Will Bitcoin meet the same fate as Litecoin Halving?

Bitcoin halving is only about seven weeks away, and the uncertainty around price is now heightened more than ever. Never before in the history of Bitcoin, it has gone into halving with a bearish outlook.

The markets began to gain bullish momentum at the beginning of the year as the price broke above $10,000. However, the shock due to Coronavirus in mid-March has now thrown the markets to the bears with early capitulation.

Bitcoin Halving Countdown (Source)

Litecoin Juxtaposition

Litecoin [LTC] halving occurred last year on 5th August 2019, the reaction to the price before the event turned exactly as expected. A bullish run-up before halving, signifying miners attempting to Hodl the last bit of profitability before the rewards are reduced in half. 

In terms of the price, the halvening should be priced in because everyone knows about it since the beginning. But the thing is people kind of expect the price to go up. So a lot of people are buying in because they expect the price to go up and that’s kind of a self-fulfilling prophecy. So, because they’re buying in, the price does actually go up.

Since altcoins usually exhibit strong correlation in prices. In the chart below, the comparison Bitcoin Cash [BCH] and Litecoin [LTC] has been chalked to filter out the halving pump from the rest of the crypto market movement.

We can see that the jump in June 2019 was possibly influenced by halving. Moreover, the downfall during the bear market in the second half of the year and eventual confluence in December shows how the pump was largely due to halving speculation.

Moreover, leading up to halving, the hash rate increased more than two times from around 200 Th/s to more than 400 Th/s. This was primarily due to the increase in price, which prompts more miners to join the ecosystem.

The over-all hash-rate of the network usually drops after halving and picks up if there is an increase in price. Since the crypto-markets were a negative trend after reaching the highs in August, the downfall in price, and consequently the hash-rate continued later as well.

Moreover, there are significant differences between the current market trends, and the event leading up to Litecoin [LTC] halving in 2019. The crypto markets were in a bullish momentum before the Litecoin halving last year. However, currently, the COVID-19 scare has thrown the market into tremendous uncertainty.

Can we assume that the effects of halving are already dealt with?

Bitcoin [BTC] recently dropped more than 50% on the panic sell due to Coronavirus. This is equivalent to a drop in reward by 50% which occurs on halving. The markets witnessed a huge drop in total hash-rate and eventually in the difficulty (a drop of more than 15%) as well.

We can see that the drop in Litecoin’s hash-rate began just after the halving (black vertical line). We are already witnessing drops of similar scale in Bitcoin after the shock due to Coronavirus. The hashrate seemed to stabilize around the 300 TH/s mark in September and early October. However, the presence of bears in the crypto markets and altcoin sell-off caused hashrate to dip further.

Now, Bitcoin halving which is imminent in May, which might further cause another huge drop in the hashrate.

Understanding Capitulations

The Hash Ribbons indicator in the chart below plots the 30 and 60 Simple Moving average of the Bitcoin hashrate. Usually, miner capitulation begins at the end of the bear market. As reported earlier, these capitulations tend to accelerate the bottom formation, which is usually followed by bullish accumulation.

Moreover, the accumulation period that ensues as the capitulation reaches its end, and the weak miners are dead also marks the beginning of new bullish trends. The 2018 and 2019 bear market ended with similar capitulations. Furthermore, we can also see that the accumulation bands are getting smaller now as the industry grows stronger.

Lately, the miners have been under a lot of pressure due to a couple of reasons:

• Old miners are facing tough competition from new generation 6-7 nm chip miners.
• The bullish and bearish cycles are getting shorter with more frequent capitulations. This creates a lot of risk in the business, especially among medium and small scale miners.
• The global economy is currently living under the threat of a recession, or much worse, a depression which could affect Europe and the US longer than the next two quarters of 2020. Hence, investment in risk assets like Bitcoin [BTC] is very unlikely until we see a strong correlation with the growth of safe-haven assets (like Gold and Silver).

In all probability, the halving will cause more miners to exit the space as it during the previous halvings. Hence, we can expect the current bearish momentum or accumulation period to last longer than the previous times.

How Bitcoin [BCH] Cash and Bitcoin SV Halving Might Affect the space?

Gone are the early days of Bitcoin and the crypto markets (early 2011-2014), when miners who mostly employed GPUs to mine cryptocurrencies had options to switch to other cryptocurrencies during times of non-profitability.

Since the hashing algorithms for Litecoin and Bitcoin are different, a specific ASIC (Application-Specific Integrated Circuit) miners for them cannot be used to mine the other cryptocurrency. Nonetheless, it is still possible with the hard-forks of Bitcoin – BCH and BSV.

The halving for these protocols is set for a month earlier than Bitcoin. BCH halving is expected to occur on 8th April 2020, and BSV halving on 11th April 2020. According to a report from Coinmetrics on the state of the networks,

“When Bitcoin Cash and Bitcoin SV halve their block rewards, this should force miners to direct even more hash power to Bitcoin as it will still have a 12.5 native unit block reward (instead of 6.25) for about a month longer,”

Nevertheless, the total hashrate of BSV and BCH is considerably lower (around 2-4%) for the total hashrate for Bitcoin. Hence, in the likely event of a shift from these protocols to Bitcoin, the effect on the network strength is expected to the negligible.

While it gives a lot of reason to worry, the absolute death of the mining industry due to the event is unlikely. Mining cost is largely a function of the difficulty, this is a dynamic metric determined by the protocol itself.

Due to the intrinsic design of these cryptocurrencies which includes difficulty adjustments – the actual cost is highly variable. The basic idea is to restrict the time rate of production of Bitcoins. New Bitcoins are created when new blocks are added to the Blockchain, the network balances these two metrics (hashrate and difficulty) to limit it around 10 minutes. 

Therefore, in case of further drops, the difficulty adjustment will eventually favour the last of the miners that continue to stay in business. The price, on the other hand, could potentially reach new lows. However, due to the economic slow-down, if Bitcoin manages to strengthen itself as a safe-haven, the price and eventually the hash-rate will follow an upward path.