Bitcoin just became twice as expensive to produce.

That’s certainly one way to look at it. Another is that the supply has been cut in half, so Bitcoin is now rarer and more valuable — so, which is it?

The sudden change in Bitcoin’s supply comes as no surprise to the community, as the halving is an aspect of Bitcoin’s programmatic supply mechanism. Unlike money issued by central banks, Bitcoin cannot be printed off at will. Every time a block of transactions gets entered into the blockchain by a miner, the miner gets a block reward, and that’s how we get new bitcoins.

Two days ago, on May 11, 2020, the block reward paid to miners was cut from 12.5 BTC to 6.25 BTC. The global supply of Bitcoin is now 50% what it was on May 10, and miners face the same overhead costs with half the reward.

This raises the interesting question of how the price dynamics of BTC may be affected. Historically, halvings have correlated with price increases, although two data points are hardly enough to indicate a trend.

In theory, halving the supply of bitcoins being issued could lead to a price increase. However, to view the halving as a simple matter of “half the supply = twice the demand” is overly simplistic. There are conflicting views and arguments as to whether the latest halving event is already factored into the future price action. When the markets expect an event, that event can become “priced in,” meaning that it may not impact price action, or that its impact on the price will be predictable.

Let’s take a look at three different theories on the halving.

1. Efficient Market Hypothesis: Bitcoin Halving Is Priced In

The Efficient Market Hypothesis (EMH) is the idea that the value of an asset reflects all available information at all times, making it impossible for the asset to outperform the market and generate alpha. The theory hinges on the idea that the many different participants in a market are all acting in their own self-interest and that they all have forms of trading edge unique to them. Their activity creates accurate buy and sell signals, causing asset prices to settle at their “fair” market values.

Advocates of the theory apply this to Bitcoin as well, claiming that the Bitcoin price reflects the actual market value. This would mean that, yes, the BTC halving is priced into BTC’s price. The theory behind this would state that people have already started accumulating Bitcoin in anticipation of the halving, causing the price to move to where it’s “supposed” to be.

If Bitcoin is as efficient as the EMH purports it to be, it invites the question of whether it’s a worthwhile investment in the first place. However, while EMH advocates would not support buying Bitcoin in the hopes that the halving would boost its price, analysts like Nic Carter point out that there are many other unforeseen factors that could increase the price and that these factors, by virtue of being unforeseen, are not currently priced in.

In general, the EMH is more applicable to large, sophisticated, and efficient markets. Historically, Bitcoin has been viewed as less efficient than mainstream financial markets, with a lower market cap than other well-known commodities and often a slower reaction time to market-moving news.

However, while Bitcoin may not be an efficient market in general, the price has been showing signs of faster reaction times to market-moving news.

When U.S. forces assassinated an Iranian major general, the price of gold and oil futures increased almost immediately, trailed by Bitcoin a few hours later.

The price of all three assets continued to react to developments around the tensions between both nations, with Bitcoin’s reaction to news events shrinking from hours to minutes. This is not proof that Bitcoin is an efficient market, but it may indicate a growing tendency to absorb information faster.

Mainstream institutional finance now has many ways to invest in Bitcoin compared to the infrastructure that was available even a few years ago, contributing to efficiency as well. But, while the space is maturing, it still has a way to go.

The fact that the price of Bitcoin can differ greatly across various exchanges is another indication that it may not be an efficient market. SFOX was designed to allow traders to access a market-wide order book and seek the lowest price at any given time across multiple exchanges, and this process is aided by low market efficiency.

Nic Carter himself has stated that he does not believe in the “strong” version of the EMH wherein all events are priced in to an asset at any given time, but rather a more nuanced theory that simply acknowledges pricing in as a common phenomenon.

So, if the halving is priced in, where’s the bull market? The EMH suggests that the recent halving may contribute to price appreciation in the coming weeks and months. However, the halving only moves supply from 3.6% to 1.8% annualized issuance. It’s important to bear in mind that, even according to EMH, upward momentum from the halving could be offset by downward momentum from other factors. This take on the halving may be disappointing to Bitcoin bulls, but there are those who take an even less bullish approach.

