There is a notion that the Bitcoin halving brings a price increase with it, so people expect the same also for the one that will happen in 2020.
That is true when you look at price trends a few weeks after the halving. But should we look at these trends in the light of a bull run? If we do so, then can we be sure that the halving brought the bull run about?
These are particularly interesting questions that could offer an insight into what may happen in May 2020, when the third Bitcoin halving event occurs.
History of Bitcoin Halvings and Bull Runs
Unfortunately, the data on halvings and its correlation with bull runs is not as abundant as you may think. It is worth noting though that there have been two halvings prior to the upcoming one and price increases have followed both of them. In both cases, prices have rarely dipped back to the price we had on the day of the halving, even during bear markets.
The first halving occurred on November 28th, 2012. Back then, Bitcoin prices were at around $12 USD, and they proceeded to increase after a brief decline in the weeks following the halving. In fact, it is possible to say that the bull run started there, and it lasted until the Mt Gox debacle brought the markets down in early 2014.
With the second halving, we can see a similar pattern. On July 9th, 2016, Bitcoin prices were hovering around the $650 mark. There was a short-lived decline immediately after the halving and then an unstoppable run to almost $20,000 that ended in December 2017.
Are two halvings enough to reach a conclusion?
This is precisely where the data and logic start to clash. Bitcoin is barely 11 years old and it has had 2 halvings. Upon the third halving in May, 89% of all Bitcoin will already be mined, so will this trigger the same kind of market reaction that the previous two halvings did?
Logarithmic charts – which measure percentage changes as opposed to absolute price changes – might provide a better insight. On log scale charts, we can see that there is still a price increase after each halving, but it is much more moderate after the second halving. In other words, the supposed bull run after the second halving is nowhere near as spectacular as the one that followed the first halving.
New Bitcoin supply constraints might be less effective
Looking at the very limited data set – 2 events over 11 years – on the logarithmic chart, it would be reasonable to assume that the next price increase after the coming halving, might not look like a bull run at all. This is paradoxical, especially likely if we consider the fact that the new Bitcoin supply constraint will allow miners to increase supply from 89% of maximum BTC supply to 95.37% throughout the next mining period.
If demand keeps up with current levels, then those supply constraints should be enough to bring about an incredible bull run. But the effects of the halving are just about the supply side of Bitcoin.
Bitcoin demand will set the pace of the next bull run after the halving
This is the key element that many miss out on when they look at the Bitcoin halving event as the spark for the next bull run. Not only are we working with limited historical data to make any kind of safe assumption, we are also assuming that demand will keep up.
Maybe the psychological effect of the dwindling Bitcoin supply will create enough FOMO to spark a bull run. That would be directly correlated with the halving, but it all depends how we look at the numbers. In reality, even though Bitcoin supply will be above 95% of the maximum after this coming halving period is over, halvings are slowing the rate at which the remaining BTC are entering the market.
Looking at the market this way, it could yield the opposite psychological effect. After all, is the difference between 89% of maximum supply and 95% of maximum supply that big of a deal psychologically?
Adoption is the only factor that can bring about sustained bull runs
These psychological effects are also typical in an environment dominated by traders. Whether we do enter into a bull run after the next halving or not, is largely unrelated to Bitcoin adoption. Adoption is the best way to sustain demand, which in turn would make those supply constraints more valuable for those who look at the price – traders.
The correlation between Bitcoin halvings and bull runs is a supply side bias
Therefore, it is safe to say that even if the scant evidence for Bitcoin bull runs is somehow correlated with halving events, looking at the data this way is absolutely biased. In fact, those who see this pattern are suffering from a Bitcoin supply side bias. The demand side is a critical component; halvings might only have a marginal psychological effect on this side of the equation.
Even after considering the demand side, it is also necessary to understand that there are other factors that might correlate with a bull run. These include exogenous factors – like excess liquidity in traditional markets due to years of quantitative easing – and upgrades that make Bitcoin more useful – like SegWit and the subsequent implementation of the Lightning Network.
It is important to try and price those factors when looking at the price charts, whether they are linear or logarithmic.
Ultimately, these factors are a bit harder to separate, so it is possible that we will never be able to understand the correlation between Bitcoin halvings and bull runs to a precise degree.