Ever Wondered About the Role of Miners in the Price of Bitcoin and Its Upcoming Halving?
One of the most anticipated events in today’s cryptosphere is the upcoming Bitcoin halving. A halving is a compulsory reduction in Bitcoin miners’ block rewards, which takes place after every 210,000 blocks are produced – usually every four years.
The next halving is expected to happen in May 2020 and will see block rewards drop from 12.5 BTC to 6.25 BTC.
For Litecoin, its second halving is expected to take place on the 6th of August and there are already quite a lot of analyses being published on the effects of these events on the particular assets but also on the entire cryptocurrency market in general. However, these analyses haven’t delved significantly into the direct relationship miners seem to have with the price of the respective assets.
What Does a Halving Mean for Miners?
Mining Bitcoin is not a walk in the park and usually involves time and resources. Miners spend a lot of money to acquire specific hardware which sometimes need to be replaced especially when better ones are produced, to make this process a lot more efficient.
These hardware consume a lot of electricity, which also increases the cost of mining and since it’s a business, profit is important to miners. If halving occurs and their rewards are significantly reduced, the number of miners might also drop considerably. The only way they choose to stay in business is if the reward, even after the halving, still lets them see a nifty profit.
For miners, every halving presents the same two scenarios which directly affect their decision to continue. On one hand, it’s possible that the price of Bitcoin rises as a direct result of the natural laws of demand and supply as a halving will reduce the amount of Bitcoin in circulation.
On the other hand, the prices may not rise and this would mean that miners have to quit the business.
What Does a Halving Mean for Prices?
All the Bitcoins or Litecoins in circulation come from miners and if the reward drops then these miners don’t have as many to sell into the market as they used to.
In theory, a price surge can be artificially induced if all miners decide to keep their crypto – an extremely implausible scenario as it might be difficult to harmonise miners all over the world.
Generally, if the miners sell less into the market – whether they choose to or because they no longer have as many to sell – prices would most likely go up.
Another important thing to consider is selling pressure. Since every asset in circulation arise birthed and begins its journey from the miners, it’s not difficult to see how miners can be responsible for the market’s selling pressure. At the time of writing, BTC is valued a little over $9,000 and at the current average production rate of 144 blocks per day, we can estimate that block rewards are a little less than $1.3 million.
If miners seek to keep the same earning standard even after a halving, they might have to sell a higher percentage of the BTC they receive as rewards. If every miner decides to sell every single part of BTC they mine every day, selling pressure undoubtedly increases, keeping prices stifled.
How Do Miners Proceed from Here?
Bitcoin and Litecoin miners need to push out all their earnings into the market at any point when they feel like their mining costs is beginning to eat up most of their profit. At the moment, the estimated point where they comfortably breakeven is $3.5k BTC. However, this is bound to significantly change after the next halving.
While it might be too early to say for sure, it’s possible to estimate that the point earlier stated above would double and at $7,000, the only way to curb selling pressure would be for prices to remain higher.
As stated earlier, miners can also decide to withhold their rewards, significantly reducing the amount of Bitcoin is circulation which means that prices stay higher and mining remains cost-effective and lucrative.
What Does the Future Hold?
Generally, making exact predictions might be tricky and everyone would need to take everything they hear or see, with a pinch of salt.
However, we might be able to assume beyond reasonable doubt that the next halving will increase prices even if we cannot exactly say for how long the increased price will be sustained. If the sustenance holds, miners would stay in business and more might join. Regardless, the $7,000 figure might be an important mark.