Pricing In The Bitcoin Halving: How Miners Are The Key To Major Upswings
Miners' selling behavior changes with supply and demand.
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The second Litecoin halving will take place on August 6th, and the next Bitcoin halving is in less than a year. We have already performed analysis on the historic price behavior during halvings: but how do miners factor into the market price?
Miners invest in specialized equipment to mine the coins, and just like any other business, they need to make a profit. During a block reward halving their income is cut in half. If mining becomes unprofitable, they will need to shut off their equipment – and they will only return when the price rises back above their break-even point.
So there are really two scenarios that will play out for miners when a halving occurs:
- The price of Bitcoin rises to meet miners’ revenue expectations and the status quo is preserved.
- The price doesn’t rise and miners are forced to shut down. Only mining farms survive, which centralizes the mining temporarily.
If the hashrate for BTC (or LTC) drops low enough (and remember, that’s a function of the mining power devoted to the activity), then the mining difficulty will become easier – allowing more miners to come back online since it will be more profitable again.
Keep in mind that miners, given that their block rewards halve, will have less Bitcoin to sell into the market each day.
So is the price increase a self-fulfilling prophecy?
Short answer: it might be, if we look at minders’ tendencies to sell their rewards. As the price goes up miners sell less of their block rewards. Less selling from large entities means it’s easier for the price of Bitcoin to rise.
Miners control a lot of the sell pressure in the market. A good way to measure how much Bitcoin is actually bought and sold (not just traded) each day is by examining Coinbase Pro volume, since it is the most popular fiat on-ramp.
According to Coin Market Cap, the average amount of BTC/USD volume on Coinbase Pro is $55M. If the price remains flat, we can offer a rough estimate that half of that volume is sell pressure.
There are 144 blocks mined on average per day, and at a price of $9k per BTC, that’s ~$1.3M that miners are rewarded with each day. As the price of Bitcoin falls, miners need to sell a higher proportion of their block rewards to remain profitable. If all of the Bitcoin mined per day is sold on the open market that is an additional 5% of sell pressure, which is more than enough to suppress the price.
When do miners need to start selling?
Miners need to sell all of their rewards when the cost to mine blocks are closest to their break-even point. At the current block reward, that is about $3.5k per BTC, but miners currently have more Bitcoin to sell on the market than they will after the Bitcoin halving event.
Post-halving it’s nearly impossible to forecast what the hashrate will be, but a good estimate of the break-even point would be $7k, meaning the price needs to stay well above this level approaching, and after, the halving to prevent huge selling pressure.
Miners can collectively influence the price based on their selling behavior (although that doesn’t necessarily mean it is a coordinated effort). If miners sell less BTC, the price of the coin may rise, and then mining operations remain profitable as Bitcoin trades at higher prices with smaller block rewards.
What will happen in the longer term?
Maria Shen has found that historic Bitcoin halvings have seen a short term dip in hash power followed by no long-term effects; but that’s because the price of Bitcoin kept rising to encourage more miners to come online over time. It can be postulated that this is at least partly due to miner selling behavior.
Approaching the halving it’s important that we see a sustained hashrate with a steady or rising Bitcoin price, as we’ve seen in the past, to fulfill the prediction of a post-halving price increase. These factors limit the amount of Bitcoin that miners will sell, and encourage the price to rise.
If the price of Bitcoin can stay well above $7k leading up to and after the Bitcoin halving next year we might just see the Bitcoin parabola that is the stuff of investor dreams.