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BTC, BCH and BSV Reward Halving Attract Convoluting Expectations

13 April 2020
BTC, BCH and BSV Reward Halving Attract Convoluting Expectations

The next 30 days is building up to be a crucial timeframe for the crypto market. This assertion stems from the uncertainties surrounding the long-term impacts of the reward halving recently implemented on the Bitcoin Cash and Bitcoin SV blockchains and the more prominent one slated for the Bitcoin network in a month’s time. As expected, experts have made known their expectations, even as market trends continue to shift in favor of crypto investors. In this article, I will explore the matter at hand, highlight the factors that could give us a hint on the lasting effect of these developments, and examine how it all fits into the global economic crisis forcing investors to panic.

How Has the Crypto Industry Fared So Far?

bitcoin corona

It is imperative to begin this writeup with an in-depth look at the current state of the global economy. Without any doubt, the seemingly untamable coronavirus pandemic has put an immeasurable strain on the already fragile economy. In turn, a majority of countries have moved to propose and pay massive bailout funds to ensure that crucial industries survive these perilous times. Consequently, the dire state of the global economy has forced experts to review their optimistic projections regarding the outlook of economic growth in 2020. In many of these reports, if not all, financial experts have concluded that it is looking ever more likely that these events will culminate in a global recession. Already, a record-breaking 10 million people have filed for unemployment in the US following the outbreak of the COVID-19 disease in the region.

Although Bitcoin and other cryptocurrencies were victims of the devastating effects of this unfortunate turn of events, it is, however, glaring the digital asset market has begun to show signs of recovery. For instance, the price of Bitcoin crashed roughly a month ago to the $3,000 mark, and at the time of writing, it has bounced back to the $7,000 price range. This points to an increased demand for crypto assets, as reported by various crypto trading networks in March. It also showcases the remarkable feat of the crypto market, in a short period, to withstand the liquidation pressure recorded in mid-March that had threatened the validity of Bitcoin’s stance as a safe haven.

While other markets were reeling the effect of the global economic crisis, the crypto industry went about its business and implemented various initiatives in anticipation of the surge of mainstream adoption of cryptocurrency. Undoubtedly, these responses to economic uncertainties have positioned the crypto industry for an even more successful stint tied to several key events, slated for the next couple of months.

Before the pandemonium accompanying the spread of the coronavirus, one of the most anticipated developments in the crypto industry in 2020 included the implementation of reward halving protocols on the Bitcoin blockchain and its doppelgangers – Bitcoin Cash and Bitcoin SV. Even though the prevailing global market conditions have, to an extent, overshadowed these developments, reports emerging from the crypto space show that crypto proponents are still in high spirits as regards the potential long-term impacts of reward halving on the prices and viability of cryptocurrencies.

Danny Scott, chief executive of CoinCorner, recently reiterated the popular narrative surrounding the perceived catalytic impact of halving on the price of Bitcoin.

Danny Scott, chief executive of CoinCorner

Danny Scott, chief executive of CoinCorner

“As the third halving event to occur, there are expectations for what might come after, with history telling us that the Bitcoin price will typically begin to rise significantly within the 12 months following a halving – something that can be simply put down to supply and demand,” said Danny Scott.

The short-term effects of Bitcoin Cash and Bitcoin SV reward halving

bitcoin halving

It is common knowledge in the crypto community that instances when Bitcoin had undergone reward halving have always preceded bullish market trends. However, in this case, Bitcoin Cash and Bitcoin SV, both forks of the Bitcoin blockchain, have initiated reward halving protocols of their own roughly a month before the same process is expected to take effect on the Bitcoin network. And so, the fact that all three cryptocurrencies share the same mining algorithm and the current economic crisis has somewhat tempered expectations. For the first time, experts are factoring in the sentiments of the mining community and the possibility of miner-led selling pressure.

Since all three rely on the same mining algorithm, it is easy for miners to switch seamlessly to ensure profitability. In other words, it is projected that the reward halving of Bitcoin Cash and Bitcoin SV will naturally cause an exodus of miners to the Bitcoin network. Also, the reduction in the mining activities of both Bitcoin’s doppelgangers might leave them vulnerable to the 51% attack security threat.

Analysts at Arcane Research explained that the slash in the hash rate of both cryptocurrencies will significantly weaken their networks. The report reads:

“There is a real risk that the hash rate might be temporarily halved on both the Bitcoin SV and Bitcoin Cash networks until the Bitcoin halving in May, unless the price of the coins or the transaction fees of the networks increase significantly relative to Bitcoin,”

A drastic drop in mining activities of mineable cryptocurrencies will automatically reduce the block difficulty of such blockchain networks. While this is a given, this threat seems not to apply to Bitcoin as it already boasts almost 95% of the SHA-256 hash rate share. Therefore, a slash of mining activities on the Bitcoin protocol after the forthcoming halving will have little or no impact on the security of the network. However, as far as price goes, nothing is certain.

For one, Litecoin’s halving culminated in an underwhelming six months that saw its price drop by almost 50% during this timeframe. As for Bitcoin Cash, its price had recorded a 27% surge the week leading to its reward halving and an 11.2% 24-hour price fluctuation. Following the implementation of the block reward halving, its prices continued to hold, even though there are indications of waning demand for the crypto network. This was evident in the 30 to 35 minutes it took to mine the last few blocks before the halving, as opposed to the average 10 minutes it usually takes to mine a new block. As such, it was no surprise that the price of BCH began to reflect this lack of demand hours after its block reward halved.

