What Effect Will The Halving Have On The Price Of Bitcoin

| About: Bitcoin Investment (GBTC)

Summary

Tomorrow miners are rewarded by 1/2 as much Bitcoins for their efforts.

The halving event is widely anticipated and I expect miners won't be surprised.

Speculators could be disappointed causing prices to fall.

Less efficient operators will be forced out at much higher price levels than before, restoring equilibrium at a higher level.

The Bitcoin system is setup so you can mine for the coin and by doing so you engage in a service for the entire network. The miner is effectively trading an investment in energy and hardware in exchange for Bitcoin. Very much like in traditional mining.

Tomorrow the reward a miner gets for sealing a block on the blockchain ledger is halved. This rare event, that has been widely anticipated, is called The Halving. Check the countdown clock here.

If you consider investing in Bitcoin but are new check out my prior two articles 5 Reasons to Invest in Bitcon and 6 Reasons why you should not invest in Bitcoin.

From that point onward less (presumably half as much) bitcoin will enter the system provided mining capacity stays the same. That isn't necessarily the case, however, as the decrease of the reward is going to force out the less efficient operators. Potentially supply decreases by more than 50%. Bitcoin may be a new phenomenon but long time mining investors know a thing or two about the importance of investing in the low-cost operator.

What may mitigate the carnage among miners is the recent jump in the price of Bitcoin. At $600 a coin it is much easier to stay afloat even at ½ the previous rate as compared to when Bitcoin hits $300 or $200 a piece.

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I'm currently exploring the cryptocurrency market and looking for opportunities but by no means a Bitcoin authority. However, my investors (or gambler's) instinct tells me the halving may not have the anticipated effect of driving up the price of Bitcoin.

I'm thinking the halving has already been priced in looking at the recent surge of the price. It seems more likely to me Bitcoin traders are going to be disappointed after the event fails to deliver a spike. We could very well see a sell-off instead.

Marginal miners have ceased ordering rigs (specialized hardware adapted for bitcoin mining) quite a while ago anticipating the halving and that's already having an effect.

Meanwhile, the floor of the Bitcoin price may actually have moved up quite a bit. Even the low cost producers effectively have their cost base doubled. In the short term the price can really go anywhere but now miners will drop out much more quickly in response to price drops limiting supply. That in turn should cause the price to rebound. Possibly, the cycle isn't unlike in gold mining except it moves much faster. The equipment isn't as expensive, there isn't the same amount of bureaucracy and government regulation to deal with, no foreign governments get involved, equipment can be ordered and delivered faster etcetera.

In summary I believe the halving won't cause Bitcoin to shoot up. The price may collapse afterwards as speculators are disappointed but should in turn rebound towards the new equilibrium quite quickly as even the most efficient of miners will be able to keep their rigs running after a collapse.

There has been one prior halving event on November 28, 2012. In that instance there was no noticeable price reaction. If you are nevertheless convinced Bitcoin will rise in price subsequent to the halving you can invest through the Bitcoin Investment Trust (OTCQX:GBTC) although it trades at a premium to NAV. Alternatively you could hold the "real" thing, although it puts some of the security burden on you, through a cloud based platform like Coinbase or Kraken or store it on a hardware cold-storage wallet like Trezor or Ledger.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.