Will Bitcoin Halving Generate Profits for Investors?

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Few events generate as much excitement within the Bitcoin ecosystem as the halving of rewards for miners of the cryptocurrency. Crypto twitter, normally a squabbling navel-gazing mess, comes together to salivate at the prospect of profits. In the past, halving parties have also been held to watch the drip of digital profits from crypto.

The event reduces the overall supply of Bitcoin in existence by decreasing the number of coins awarded to Bitcoin miners for solving cryptographic puzzles. If investor demand for Bitcoin remains constant, the price of each coin in circulation should increase.

Not surprisingly, anticipation of a jump in Bitcoin’s price runs high. Rewards for miners were previously halved in 2012 and 2016. Bitcoin’s price surged by 8,000% and 600% respectively after each halving. Both events also set the baseline of a future price trajectory for the cryptocurrency.

Investors are hoping for a similar price jump when the halving event occurs on May 12. It would be a welcome occurrence. After touching $20,000 in late 2017, the cryptocurrency’s price has been in the doldrums. A prolonged recession afflicted Bitcoin’s price much before there was talk of a pandemic-induced one.

A sharp upswing would reignite hope among the crypto faithful. Investors and funds long on Bitcoin may construe the event as a sign of Bitcoin’s viability as an investment asset. But market signals are mixed at best and depressing at worst.

The Bitcoin Myth and its Returns  

In the Bitcoin myth, there are two important and competing narratives. The first one is of a cryptocurrency developed by an anonymous hacker in response to the 2008 financial crisis. Satoshi Nakamoto is the archetypal rebel genius, chafing at the controls and mess wrought by government-controlled financial institutions. The second narrative is more complicated. It involves defining Bitcoin in the image of its inventor, a rebel asset that does not move in lockstep with mainstream markets and is different from the other entities.

Nakamoto can afford to remain anonymous. Bitcoin cannot. Investors need criteria and patterns to evaluate its suitability as an investment. Is it a store of value, as some claim, or a volatile asset that is a perfect vehicle for quick profits? What parameters should investors track to make a buy or sell decision?

The answers to those questions are difficult and, ultimately, impossible. The cryptocurrency moves in mysterious, and often erratic, ways. It rose sharply in response to government clampdowns in 2017 but barely budged after Bakkt, a futures trading market backed by NYSE owners, opened for business.

It doesn’t help matters that Bitcoin’s definition has become a matter of convenience. Some asset managers, who are bullish on Bitcoin, play up its profit potential. But those have been hard to come by in a market that has been in a slump for the last two years.  

Others point to its lack of correlation to mainstream markets, which react to fundamental underpinnings and news developments. But the same managers conveniently forget the news cycle hype that drove Bitcoin to unsustainable highs in 2017.

Still others tout it as a safe haven during times of crisis. But that may be just theoretical conjecture. Recent analysis by the Kansas City Federal Reserve analyzed correlations between daily returns and S&P 500 performance pre- and post-Bitcoin. They concluded that “the 10-year Treasury note behaved liked a safe haven consistently, gold occasionally, and Bitcoin never.

What will Happen During this Halving?

For the halving event, investors are expecting a repeat of previous price performances. Analyzed in isolation, the returns numbers are impressive. However, those figures were eked out away from the glare of mainstream spotlight and during times of plenty. Bitcoin’s network, such as it was then, was sparse and supposedly dominated by retail investors who could manipulate prices with a single large trade and project the shimmering image of a bull run.

2017 changed the landscape and set a new baseline for profits from cryptocurrencies. While the Bitcoin ecosystem has become more sophisticated in terms of products and technologies, it has not generated past profits. The flood of big names, institutional investors, who were expected to bring liquidity to crypto markets have failed to materialize. Bitcoin’s technical network is still under construction. Meanwhile, retail investors are reported to have cashed out and left. The volatility in prices and lack of transparency at crypto exchanges has prevented the introduction of new investment products. The Covid-19 pandemic has further complicated matters. City-wide shutdowns and widespread unemployment translates to less cash for investment.

But there is still hope for halving profits. According to recent reports, hedge fund Renaissance Technologies is reported to have filed an application with the SEC to trade Bitcoin futures. The fund relies on quantitative techniques and data to pick out its winners. But Bitcoin’s relative novelty and haphazard price movement means that Renaissance does not have much to work with to identify trends. Others are also making their way into BTC markets. Open interest in Bitcoin futures is increasing. Stack, a Singapore-based Bitcoin Index Fund, recently announced that it had secured $160 million in capital commitments, $10 million of which came in during the last two weeks.

It is possible that Renaissance’s entry may open the door for others to follow and cause a quick bump in Bitcoin prices during the halving event. But it is unlikely that the price increase will prove to be an important turning point for Bitcoin’s price trajectory, as it has in the past.