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May Market Outlook – @blockchain

With the Bitcoin halving now a few days away, we thought we’d share with you some data-driven insights into what we think may happen this halving cycle.

Key Takeaways:

  • The data shows that the market is very different from previous halvings — and the impact of miners selling their bitcoins is very different this time around.
  • The options market suggests that we will not see a bullish period in the months following the halving.
  • The impact of Covid-19 so close to the halving and Bitcoin’s correlation to equity markets means we may not see significant surges in price.

The countdown to the halving

Bitcoin is set to reduce its block reward by half around May 12th and Google searches for “Bitcoin halving” are skyrocketing. What is particularly significant about this halving cycle is its timing. With bitcoin set to reduce its rate of supply at the time that central banks around the world are conducting one of the greatest money supply experiments in history, many eyes are turning to the nascent digital asset as a hard, digital store of value.

The case for a price surge

Previous halvings have heralded significant surges in the Bitcoin price around the halving event and in the months following. Why did this happen? Will it happen again?

Simple economics would dictate that if there is a decreasing rate of supply of an asset and demand remains the same or increases, then all things being equal, the price of the asset will go up.

What’s more, many Bitcoin proponents, point to a model known as Stock to Flow, to argue in favour of dramatic price rises around halving events and with Bitcoin’s ratio set to increase with a decrease in supply, they are expecting a surge in price following the halving.

But history does not always repeat itself, and a far larger, more established crypto market may not produce the same results in 2020.

What does the data say?

The market in 2020 is very different from 2016.

In 2016, the total daily Bitcoin volume on spot exchanges rarely exceeded $1 billion USD, peaking at close to $1.5bn roughly 2 weeks before the halving. In 2020, in contrast, total daily volumes in 2020 are regularly ten times this number, with daily spot volumes on Top-Tier exchanges hitting $21.6 bn on March 13th.

Furthermore, it is crucial to acknowledge that in 2020 we have a much broader array of market participants, larger market players, more established exchanges and a far more developed derivatives market.

All of this means that we may see less of a price increase in the year following the halving.

Miners are smaller players in 2020

During previous halving cycles, miner selling was a bigger determinant of the sell pressure in bitcoin markets. In 2016, miners likely had a far bigger impact on the bitcoin price, as miners selling their bitcoins represented a larger and more impactful component of bitcoin sell pressure.

Some have argued that this halving of sell pressure contributed to the rise in bitcoin price in the months after the halving event in 2016 and 2017.

Now however, with far higher spot and derivatives volumes, and more market participants, the drop in sell pressure from miners selling half the number of bitcoins will have less of an impact on the total sell pressure. We might therefore expect less of an impact in the months following this year’s May halving, and therefore less of a surge in price.

Options: the market does not expect a surge

Options market makers are often considered the most knowledgeable market participants, and many look to their pricing for indicators of where prices are heading. The more mature derivatives market of 2020 gives us a better picture than in 2016 of what the market thinks. Specifically, the bitcoin options market gives us some insight into what the market believes will happen.

Implied volatility is a derived metric which measures the expected volatility of an asset, and is used by traders to gauge the forward-looking sentiment of a market: higher implied volatility is associated with higher premiums for options, meaning there is greater demand for those options.

If we look at the skew today of the implied volatility for bitcoin options we can see that the market is more concerned about the downside of bitcoin dropping in price, than the potential upside.

Looking at the chart above for Deribit, we can see that the curve to the left is far steeper than the curve to the right. What this means is that sellers of options (such as market makers) at these lower strike prices on the left are commanding higher premiums for these options, as they believe there is more downside risk to the bitcoin price, and buyers of options at these low strike prices are more willing to pay a premium to express their views, as they also believe there are more downside movements to come.

In short, the options market does not expect the bitcoin price to rise much, and is more concerned about the price dropping. This also currently holds for contracts expiring in June, September and even December.

While it’s possible that this chart just points to a risk-averse options market, (particularly if it primarily comprises miners who are already long bitcoin through mining), it does add weight to the argument that markets are not expecting much of a price surge in the aftermath of the upcoming Bitcoin halving.

The elephant in the room: Covid-19 and Bitcoin’s ‘Black Thursday’

Finally, we cannot ignore the impact of Covid-19 and the massive effect it has had on financial markets. With crypto markets by and large tracking equities throughout the financial turmoil of recent months, bitcoin saw one of its biggest single day drops on March 12–13th, plunging over 40% to trade below $4,000 on some venues, as stock markets took a beating.

Comparisons with previous halving cycles therefore, cannot ignore the impact of enormous macro events like the coronavirus crisis, the fact that bitcoin now seems to track equities quite closely, and that such dramatic external shocks to the bitcoin price so close to the halving may negate much of the supposed impact of these events.

What does this all mean?

Predicting the bitcoin price is notoriously difficult. While in theory a decreasing supply, and stock-to-flow models may suggest a surge in price, the reality is a lot more complicated. A far larger, broader spot and derivatives market means that miner selling is simply less impactful. Options markets do not point to a bullish period following the halving, and the impact of Covid-19 and equity market volatility on the Bitcoin price could suppress the bitcoin price.

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