For the past few months, the blockchain community has been abuzz about the Bitcoin (BTC) halving happening in May. With the properties of the ongoing coronavirus pandemic, Bitcoin has been performing extremely well, peculiarly in comparison with commodities such as oil or gold that accept traditionally been depended upon as a safe hedge against market volatility. Role of the chat driving the price of Bitcoin upward is "the halving."

With two weeks left until the halving, what exactly is information technology, and why should investors pay attention to its existence? If what they say is true — with some predicting that Bitcoin volition striking $30,000 by year-end due to the halving — is this the time for investors to enter the market? Earlier we analyze the halving and what it means for the market, Two Prime's investment thesis hither is that "the halving will bulldoze the coming rally": 50% upward, xxx% sideways and twenty% down. This view is heretical.

Bitcoin halving's impact on Bitcoin's price

Bitcoin'south halving refers to the halving of the payouts to Bitcoin miners when they mine a cake. In finance, we talk about stock and menstruum. If we employ the analogy of a bath, the stock is the amount of h2o existing in the bathroom, and the flow is the amount of water flowing into the tub. The halving would hateful halving the flow of water into the bath. This means two things: First, it represents a deceleration of the rate at which new Bitcoin is added to the stock; and second, because Bitcoin has no endogenous greenbacks flows, it is non subject to discounted cash menses assay.

The cost of Bitcoin is almost entirely psychologically driven, with some hard cost constraints such as labor, hardware and free energy on the miners' side. Information technology is purely supply and need that sets its price. Halving is a supply-side constraint, where we're having the rate at which new Bitcoin will exist introduced to the market and reducing the faucet flow in half. The market is very bullish on the halving. Historically, other halvings take led to rallies in Bitcoin, so information technology'south logical to call up this way. Why would this time exist any different?

Halving doubles the cost per Bitcoin: half the reward for the same price to miners. In essence, miners are sitting on operations for which the toll per Bitcoin substantially doubles overnight. Unless prices become upwards, miners' margins accept a huge hitting.

This is a problem that is item to Bitcoin. If it happened to any other industry, those types of margins would put information technology out of business overnight. We need look no further than OPEC supply and the oil prices of the 1970s to understand how supply-side shocks can wreak havoc in the existent world.

Historically, miners have had the near control over Bitcoin'due south circulating supply, as they have control of the faucets. Simply similar OPEC back in the day, the suppliers of Bitcoin take been able to influence its price in the market by controlling the supply and belongings Bitcoin until the toll is correct. To understand the ability Bitcoin miners agree on its price, we must wait at the ratio of existing supply to new supply through the following: dS divided by S.

Bitcoin's mining supplies

The principal statement of Bitcoin bulls is that every other halving has led to an increase in price. Per the chart in a higher place, miners need to cover both their doubling costs and their fixed costs. As a result, they will agree and limit new Bitcoin supply until the price is right to cover these costs. This requires treasury, influence and patience. Arguably, miners have all three.

However, if you lot follow the math, the dS–S ratio started at infinity (10 1000000 divided past cypher) and information technology will end upwards at zero (almost zero divided by 21 million). This ratio moves toward zero equally each halving happens. When the ratio is high, a highly correlated group of miners tin can dictate the price — but like how OPEC was able to dictate the price of oil in the 1970s. Just when the ratio is null, miners have no power and tin no longer dictate the price of Bitcoin. This is alike to Iraq throwing a tantrum over the one barrel of oil it has left when the U.s. is awash in cheap gas power and nuclear abundance. In other words, what miners desire does non affair.

In addition, the toll dictated past miners is led by sunk cost, as the Bitcoin has already been mined. If the price of Bitcoin goes below the cost to mine information technology, the whole arrangement would experience tremendously swift, mayhap catastrophic changes.

The theoretical argument hither is straightforward: There is an inflection bespeak at which the holding of Bitcoin by miners will not affair at all. The tendency of price manipulation by miners should buckle at this point and maybe inverse. We like to telephone call this point of inflection "peak Bitcoin." The but question is when this will happen.

At this point, it may sound like we're bearish on Bitcoin, but that is in fact untrue. We're bullish, although a bit cynical, and this is why:

At that place is still a lack of understanding from the full general population on how this all works. A naive green mixed with fiscal illiteracy still runs the crypto markets. Likewise, most Bitcoin maximalists are lemmings with almost no regard to the technicals and limitations behind the asset.

Every bit nosotros know, the price of Bitcoin is almost purely psychological. The momentum of the oversupply however continues to bulldoze the price upward, and there's no point in fighting against information technology. Just at some point, the influence of the halving volition disappear. And at that point, we will exist left with nothing but a supply-side cost shock. And unlike oil, which is fundamental to the functioning of modern society, Bitcoin is not.

So, what'southward to be washed? Investors must hedge by looking for other types of crypto assets that are uncorrelated to the cost of Bitcoin. There are hybrid stablecoins that are emerging. These hybrid stablecoins are able to hold steady in toll without being pegged — and influenced — by fiat currencies, and some may even have incrementally accretive value.

And so far, Bitcoin has provided a rubber harbor for crypto and represents about 65% of the overall crypto valuation. Even so, Bitcoin'due south dominance may also crusade catastrophic damage if the price moves down. There is an urgency in finding some alternatives to Bitcoin. Should nosotros see the price move sideways at a halving, that should be the canary in the coal mine (pun intended), and few miners will survive its operations. At that "peak Bitcoin" point, we will have three years to detect alternatives before the unabridged cryptocurrency marketplace implodes. Crypto will need to discover a way to survive without so much dependency on Bitcoin.

The views, thoughts and opinions expressed here are the writer's alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Dr. Marc Fleury, Ph.D., is the CEO and co-founder of Two Prime, a financial technology visitor that focuses on the financial awarding of crypto to the real economy. Building upon his financial expertise, spanning from his role advising private disinterestedness firms to his academic pursuits in modern budgetary theory and cyberbanking theory, he provides the strategic direction for core vision investment strategy and partnerships for the firm.