It is important to state here that the immediate effect of block reward halving on the price of BCH aligns with the prediction of one of the cryptocurrency’s biggest proponents. The executive chairman of Bitcoin.com, Roger Ver told Cointelegraph days before the halving that he does not expect the slash in BCH’s supply to cause major excitement. Ver said:

The executive chairman of Bitcoin.com, Roger Ver

The executive chairman of Bitcoin.com, Roger Ver

“The last two times, basically nothing happened at all. It was a non-event; it wasn’t exciting at all, and that’s my prediction for what’s going to happen this time as well. But we’re just a couple of days away, so stay tuned and see what happens with that.”

Like Bitcoin Cash, Bitcoin SV recorded price movements indicating an increased demand for the digital asset. A day before its reward halved, Bitcoin SV was up by 19%.

What Are Crypto Professionals Saying of These Unfolding Events?

In some quarters, it is expected that the price of Bitcoin will gain momentum as the May 13 date slated for its halving draws near. Others agree that these events will attract new users to the crypto space, which is good for business. Paxful’s co-founder and CEO Ray Youssef explained that there is an “unprecedented surge in demand and price in the aftermath of the past two halvings. Though it would be hard to say, of course, if the past patterns will hold true, [it will bring new users in the market].”

While echoing Youssef’s views, CoinMetrics hinted that the two halvings will force the lower mining profit margin in the short-term and exciting price trends in the long run. CoinMetrics stated:

Paxful’s co-founder and CEO Ray Youssef

Paxful’s co-founder and CEO Ray Youssef

“We expect miners to follow a cycle of decreased profit margins, increased selling, capitulation, and a culling of the least efficient miners from the network. Once this cycle is complete, the miner industry should return to a healthier state that is supportive of future price increases.”

On the other hand, Lennix Lai, director of financial markets at OKEx, believes that the halving of mining reward will spur the introduction of mining management products to help miners optimize their activities. Lai stated:

Lennix Lai, director of financial markets at OKEx

Lennix Lai, director of financial markets at OKEx

“We expect the competition among miners would be getting intense. Whilst the most efficient miners shall prevail, we believe there would be a surge in demand for miner-oriented financial products which would assist miners to manage their price risk and expected cash outflow.”

In what seems like a pessimistic standpoint, Zach Resnick, managing partner at Unbound Capital, asserted that the three halvings will have little or no effect on the value of the cryptocurrencies. While speaking in an interview with Coindesk, Resnick explained:

Zach Resnick, managing partner at Unbound Capital

Zach Resnick, managing partner at Unbound Capital

“The conventional crypto wisdom that halvings magically induce a bull run such that the real USD value of miner revenue does not cut in half is naive wishful thinking, encouraging investors to be fooled by correlation/causation… Given the current market conditions, this bullish speculative frenzy coming to counteract the halving doesn’t seem likely this time around. Thus, miner revenue will truly halve, leading to many miners becoming unprofitable and shutting down.”

Speaking further on the correlation between the hash rates and the value of coins, Resnick agreed that there is bound to be volatility in hash rate shares of these cryptocurrencies. But he added that it might have no impact on the value of the coins. Resnick said:

“The ‘nomadic hash’ is incentivized to flee already halved chains for chains that continue to retain their 12.5 coins/block subsidy. Because of this incentive to arbitrage across chains, we expect the hash rate to be volatile, but we don’t expect this to have a significant impact on the coin value.”

He went further to project a trying future for miners of Bitcoin Cash and Bitcoin SV, considering the dwindling rewards for finding new blocks and the apparent slow pace of merchant adoption, which might have presented a soft landing via transaction fees. According to Resnick, “BCH and BTC miners and investors may be able to continue ignoring this inevitable threat this month, but they won’t be able to forever.”

How Does It Affect Transaction Fees?

The original plan was that when the Bitcoin network reaches its 21 million BTC supply cap, miners would have to solely rely on transaction fees as the incentive for mining new blocks. At the moment, the slash in the block reward of Bitcoin and its forks is certainly going to stretch miners’ resolve to continue to mine these coins. For most miners, the goal is to make profits. Therefore, for miners to remain in business, it is looking ever more likely that transaction fees might jerk up.

When this happens, the prices of these coins must support such a fee hike. In other words, for the networks to remain viable and attract merchant adoption, the price of their coins must record uptrends that will nullify the effect of hiked transaction fees. Another factor that is worth mentioning is the size of the blocks. This is quite important for Bitcoin as it currently has a 1mb block size, which might contribute to even higher fees. As per the other cryptocurrencies with 8mb block size, it is possible to spread the cost of finding new blocks across several transactions and put a reasonable cap on transaction fees.

Final Thoughts

In summary, all the factors responsible for the long-term viability of these cryptocurrencies are intertwined. Hash rate has been linked to selling pressure – the reason being that an exodus of miners will surely precede a dump of the mineable asset. Likewise, the lack of merchant adoption of mineable cryptocurrencies will further test the resolve of miners to stay put. If there is a lack of demand, it is more difficult to rely on transaction fees as a means of recouping the cost of mining these assets.

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