7 day average (below) there are signs that the curve is at least flattening somewhat, but there has still been no drastic move.

This, in part, explains why a sustained price rise over the next few months is on the cards for Bitcoin. If the hash rate doesn’t drop noticeably, then a price increase is the only way for the currency to follow the basic laws of economics. Those same laws dictate that the effects of the supply reduction will be exaggerated somewhat, as it comes at a time when central banks around the world are continuing to flood the global system with easy money.

When you add to that the fact that the halving itself happened with so little disruption to any of the major Bitcoin metrics, which should result in an increase in confidence, the future for Bitcoin looks rosy indeed. 


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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