Bitcoin ‘Halving’ Opens New Crypto Trading Opportunities


Can demand remain consistent as the steady supply of new bitcoins is slashed in half?

What are the key levels to look out for?



If you are somewhat familiar with cryptocurrencies, and more specifically bitcoin, you must know that approximately every four years, the reward for mining it just got slashed in half. When bitcoin was launched in 2009, miners received a 50BTC reward for every block they mined. In 2012, that number was cut in half to 25BTC, and with the last halving in 2016 it was cut to 12.5BTC.

 

On Monday, the 12th of May, that reward was cut in half once more, to 6.25 BTC, opening the door to a new era for the most-popular cryptocurrency. A vibrant discussion is taking place in the crypto community: will the pattern which followed the previous two halving events occur again?

 

After the first halving in November 2012, prices rose to a hair below $1200 from just above $12 in two years, for a gain of almost 10,000%. Similarly, prices rose to just below $20,000 in December 2017 from about $700 after the halving event in July 2016.

 

While both halving events so far have been followed by a strong rally, the price also pulled back somewhat after peaking out on both occasions - down 86% between November 2013 and January 2015 and again falling 68% between December 2017 and December 2018. With these facts widely available for all market participants, it is worth asking - how important is the third halving event for bitcoin’s price?

 

Third Time’s the Charm

 

The coming months will be key to cryptocurrency’s survival as an asset class. If history is any guide, bitcoin’s rise after this event could be rather dramatic. As the reward for each block mined diminishes, the pace of supply growth will continue to decline, just as it has been since the first block, or “genesis” was mined in 2009.

 

Bitcoin Block Reward

 

The key question for all bitcoin traders is whether demand for the cryptocurrency will increase, and if so, when that might happen. In the following lines we will discuss several possible scenarios and some key levels to pay attention to.

 

Risk On - Risk Off

 

Ever since financial markets bottomed out in March 2020 after a month of tumultuous trading, one key question has been on the mind of cryptocurrency traders: “Is the asset class correlated to the broader financial market?”

 

If price action over the past several weeks can be taken as a clue, the answer should most definitely be “yes”. And, while the recovery in stocks has been relatively slow, bitcoin bounced back quicker. It’s also true, however, that it dropped more than the stock market on the way down. From peak to trough, BTC dropped from about $10,000 to as low as $4,000.

 

Bitcoin vs S&P 500

 

During the events of the past months, we can identify a non-linear correlation between bitcoin and the S&P 500. Both being risk assets, they sold off in tandem around the end of February as liquidity needs of companies and individuals increased rather quickly.

 

Our chart shows the moments where a non-linear correlation was established at the end of February when both stocks and cryptocurrencies collapsed under the weight of coronavirus uncertainty. That said, bitcoin bottomed out about 10 days before the S&P 500 did.

 

With the rally in risk assets arguably being driven by the new radical easy-money policy from the U.S. Federal Reserve and other central banks, as of today, stocks are seen as a more tangible asset and are trading higher by almost 10% when compared with May 2019, bitcoin on the other hand is still down by a tad over 7.5% on the same time horizon.

 

A Speculative Instrument or a Store of Value?

 

With all that said, the key factor to watch over the coming weeks is whether or not demand for bitcoin increases. The recent peak just above $10,000 reached on May 7th was followed by strong selling, but overall market liquidity is much higher than in 2017. That begs the question - if trading volumes are higher, why aren’t prices also pushing higher?

 

Bitcoin Trading Volumes

 

A possible answer is that the trading infrastructure on the cryptocurrency market in 2020 is much better   now than back in 2017. That said, while the pace of mining new bitcoins, hence the supply of the cryptocurrency has been growing slower, and trading volumes have been expanding, we can deduce that the desire to hold the asset long-term is much lower when compared with end-2017.

 

For the time being, bitcoin isn’t seen by the market as a store of value, but as a speculative instrument instead. Of course, that can change any minute, especially in an environment where central banks are eternally printing more fiat currency.

 

The last two post-halving rallies have almost been in a straight line after the events (November 2012 and September 2016). But the age-old adage on Wall Street: “buy the rumor, sell the news” also applies here. Many more eyes are looking at the halving event this time around than in 2012 and in 2016, and if you have been trading financial markets long enough, you know – the majority is wrong most of the time.

bitcoin_weekly_chart-(2).jpg

I’m leaving you with a long-term weekly chart that is worth paying attention to. The key levels to watch as of today are the $10,000 - $10,500 area, which holds the key to a continuation of the long-term trend higher. Another failure above these levels, risks sparking a big round of profit taking, that would put the 2020 bottom around $4,000 and the trend line at $5,000 back in play.



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