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As the coronavirus pandemic continues to unfold and new signs of blocks slowly starting to lift in Europe, all eyes in the crypto community have returned to the Bitcoin (BTC) halving. There are only 10 days left until the event and Bitcoin’s price appears to be acting accordingly, having climbed a staggering 23% to a monthly high above $ 9,400 earlier this week.
A widely celebrated event in the cryptocurrency industry, the halving is part of Bitcoin’s monetary policy, where every four years, the reward for mining Bitcoin is halved. This means that 6.25 BTC will be issued every 10 minutes on May 11, instead of the current 12.5 BTC.
The upcoming halving will be the third since Bitcoin has started and the event brings with it some bullish views on the value of the asset.
According to PlanB, the creator of the much-discussed “Stock to Flow” model, reducing Bitcoin’s issuance rate is set to increase the price of BTC in the long run. Recently, the analyst said in a tweet:
“The IMO #bitcoin 2020 halving will be like 2012 and 2016. As with the S2F model, I expect a 10x price (order of magnitude, not precise) 1-2 years after the halving. The halving will be decisive for the S2F model . I hope this halving will teach us more about the underlying fundamentals and network effects. “
However, views are mixed when it comes to price action after the halving. Some believe that it will undoubtedly bring higher prices, while others believe that this factor is already considered in current prices, as it is publicly available knowledge. Other investors ignore the importance of miners and issuing rewards, as they believe speculation is the sole driver of Bitcoin’s price.
Bitcoin’s mining business deserves observation
While speculation is a driving force for Bitcoin’s price when it comes to certain bullish or bearish cycles, supply and demand are always at stake. Miners are extremely important when it comes to understanding the price of Bitcoin, as they are the individual providers of new coins on the market.
Miners create constant selling pressure by liquidating their newly minted coins to pay for their electricity and hosting bills. While traders take advantage of short-term volatility, miners ultimately “dictate” the price of Bitcoin on the supply side.
This, of course, isn’t as linear as it sounds. Volatility will also determine which miners can remain on the network, and if prices drop too low, some miners may fail, as their operations are no longer profitable. A good example of this can be found in the infamous March price crash.
Miners aren’t the only market players creating selling pressure, but most of the trading volume does not represent real buying or selling pressure, but rather short-term moves that traders buy and sell repeatedly.
As such, miners are the only actors who create constant selling pressure for freshly mined coins. With this in mind, it is important to understand what miners have been up to as the halving approaches as their behavior can tell a lot about what the post-halving Bitcoin price will look like.
When the miners move, the markets move
By analyzing certain transaction patterns across the Bitcoin blockchain, it is possible to extrapolate information that can complement trading strategies. For example, Joe Nemelka, a data analyst at CryptoQuant, an on-chain data company, recently told Cointelegraph that an increase in the influx of miners to exchanges may signal upcoming volatility.
According to Nemelka, the percentage of inflows of miners in exchanges relative to all other inflows (other exchanges, wallets, etc.) is evident. As shown by the graph below, you can also see some higher than 6% spikes in the percentage of the miner flow in exchange that signaled a change in the price trend.
Miner in percentage of exchange flow. Source: CryptoQuant
Miners liquidate their Bitcoin holdings for a variety of reasons, and monitoring this, along with investor sentiment, is invaluable in spotting divergences and subtle trend shifts.
For example, when miners’ stock inflow is abnormally high in a bull market, miners could profit and create greater selling pressure at certain price levels at which they believe it would be wise to sell.
Conversely, a high influx at times when the price is falling can signal that a large number of mining operations are capitulating, a process that can signal a shift in the market as more resilient miners hold their BTC and reduce the pressure of sale later.
What are the miners doing?
While the Miner to Exchange Flow Percentage dataset allows market participants to spot spikes in miners’ selling pressure, the Miner Position Index allows us to understand trends when it comes to miners holding or selling Bitcoin.
Miner’s position index. Source: CryptoQuant
The chart above shows that miners have been holding Bitcoin since January, perhaps hoping to sell it at post-halving prices. Mason Jang, CSO of CryptoQuant, told Cointelegraph:
“The MPI (Miner Position Index) highlights periods in which the value of Bitcoin’s outflow by miners on a daily basis has historically been extremely high or low. MPI values above 2 indicate that most miners are selling Bitcoin. Also, if the MPI is below 0, it means there is less sales pressure from miners. Therefore, it could be a good signal to buy BTC. “
Will history repeat itself?
Historically, Bitcoin’s halving has been followed by a significant price increase, which is also another point in favor of an accentuated price increase following the next fork. However, history doesn’t always repeat itself and while data on the chain may help navigate the next event, it’s worth noting that the cryptocurrency market has changed enormously since Bitcoin’s last halving in 2016.
CryptoCompare data also shows that 2020 saw daily trading volumes that are consistently 10 times larger than 2016. To put this into perspective, in 2016, total daily Bitcoin volumes in spot trades rarely exceeded $ 1. billion. Fast forward to March 13, 2020 and top-tier trades hit a record $ 21.6 billion in daily spot volume.
Total daily spot volume year by year. Source: CryptoCompare
The graph above shows how much the market has evolved compared to previous years. Considering the skyrocketing volumes seen in 2020 and the fact that more market participants are involved, the drop in selling pressure from miners is likely to have a drastic impact on the overall selling pressure of Bitcoin. This means that the upcoming halving may not translate into a massive increase in the price of Bitcoin.
What can we get from it? While the halving has been a historically bullish event for Bitcoin, it doesn’t necessarily mean it will always be like this. While on-chain data is a great tool for integrating your trading and investment strategies, it should be looked at within a broader context.
The market has matured enormously since the last halving and new entrants have brought higher trading volumes and there are more transparent, accountable and regulated venues. Furthermore, the current coronavirus pandemic has shown that conventional expectations about market behavior can change rapidly.
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