Will Bitcoin’s third halving follow cues from other PoW coins?

Bitcoin Halving

To understand what and why halving was introduced by Satoshi Nakamoto it is important to understand the motive behind it. Satoshi Nakamoto summarized the intentions behind controlling the BTC creation and how it is performed by adjusting the inflation/deflation via code like adjusting the difficulty or events like halving.

“As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.”

Not only does Bitcoin support fixed inflation, the halving event furthers the idea of fixed inflation by rewarding the holders depending on the market demand.

“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.”

In simple terms, Bitcoin halving or halvening is when the mining rewards are slashed in half to control the output of Bitcoin. The halving happens once every four years. Since the start, Bitcoin has undergone two halvings, and the block reward has decreased from 50 to 25 bitcoins and 25 to 12.5 bitcoins. The third halving, which is set to happen in 27 days will halve the reward from 12.5 to 6.25 bitcoins.

In economic terms, halving creates a negative supply shock, where the supply for Bitcoin is reduced, however, the demand stays relatively the same. This should cause the price of Bitcoin to increase and it does. However, it has also been observed that the price tends to rise even before the halving acting like a self-fulfilling prophecy.

Bitcoin Cash and Bitcoin SV are two well-known forks of Bitcoin and have undergone their first halving recently. Studying the effects of halving for these PoW coins could shed light on what could potentially happen to Bitcoin during and after the halving.

Bitcoin Cash and Bitcoin SV

Bitcoin Cash (BCH) is a fork of Bitcoin, which forked on August 1, 2017, and Bitcoin SV (BSV) forked is a fork of Bitcoin Cash.

Bitcoin Cash halved on April 08 at 12:20 UTC, while Bitcoin SV on April 10, at 01:30 UTC, both of which caused a reduction of block reward from 12.5 to 6.25 BCH. However, these halvings had unintended effects on their networks. The hash rate of BCH plunged by 72.95% while that of BSV by 66.53%.

However, since the fall, the hash rates of both the networks have bounced back by more than 70% and seem to have stabilized for now.

Due to the drop in hash rate, the difficulty has also seen a similar plunge as well. Additionally, other aspects like the blocks produced per day have tanked too. From an average daily block production of 144, it had dropped to 55, 54 per day after rebounding back to original levels.

This fluctuation in block production stems from the fact that the forks have managed to change the difficulty adjustment method that Bitcoin follows. Bitcoin’s difficulty changes after 2016 blocks, however, for both these forks, the difficulty is adjusted based on a 144-block rolling average.

Will the same happen to Bitcoin? Probably not.

Bitcoin is far superior to its forks, in terms of decentralization and even security. With an excess of 122 million TH/s Bitcoin has the largest network share of the hash rate at press time. BCH and BSV had 3.58 million TH/s, 3.08 million TH/s respectively before the halving.

During the first halving for Bitcoin (on November 28, 2012), the hash rate of Bitcoin reduced by 39.62% from 29.40 TH/s to 17.75 TH/s. For the second halving (July 09, 2016), the hash rate declined by 1.58 million TH/s to 1.24 million TH/s, or 21.51% reduction.

Also, the Bitcoin hash rate has grown considerably since the last two halvings. However, the uncertainty around this halving is too much to be ignored. Especially with the price drop on March 13, which has been termed as “Black Thursday”.

The debates surrounding the halving include “if the halving is priced in or not” and that there will be “miner capitulation” due to the shift in the halving narrative.

Both these questions remain unanswered due to the same reason the third halving might be different than the rest of the halvings — uncertainty.

With most of the population around the world under lockdown due to the COVID pandemic, the global economy looks to be hanging by a thread thrown by the central banks around the world via fiscal stimulus. Soon, there might come a point in time when this will not be enough and the thread snaps causing a full-blown recession.

Be that as it may, for now, the hash rate of Bitcoin has confidently climbed up since March 13, however, the price has been stuck in the $6,000 to $7,000 range for quite a while. If this does not increase, a lot of miners will undergo capitulation causing a sudden decrease in the hash rate, like BCH and BSV after their halvings.

An estimate of the drop in hash rate is said to be around 29% based on BitMEX’s recent report.

According to BitMEX research’s different cost curves, the above-attached curve best fits and explains the next halving and drop in hash rate. The “Linear cost curve” indicates that the hash rate of Bitcoin will drop by 29% post halving.

So to sum it all up, Bitcoin will not follow Bitcoin Cash, Bitcoin SV, or even Litecoin’s cue in the next halving. It will also not be like the halvings before it, the third halving will be an entirely new one, the one that will factor in the recession, the inflation, the pandemic scare, etc.

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