How The Halving Will Impact Bitcoin's Price and Production

This year, sometime around mid-May, an event long anticipated in the Bitcoin community will occur: halving, i.e. the reward granted to miners per block added to the already existing blockchain (from 12.5 BTC to 6.25 BTC) will be halved. The history of Bitcoin will see 32 halvings, and we are approaching merely the third one. Very many people continue to wonder about the impact of this halving, about the evolution of the price, about what will happen with the miners, etc.

How will the production cost evolve?

One first aspect to remember is that when halving occurs, the Bitcoin
production cost will double immediately. But pay attention, this is the production cost, not the transaction price! The production cost is assessed based on a number of elements, but the most important of these elements is the cost of electricity.

This cost varies from one country to another, and some of the best places in the world where Bitcoin can be mined against a low cost of electricity ($0.03-0.06/kWh) are some regions in China and Russia (more recently, it is believed that the Western zone of Texas, USA, has the most competitive price in the world). Thus, with a constant cost of electricity, but with a halved reward, we will see an instant doubling of the production cost.

An exceptional study conducted by those at CoinShares Research (a study on which this argument is based) shows that, in December 2019, we had a world average production cost of $6300 per Bitcoin (price calculated for an electricity cost of $0.04/kWh).

I need to stress the fact that this ratio shows that some segments of miners – those that managed to ensure both an electricity cost below $0.03/kWh and state-of-the-art equipment – were mining at less than 4000$ per Bitcoin. I tend to believe that these miners were and continue to be the exception rather than the rule.

Therefore, we may expect that, after halving, the doubling of this global average production cost will mean $12600 per Bitcoin for the largest number of the miners, and $7000-$8000 per Bitcoin for the exceptional miners. We will thus have an average production cost and an exceptional production cost.

How will the transaction price evolve?

The transacted price will keep up with the adjustments made in the production sphere and it will increase – in a reasonable time –
to a level that should be sustainable and profitable enough to allow
the miners to continue their activity.

If the assessments herein turn out to be correct, this minimum level of $7000-$8000 will become that which in Bitcoin mining is called a price floor; it is extremely unlikely for the Bitcoin transaction price to go below this price floor on a longer term.

However, in my opinion, the transacted price will rank somewhere in a
slightly higher range, between $10000 and $12600 and it will seldom
drop below $7000-$8000. I have obtained the amount of $10000 by
averaging the two production costs we will have after halving: the
average cost and the exceptional cost.

My assessment of this minimum $10000 transaction price per Bitcoin
after halving is based on the following aspects:

1) Usually, the cost of electricity stays constant on the
short term, while on the long term it continues to increase.

2) technological innovation

In the last years, Bitcoin mining equipment underwent unprecedented
development. Ever since 2013, when ASICs appeared, their processing
capacity has improved to a level we could hardly imagine back then.
This growth curve has not peaked yet.

3) high cost of state-of-the-art equipment

The market has already begun to see the appearance of the most
powerful and efficient equipment available right now: Antminer S19
and Antminer S19 Pro (by Bitmain), with a processing capacity ranging
between 95 TH/s and 110 TH/s.

Of course, the most efficient equipment
is also the most expensive and hardly accessible and it will always be like this. This immense processing power to be delivered by the most efficient equipment will have an impact on the whole processing power of the Bitcoin network and, implicitly, on the network’s difficulty; an extremely high level of competitiveness among the miners will ensue therefrom (the processing power and the mining difficulty are two very important variables in Bitcoin mining, the former having an influence on the latter).

The cost of electricity, the technological innovation, and the high cost of state-of-the-art equipment act like a buffer and push the price upward.

Most likely, this transaction price adjustment to the production costs will not occur suddenly, but within a reasonable period (in
several weeks, maximum several months after halving). This will occur
unless the assessed transaction price will already be there at the
time of the halving, at an adequate level for most of the miners.

To conclude, in my opinion, halving will be a beneficial moment for
Bitcoin and there is no real reason of concern as regards its growth,
despite the fact that a new financial crisis seems to be looming on
the horizon.

Sources:

(c) image: cryptobriefing.com
https://coinsharesgroup.com/assets/resources/Research/bitcoin-mining-network-december-2019.pdf