A Bitcoin halving black swan

Bitcoin’s short-term price outlook is uncertain, to say the least. While the macroeconomic environment increasingly appears bullish for Bitcoin in the medium to long-term, given the current liquidity crunch it’s prudent to prepare for continued downward price pressure in the short-term.

In just over eight weeks Bitcoin will undergo its third halving where the amount of new Bitcoin issued every block to secure the Bitcoin blockchain will be halved. Holding price constant Bitcoin’s security budget will drop 50% overnight.

This dynamic becomes very consequential as financial markets worldwide nosedive. Bitcoin miners will not only face margin pressure from new issuance being halved but could also face margin pressure from a coronavirus induced drawdown, amplifying the effects of the halving. If this is indeed the case, the effects on miners will be enormous.

The above is especially concerning with hash rate continuing to balloon as more miners come online. Hashrate is up nearly 3x over the past year, not only spurred by higher BTC prices, but also a potential halving rally. An increasing amount of miners could be competing for a substantially smaller pool of industry-wide revenue.

As with any halving, only the most profitable and well-capitalized miners will survive. Miners that are over-leveraged or not competitive will bear the greatest cost over the next couple of months. Those who sought to add capacity as fast as possible to chase a halving rally, at the expense of competitiveness, will be punished.

Litecoin experienced a very similar scenario last year. After cryptocurrency markets peaked in June 2019, Litecoin was taken down with it. Like Bitcoin will, Litecoin underwent a halving 2 months after it’s drawdown began. The consequences for miners were severe.

Hashrate plummetting is not necessarily bearish for Bitcoin’s price. Price does not follow hash rate, and, unlike Litecoin miners, Bitcoin miners may be able to mitigate the effects of such a scenario through proactive use of Bitcoin derivatives.

However, a hash rate crash would yet again kill a bullish Bitcoin narrative. Bitcoin miners should prepare for the worst and Bitcoiners should level set their expectations when it comes to the halving. The Bitcoin halving narrative is dead (h/t TBI).

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