The 3rd Bitcoin halving was a significant event for various reasons. In addition to the annual inflation rate being reduced, the potential effect to the mining network is the main question right now. With more than $7.3 million per day in mining revenue being erased, it’s creating a first time scenario in which miners are witnessing non-profitability.
The Third Bitcoin Halving
As mentioned in a previous report, the 3rd Bitcoin halving was a much anticipated event. Many investors were predicting a massive price surge. During the 3rd halving that occurred a couple weeks ago, Bitcoin block rewards got reduced from 12.5 BTC to 6.25 BTC. On a macro scale, this results in $7.3 million less being paid out in miner revenues per year. Even though many investors thought this would create a bullish environment, they can't forget miners, who are essential to the Bitcoin infrastructure. There’s no doubt that the 3rd halving is the driver behind the recent Bitcoin volatility. Miners for the first time enter a new era where they are asked to produce in a non-profitable environment. Even though Bitcoin is on pace for 30+ halvings, the 3rd halving might tell us a lot about what the future holds.
As Visionary Financial mentioned on Twitter, hash rate was very important to follow post halving. It would help us understand miner sentiment. In addition, it would help us assess price action since hash rate and Bitcoins price have been historically correlated. Right before the 3rd halving, Bitcoin hash rate was about to test the 1 year hash rate resistance. Visionary Financial mentioned this being crucial if investors were going to see $10,000+ price breakthroughs. It was also noted that Bitcoin could experience a sell-off if this level was rejected. Since the halving, the Bitcoin hash rate has shown strong rejection off the 1 year hash rate resistance. Consequently, price has failed to break out to the upside with Bitcoin falling from $9,800 to $9,400 levels post halving.
The figure below is Bitcoins hash rate before the 3rd halving. We can see that the hash rate was planning to test the 1 year resistance upon halving.
The figure below shows the hash rate action post halving. We can see that it very well tested the 1 year resistance which resulted in a strong rejection. The hash rate needs to accelerate through 1 year highs if investors are going to see $10,000+ prices in the near term. Failing to do so could be extremely bearish.
Best Case Scenario
Despite many people looking for a rally post halving, there were also people that expected a “short sell-off.” During the 3rd halving, there’s a lot of relocation of mining efforts going on. This results from mempool congestion ( where transactions reside before they’re confirmed). During this series of events, you could very well see Bitcoin hashrate drop 30-40% before a reversal. Right now we’ve seen about 20% reduction in hash rate post halving. If this were to happen, you could very well see metrics like “cost per transaction” to increase significantly as well as increased mining times for every block. The best case scenario is this obviously not happening, but even if it does, one could argue that it's fundamentally natural to see a 30-40% hash rate drop post halving as long as you can see that correction and continued demand in Bitcoin.
Worst Case Scenario
Bitcoin Security - If the hash rate really did drop 30-40%, this would be significant to the network. In a scenario like this, the network would simply have less manpower. In this environment, one could argue that substantial security risk is involved. If you saw a 40% reduction in hash rate, people would start talking about a potential “51% attack” to the network. This is highly unlikely, but it's chatter you could see surfacing if the hash rate did drop to this magnitude. 51% attack simply involves an individual/entity capturing control over the network by amassing 51% of the global hash power. It would cost an individual/entity a tremendous amount of resources to pull this stunt. This is why it’s highly unlikely.
Switching To Other Altcoins - Another worse case scenario would be Bitcoin miners deploying resources elsewhere. If the 3rd halving causes an unfruitful environment financially, you could see Bitcoin miners deploying resources to other altcoins. Recently, there’s been enough demand in altcoins to see something like this happen. According to a recent report, a majority of investors at Coinbase are simply using Bitcoin as a liquidity tool to get into other altcoins. Coinbase stated that:
“ The data bears this out. Among customers with at least 5 purchases, 60% start with Bitcoin but just 24% stick exclusively to Bitcoin. In total, over 75% eventually buy other assets.”
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