Exploring The Bull And Bear Cases For Bitcoin's Halving Against The Backdrop Of COVID-19

The following is a contributed article from a content partner of Benzinga

The bitcoin halving event is only a few days away, and cryptocurrency traders and investors are watching to see how the market will fare going forward. 

Historically, bitcoin’s previous halvings have led to an extended rally that lasts about 12 months before peaking. For instance, the first halving saw the price of bitcoin climbing from about $12 in November 2012 to a peak of around $1,100 in November 2013. The second halving triggered a rally that sent bitcoin up from about $650 in July 2016 to a peak of around $2,500 in July 2017 before the ICO mania took bitcoin all the way beyond $19,000.

However, this is the first time that a bitcoin halving event will be happening against the backdrop of the gathering dark clouds of a global economic recession. In fact, this is the first time that the safe-haven theory of bitcoin will be put to the test by global economic uncertainty. This piece explores the bullish and bearish cases for the next bitcoin halving event.

The Bullish Case For Bitcoin Halving

To start with, if the crypto market responds to bitcoin in a similar way it reacted after the first two halvings, the price of bitcoin could surge in the weeks ahead.

As with previous halvings, this one will see the reward for mining new bitcoin cut in half, reducing it from 12.5BTC to 6.25BTC per block. The intended consequence of this is to reduce the amount of new bitcoin being added in the overall market, increasing the scarcity of new coins.

Of course, unlike prior halvings, this event is occurring amid mounting economic uncertainties and the dark clouds of a recession hanging over the global economy. 

Year-to-date, bitcoin has delivered impressive 22.85% gains to outperform the 2.92% decline in the tech-heavy NASDAQ, the 12.01% decline in the S&P 500, and the 16.78% decline in the Dow Jones Industrial average. Bitcoin’s YTD gains were recorded against the backdrop of COVID-19, which is already exerting recessionary pressures on the global economy.

Bitcoin’s gain in the year-to-date period more than doubles the performance of gold in the same period. Gold is traditionally considered a safe-haven asset, and the global demand and appetite for gold usually surge in periods of economic uncertainty. However, the fact that bitcoin has outperformed gold during this period of economic uncertainty suggests that bitcoin has been referred to as digital gold after all.

Also, more people are aware of bitcoin now than during the first two halvings. For instance, during the first halving in November 2012, there were only about 40,000 Blockchain bitcoin wallets. By the time of the second halving in July 2017, the number of bitcoin wallets has increased to more than 8 million. As of May 1, 2020, the number of Blockchain bitcoin wallets is almost 50 million. 

At the very least, the investors who are increasingly holding bitcoin may start adding to their position for portfolio diversification. The fact that bitcoin is an asset class that exists on its own terms without being subject to traditional metrics such as P/E ratios also protects it from the traditional risks that face other asset classes.

The Bearish Case For Bitcoin Halving

Nonetheless, there are still those who believe that the larger part of bitcoin’s popularity over the years is mainly due to speculative hype and that the halving isn’t much of a big deal. To start with, bitcoin has rallied by more than 30% in the last one month as both small and large traders continue to accumulate coins ahead of the halving. Hence, there’s likely to be a post-halving selloff driven by profit-taking actions.

Secondly, the halving will simultaneously increase the resources required to mine a block while reducing the rewards of mining the block. If the miners find it hard to stay solvent, they might scale adjust their operations, with some increasing their efforts while smaller miners close shop. The end result may not end up tightening supply as much as some think, and the dampening of the speculative hype could exert downward pressure on Bitcoin’s price.

Lastly, the third halving is happening against the backdrop of the COVID-19 its attendant recessionary pressures. In the first six weeks that WHO declared COVID-19 a global pandemic, the price of bitcoin tanked in line with the decline in other assets such as stocks. Bitcoin’s price only started recovering in the last 6 weeks ahead of the halving. Hence, as has been the case with digital currencies since their inception, it is hard to know how bitcoin might actually fare in the real world shoulder to shoulder with the movements of other financial assets.