Breaking Down FUD on Halvings
Looking at the history of Bitcoin and how it has developed, we can easily associate it with seasons and events. From the original design of Bitcoin, there is an automatic protocol that determines its supply rate over time. The event that controls this protocol is known as a Bitcoin Halving. As a result of this event, and many others, certain behaviours are exhibited by members of the community. One of these behaviours is “Fear, Uncertainty and Doubt (FUD)”. Historically, there appears to be a relationship between Bitcoin halving and FUD. Hence, this post is primarily concerned with breaking down FUD on halvings.
What is a Bitcoin Halving?
Bitcoin has a limited supply of 21 million coins, but not all of that is in existence yet. In an attempt to fight inflation, Bitcoin halvings reduce the rewards received by miners for creating new Bitcoins, and in turn alter the supply demand metrics.
The process of generating Bitcoins is called mining. During Bitcoin mining, computers within the network contribute power in order to maintain the Bitcoin network. In doing so, these computers confirm transactions by solving algorithms to update the distributed ledger.
The first computer to find a block gets rewarded with a predetermined amount of Bitcoins. This is what Bitcoin mining is all about. Initially, the Bitcoin block reward was 50 BTC, but over the years, the reward has dropped through the already mentioned protocol, the Bitcoin halvings.
What is a Bitcoin Halving? It’s an event where the amount of Bitcoin earned as block reward for mining drops by 50%. This event takes place once every 4 years, and so far we have had 2 Bitcoin halving events, with the third Bitcoin halving set to happen in May 2020.
Fear Uncertainty and Doubt (FUD)
FUD is a common expression in the circles of Bitcoin and cryptocurrency. Trading and investment involves sentiments and emotions which are basic elements of human nature. The anticipation of major events have been identified as key factors in market trends, especially the more volatile ones like the Bitcoin and crypto markets. This has led to a pattern in market behaviour whenever Bitcoin halving is about to occur.
By analysing the economic implication of reduced supply, increased awareness, and the technical effect of halving on the market, traders and investors behave in certain ways in order to secure themselves. Therefore, most of the time the market response that we notice do not necessarily reflect the actuality of an event. Rather, it is a reflection of the reaction of those trading the markets, and how they are responding, either in preparation for an expected event, or as a reaction to what has happened.
Bitcoin Halving and FUD
In breaking down FUD on halvings, let us consider one particular element that sums up market behaviour, price. By analysing Bitcoin price behaviour around halving periods, we will be able to conceptualize the effect of FUD in the Bitcoin market. This will also point us in the direction of what to expect in the months to come, as another halving event is almost here.
The first Bitcoin halving happened on 26th November 2012. In the months preceding this event, Bitcoin price dropped significantly. It was a retracement of over 93% which saw BTC trade for as low as $2.01. What happened afterwards was a prolonged upward movement that saw Bitcoin price reach $268 in April 2013, reflecting a 13,294% surge in BTC price.
Something similar happened in 2016 when the second halving took place. The date for the second Bitcoin halving was 11th June 2016. Ahead of this date Bitcoin price fell by over 86%, reaching a low of $163.88 in January 2015. What happened next was an upward move that saw Bitcoin reach its highest price ever of $20,089. The third halving is around the corner, and Bitcoin price has fallen. At the time of writing, the Bitcoin price is at $8,193, having recovered from sub-$4,000 region of late 2018. This behaviour is familiar, hence investors are on the lookout for the next upward surge in BTC price.
The price behaviour of Bitcoin around the Bitcoin halving event appears to follow a particular pattern. This pattern is described as follows:
- Price crashed significantly, months before halving
- A gradual to moderate recovery process begins ahead of the halving event
- A rapid rise in price takes place after halving, reaching significantly higher levels
So far, the pattern of Bitcoin behaviour has been consistent, and the normal FUD characteristics are visible. Astute traders and investors are however taking advantage of the opportunities provided by the likes of Vertex.Market to build their portfolios ahead of an anticipated BTC price surge. The Vertex platform allows for OTC trades of even higher volumes of Bitcoin and other cryptocurrencies. Transactions are convenient, fast and straightforward.
The Bitcoin market movements are not strange, neither is the current behaviour new to those who have lived through previous Bitcoin halving events. By breaking down FUD on halvings, we understand how the market swings. This gives us an idea as to what to expect in the months to come. The third Bitcoin halving is expected to take place on 17th May 2020.