After the Bitcoin block reward is halved, the price may fall instead of rise. Why?

Author: Liang Che

Source: bitpush.news

There is less than a month left until the Bitcoin block reward halving in May. Although the price of Bitcoin may rise based on the supply and demand model, a report from crypto asset analysis company Coin Metrics shows that the price of Bitcoin may fall instead of rise.

CoinMetrics data scientist Kevin Lu explained that Bitcoin selling pressure may increase in the coming months, which will lead to a drop in Bitcoin prices, but eventually the market will get back on track and pave the way for future price increases.

Coin Metrics' theory is based on the following three points: crypto miners are large-scale commercial enterprises pursuing profit maximization; Bitcoin mining is a competition with a fixed total reward that will be distributed to all participants at a fixed pace; miner income is denominated in cryptocurrency, while miner costs are denominated in fiat currency.

The report believes that crypto miners are a persistent and significant source of selling pressure in the Bitcoin market against the backdrop of the block reward halving. Because, "their selling pressure is high because miners must sell the cryptocurrencies they earn to pay their costs in fiat currency. And because their profit margins tend to zero, miners must sell almost all of the cryptocurrencies they earn."

The report added that while Bitcoin miners’ revenues represent only a small portion of total trading volume, it is important to remember that these sales are net negative capital outflows that are unlikely to return to the market, which is not necessarily the case for other transactions.

The Coin Metrics report also stated that miners will exacerbate the trend of large fluctuations in the Bitcoin market price. The report stated: "Because miners' variable costs change slowly and are relatively stable, during periods of rising cryptocurrency prices, miners will only sell fewer mining rewards to cover expenses. On the other hand, when cryptocurrency prices fall, they will have to sell more. According to this theory, miners have a pro-cyclical effect on the market because they further exacerbate price increases and decreases."

Nevertheless, the report also stated that this phenomenon will change as miners hedge against future price trends or pledge mining revenue.

The report also mentioned that “worryingly, miners are in a state of capitulation even before the halving. Once the block reward is halved, miner revenue will be cut in half while miner costs will remain the same, so we expect more miners to capitulate in the coming months.”

Coin Metrics said that miner-led Bitcoin selling pressure is already high, and in the coming months, as the halving progresses, this pressure is likely to increase. However, once the cycle of eliminating inefficient miners is completed, the cryptocurrency mining industry will be back on track and able to support future price increases.

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