First Mover: A Sneak Preview of Bitcoin's Halving – in Real Time

As central banks and governments around the world inject trillions of dollars of coronavirus-related aid and stimulus into the financial system, big investors are becoming increasingly curious about bitcoin's (BTC) potential as a hedge against inflation.

And nowhere is that inflation resistance more evident than in bitcoin's once-every-four-years "halving." That's when issuance of new units of the cryptocurrency automatically gets cut in half. The plan, expected to continue for at least another century, was coded into the underlying blockchain network's programming when it was launched 11 years ago. The mechanism's very purpose was to prevent a rapid debasement of bitcoin's purchasing power.

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Bitcoin's next halving isn't expected until May. But two lesser cryptocurrencies, bitcoin cash and bitcoin SV, are due for their halvings this week, offering an advance glimpse of the quadrennial phenomenon.

"You're going to get a sneak preview of what happens with bitcoin in a month," said Greg Cipolaro, co-founder of Digital Asset Research, a New York-based analysis firm.

Bitcoin cash (BCH), a cryptocurrency that split off or "forked" from bitcoin in 2017, is expected to undergo its halving on Wednesday. Bitcoin SV (BSV), which forked from Bitcoin cash the following year, is due for a halving on Friday.

In the realm of cryptocurrencies, the two forked cryptocurrencies are considered also-rans, with a combined total market value of roughly $8 billion, versus $131 billion for bitcoin.

But since halvings constitute a crucial chapter of any crash course in cryptoeconomics, the episodes bear watching. Many crypto traders say big price swings often coincide with halvings, providing ample opportunities for speculation. The German bank BayernLB predicted last year that bitcoin's halving could drive its price to $90,000https://www.bayernlb.com/internet/media/ir/downloads_1/bayernlb_research/megatrend_publikationen/megatrend_bitcoins2f_20190930_EN.pdf, roughly 12 times the current level.

The most likely outcome of this week's halvings, according to the analysis firm Arcane Research, is an immediate drop in profits for computer operators supporting the two lesser blockchains. These "miners" will then probably just shift their computing power to the bigger bitcoin network, where the halving is still a month away. Such computing resources, known as hashpower in the industry jargon, are crucial for keeping these blockchain networks secure – preventing theft or other abuses.

"It's going to push more hash toward the bitcoin network," says Matt D'Souza, co-founder and CEO of Blockware Solutions, which brokers high-speed computers used for cryptocurrency mining.

The loss of hashpower on the smaller blockchains might make them more vulnerable to a takeover by a malicious actor in what's known as a 51 percent attack. That's when an individual or cabal amasses sufficient computing resources to co-opt the network – similar to the way a corporate raider might try to buy enough equity in a company to force a takeover.

Mike Maloney, chief financial officer of Coinmint, a cryptocurrency-mining company, estimates that if the security of the Bitcoin Cash network fell by half, an attack would require the computing equivalent of about 400 megawatts of electricity – roughly the output of a medium-size power plant. By contrast, it would take 6,000 to 10,000 megawatts to attack the Bitcoin blockchain, he says.

Bitcoin cash's halving "will hurt the overall hashrate/security of an already vulnerable blockchain," says Michael Thoma, co-founder and lead analyst at cryptocurrency-rating firm CryptoEQ.

What happens in cryptocurrency markets, as a result of this week's halvings, is a bit more speculative. Prices for bitcoin cash and bitcoin SV might fall because holders of those digital tokens might suddenly start worrying about the vulnerability, says Dave Perrill, CEO of Compute North, which provides hosting facilities and services for cryptocurrency miners.

While the hashpower shift would bolster security on the bitcoin blockchain, miners there would suddenly face more competition – resulting in a dilution of profits.

"We see mining as largely as an experience like evolution, Darwinism," Perrill says.

He notes that it will be difficult to draw too many parallels between this week's episodes and bitcoin's halving in May. That's partly because so much of the crypto industry has evolved around bitcoin, and there's such a huge community of traders, developers and marketers who are focused on making it successful, Perrill says. In digital-asset markets, bitcoin is the bellwether, and lesser coins like bitcoin cash and bitcoin SV are often merely trading in sync.

Litecoin (LTC), yet another spinoff from bitcoin, provided a cautionary tale when it underwent a halving in August of last year. While the price quadrupled in the first half of 2019, it peaked a couple months before the halving and tumbled over the rest of the year.

Suffice to say the digital-asset industry is still so new compared with traditional finance that nobody's really certain how the various halvings will play out. Many bitcoiners have a remarkably sophisticated grasp on old-finance concepts like the theory of efficient markets, and even within the cryptocurrency industry there are wide-ranging opinions on whether the halving – an event that's known years in advance – is already baked into the price.

"Halvings are not unilaterally positive events for cryptocurrencies," the analysis firm Messari wrote in a December report. "Maybe Bitcoin is different, but maybe it’s not."

This week's halvings on the Bitcoin Cash and Bitcoin SV blockchains will provide additional data points – ahead of next month's featured event.

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Bitcoin Watch

BTC: Price: $7,334 (BPI) | 24-Hr High: $7,464 | 24-Hr Low: $7,081

Trend: Bitcoin is holding ground at press time, but struggling to take out the 50-day average for the second day running. The cryptocurrency is trading near $7,334, representing a 1.6 percent gain on the day, having tested the 50-day MA at $7,422 during the early European trading hours.

A look at the four-hour chart shows the cryptocurrency has failed three times in the last 24 hours or so to keep gains above the psychological resistance of $7,400.

The repeated bull failure, coupled with the four-hour chart MACD's bearish cross below zero indicates scope for a drop to ascending trendline support near $7,000. The risk-off tone in the global equity markets also favors a pullback in bitcoin.

At press time, major European indices like Germany's DAX and U.K.'s FTSE are reporting around 1 percent drops. The cryptocurrency has closely tracked action in the equity markets over the past few weeks.

On the higher side, a sustained move above $7,400 would open the doors to $8,000.

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