Bitcoin Halving 2020: Just Another Day in the Office
The Bitcoin Halving took place last night, and it was supposed to be the crypto-event of the year. But it wasn’t: Apart from increased volatility due to price speculation, it hardly had any short-term effects at all.
Yesterday was supposed to be the big night: The Bitcoin Mining premium decreased from 12.5 Bitcoin to 6.25 Bitcoin per block, which will reduce the future supply of Bitcoins. The market had expected this so-called halving already since late 2019, and it was touted as the key event of this year.
Despite the high expectations, the spectacular big bang did not happen. This morning (May 12, 07:44 a.m.) Bitcoin was at just under 8,800 US dollars, similar to the previous days.
“In the run-up to the halving, most forecasts were pure speculation,” says Frank Wagner, CEO of INVAO. “The best reaction in such situations is to ignore your emotions and trust in your investment strategy.”
High volatility in the days before the halving
Bitcoin, and crypto markets in general, have been extremely volatile in the days before the halving. Frank Wagner compares trading in these days with picking up coins in front of a steamroller. Particularly impressive was the price plunge from over $10,000 to nearly $8,000 in just seven minutes on May 10.
“The halving has created positive expectations among many market participants,” explains Wagner. “In times like these, traders tend to overleverage their directional bias.”
Leverage means that traders increase their upside and downside potential using crypto-derivatives. For example, if Bitcoin is worth $9,000, a trader can buy one Bitcoin at that price on the spot market. On derivatives platforms, he can leverage this position, sometimes by a factor of 100, meaning a trader can now buy up to 100 Bitcoins for his $9,000.
If the Bitcoin price drops by just 1%, the initial capital of $9,000 is completely used up and the position is liquidated in a so-called “margin call.” This leads to a price loss, which then results in margin calls for other traders. The resulting downward spiral can lead to massive losses within minutes.
“It is precisely this mechanism that has led to enormous volatility in recent days and caused losses for many investors,” says Wagner. “Our risk management shows its strengths in these market phases because compared to the market as a whole, we have had a clearly positive performance in recent weeks.”
Too early to judge the final outcome
The Bitcoin halving did also not have any significant effect on other cryptocurrencies. Ethereum, the second-largest crypto-asset in terms of market capitalization, was extremely volatile during the past 24 hours but stabilized again at about $190.
In the medium to long term, the question is how miners will react to the lower mining premium. The effect of the halving will thus only become visible in the coming weeks and months. Today is still far too early to judge the final outcome.