2. Bearish Outlook: The Halving Could Lead to a Bear Market

Amid the chorus of analysts cheering on the halving event as a catalyst for growth, there are some who believe it may have the opposite effect. For example, Bloomberg TV pundit and economic analyst Joe Weisenthal makes a case for the halving creating downward momentum for Bitcoin’s price.

Weisenthal pointed out on Twitter that because everyone knows about the halving and the BTC supply limit of 21 million, the halving must have been priced in.

Markets move on surprises and unknown events, whereas the Bitcoin supply schedule is transparent for all the world to see.

This, of course, is in-line with the principles we’ve just discussed in the EMH, but Weisenthal takes things a step further. He goes on to argue that failure to trigger a bull market could lead to disillusionment a selloff, resulting in a bear market.

Unsurprisingly, this ruffled a few feathers. Weisenthal brought VC investor and major Bitcoin influencer Anthony Pompliano into the debate. Pompliano had already tweeted that the halving was not priced in, and Weisenthal pointed out that there was a public countdown estimating the exact date and time of the halving, and that, therefore, it had been fully anticipated for a long time.

Pompliano argued that Weisenthal’s argument was flawed because a relative minority of people are invested in Bitcoin and familiar with halvings.

Dan Held, a former Uber executive now with the Kraken exchange, reiterated this point in a separate thread, stating that “Bitcoin’s halving is priced in for current believers but not for future ones.” The idea here is that for those who do not know about the Bitcoin halving or have not yet invested in Bitcoin, the halving was not priced in.

For example, the extensive media coverage around Monday’s halving could potentially attract new investors unfamiliar with the halving—or, indeed, with Bitcoin at all. These new investors could hypothetically buy in out of FOMO due to the expectation of an impending bull market, and such an investment could potentially trigger an upward price movement.

3. Chaos Theory: Bitcoin’s Halving Is Not Priced In

A final consideration is that there are so many different factors at play that the halving won’t impact price until weeks or months down the line. Cryptocurrency analyst Alex Krüger argues that the halving was not priced in as of January but may become priced in over time.

On May 08, days before the halving, Krüger posted a bold “price prediction” for Bitcoin:

Predictions of this nature are not uncommon in the Bitcoin space. The point Krüger was making, however, is that such predictions are easily made, clarifying that his prediction was both a joke and “an effort to illustrate how easy it is to justify any bias and target from a chart.” The analysis was a jab at the myriad efforts to set specific price targets for Bitcoin, many of which focus on a specific set of factors rather than the full picture.

For example, while the supply reduction is predetermined, the behavior of the miners is not. They could choose to withhold their freshly minted Bitcoin or sell more than usual depending on where BTC’s price goes, and this could theoretically affect supply and price action.

This adds an element of unpredictability to the mix. Krüger argues that even with the halving priced in later, other factors will make it difficult to anticipate price action. Beyond outside events moving the market, the miners in charge of the supply of Bitcoin may react to the halving in any number of ways, and the market may then react to these events. For example, the coronavirus impact on Bitcoin mining supply chains may have led to a drop in the Bitcoin hashrate, potentially impacting the date at which the halving actually took place.

Consider this hypothetical: let’s imagine that the halving is priced in and Bitcoin has found its market value for now. The halving has taken place, and miner rewards are halved with no corresponding compensation for their efforts.

Some of them may speculate that Bitcoin will rise in the future and stockpile their inventories, perhaps mining at a loss for a time. This sudden, genuinely unforeseen lack of supply could theoretically impact BTC price movements. Equally, the market could react negatively to the idea of miners throttling price action, pressuring the price to fall again.

There are many different game-theoretic elements at play when considering the question of halving and whether it’s priced in. In the end, its impact may not be as monumental an event as some people think it will be.

Does The Halving Matter?

The different theories on the halving raise valid points. However, at the end of the day, the market is determined by more factors than this single event. While supply may be affected by the halving, this could be fully counteracted by the miners. A shorter supply may lead to higher prices, but other unforeseen events could lead to even higher prices or even lower prices.

As more halvings happen every four years, it’s possible that halving events may become increasingly priced in, as the supply will diminish steadily over time. We can’t say that this will result in higher or lower prices in the short-term, and, as many theorists have pointed out, these small movements may simply be noise.

The halving’s impact may be worth monitoring, but trading edge can come from many places. The successful traders are those who learn about trading and find their own trading edge in a number of ways, rather than from one prediction alone.

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