What impact did Bitcoin’s Third Halving have? Let’s take a look at price, hash rate, transaction fees, and increasing institutional interest
TL;DR — Since the halving:
- Price of bitcoin increased 12% while volatility decreased — in line with our predictions
- Institutions have increased exposure to bitcoin according to CME
- Transaction fees have doubled
- Hash rate has fallen 17% as less efficient mining machines were taken off the network
- MRI indicates that general miner sentiment was strong going into the halving as the majority of miners held their BTC positions
Impact of Bitcoin halvings
The Bitcoin halvings are anticipated events that mark potential changes in price and hashrate and underscore the scarcity of the digital asset. With each halving the number of Bitcoins released into the network is lessened as miners take a 50% reduction in block reward. We explain what the halving is and what it means for the Bitcoin community here.
History has shown us that the price of Bitcoin increases after a halving and so far, that has been the case since the third halving on May 12th. Halvings put a spotlight on Bitcoin as a finite asset, drawing in new interest and investors, including institutions like hedge funds and banks. Scarcity is particularly relevant today given the incredible level of financial stimulus being created and injected into the economy by the central bank, the Federal Reserve.
Following Bitcoin’s historical price activity, there was a run-up peaking at just over $10,000 on May 7th, followed by a consolidation period that led into the third halving on May 12th. Since then, as with other halvings, we’ve seen the price reclaim earlier gains, this time increasing 12% from ~$8700 to ~$9700.
Bitcoin’s price has remained steadily bullish as volatility has decreased. As mentioned in our Crypto News Roundup, Coindesk reported on May 12th that bitcoin’s implied volatility (measuring rate of volatility for an at-the-money option) had decreased from 102% to 80% according to data from Skew, a derivatives research firm. Bitcoin’s volatility index (BVI) measures how much its price fluctuates in a day, producing a 30-day estimate. Seen in the chart below, on May 12th the BVI was 1.12%, dropping to 0.91% on May 18th.
A mechanism for supply reduction already considered
When it comes to the halving being priced in, there are two opposing perspectives. There are those who believe that bitcoin is mostly impacted by institutions and other large, sophisticated investors also believe that these participants understand the halving and have accounted for it. Meanwhile, others believe that because the Bitcoin community is composed of participants ranging the education spectrum, there’s no way that the entire community understands the significance of the halving and therefore its impacts can’t be truly known.
In an earlier blog post dedicated to the halving, we explained that “trading [BTC] on the fixed supply narrative supports future halvings already being priced-in.” Barring unforeseen occurrences like increased institutional attention, this was largely what happened with the third halving. Nathan Nichols, a Managing Partner at Imperium Investments (private equity firm focused on utilizing Bitcoin to monetize excess energy), who we also spoke to ahead of the halving, said that because the halving was priced-into their future models, business hasn’t been affected by the reduction in block reward.
New market interest
It’s likely that the halving brought in renewed institutional interest that has supported recent price gains. Traditional finance appears wary of potential inflationary pressures from the Federal Reserve’s $2 trillion stimulus package and Bitcoin is an attractive hedge.
Just a week before the third halving, Bloomberg reported that macro investor Paul Tudor Jones, CEO of Tudor Investment Corp., told his clients that he was increasing his exposure to bitcoin up to a single-digit percentage of his net worth. Viewing bitcoin as a value play in the current environment, Jones notably said that “[bitcoin] reminds him of the role gold played in the 1970s,” explaining that “‘the best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my best is it will be bitcoin.’”
With a recognizable figure like Jones publicly supporting bitcoin, it’s reasonable that new institutional accounts have added to recent volume. Chicago Mercantile Exchange (CME) said on May 10th that institutional interest in Bitcoin derivatives was up. Since the beginning of 2020, the CME saw 844 new accounts added, which is 2.3 times more compared to the same period last year. CME also reported that “more than 4,500 unique active accounts have traded since launch,” as noted by profit-loss.com.
Changing transaction fees
Since the halving, the daily average of transaction fees has more than doubled to $5.82 on May 18th, according to data from BitInfoCharts.
When the Bitcoin network experiences heavy volume, competition for block space heats up resulting in an increase in transaction fees. Users are incentivized to pay higher fees in order to have their transactions processed in the next Bitcoin block. Presently, there are ~92MB worth of unconfirmed transactions in Bitcoin’s mempool, equating to approximately 58k transactions waiting to be confirmed by a miner, according to Mempool Observer.
Miners and hash rate
Like Imperium Investments, large mining operations would have prepared for the halving and forecasted based on the reduction in supply. But for smaller retail miners whose businesses are much more vulnerable to mining’s thin margins, the reduction in profits can put their operation on the edge.
“Pre-halving, if a miner was at a break-even point for their operations, their hope was that staying online would allow them to convert electricity to BTC with current infrastructure and that BTC would appreciate in advance of their electricity bill,” Nichols explained. “If BTC went down, the miner was in the red. Post-halving, even with the rise in price, unsustainable operational costs result in being pushed out of the network as mining becomes increasingly competitive with advancing, capital-intensive machinery and infrastructure.”
In the week leading up to the event, there was speculation that as higher-cost miners were preparing to be pushed out of the network, the price of bitcoin could drop based on miners selling off their positions. But according to the Miners Rolling Index (MRI), miners were hodling their bitcoins.
Two days after the halving, the hash rate had dropped 26% from 117E to 87E. Today the hash rate sits at 95.6EH/s, an 18% decrease in computing power since May 12th. But for added context, while the hash rate has dropped, it has still doubled over last year, demonstrating the increased strength and security of the network.
At around 65%, the majority of computing power used for mining on the Bitcoin network is located in China, according to the Cambridge Centre for Alternative Finance. F2Pool’s global business director, Thomas Heller, told The Block that “a greater majority of Chinese hash rate has switched off compared to non-Chinese hash rate.” He said that this is because many of the older generation mining machines are still being used in China. However, as China’s Sichuan region enters its rainy season, the price of hydroelectricity is likely to decrease, reducing costs for a significant number of mining operations based there. Looking ahead, this is expected to have a net positive impact on network security and hashrate as fewer miners will be forced to leave the network based on cost.
Yesterday the mining difficulty adjustment took place, an event that adjusts how much energy must be expended in order to secure a block of transactions to the Bitcoin blockchain. This is the first difficulty adjustment since the Bitcoin halving, meaning that once the block reward was cut in half, costs for miners increased as the energy required to process a block remained the same but profits were significantly reduced. Now reduced by 6%, the difficulty adjustment should serve to better accommodate miners. Further reductions in difficulty are expected, Nichols explained. “We expect the difficulty to continue to decrease over the next 1–2 months if BTC price stays close to this level ($9,500), or 2–4 adjustments.”
As a new state of equilibrium is settled, it’s clear that Bitcoin is gaining recognition for its resilient economics. Recent market imbalance and quantitative easing have no doubt contributed to the recent growth of the Bitcoin community as an alternative to the traditional financial system are sought out. Mining group F2Pool captured the sentiment with their noteworthy addition to the last block before the halving. Their nod to the genesis block reads: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”