The price of Bitcoin (BTC) has dropped right before and after the two previous block-reward halving events in 2012 and 2016. BTC is demonstrating a similar trend approaching the May 2020 halving.

A theory has emerged that miners tend to sell before the halving to accumulate enough Bitcoin to finance their operations for many months after the halving occurs, allowing them to hold onto the majority of Bitcoin they mine.

Theoretically, such a practice would be beneficial for miners because the break-even price of Bitcoin mining spikes significantly when a block-reward halving occurs. According to James Todaro, head of research at TradeBlock, the break-even price of Bitcoin mining is expected to surge from $7,000 to anywhere between $12,000 and $15,000 after the halving.

“Following the Bitcoin halving, miners' estimated breakeven costs will rise from ~$7,000 today to ~$12,000–15,000 per BTC after. I would not be surprised if we see Bitcoin prices rise above these levels so that miners remain profitable.”

Because the halving drops the amount of BTC that is mined as Bitcoin approaches its fixed supply of 21 million, miners will earn less BTC after the halving for performing the same work. If the Bitcoin price does not increase substantially after the halving, and if the difficulty of mining remains put, miners will see a higher break-even price with similar revenues as before.

For that reason, it would make sense for big mining centers to accumulate large amounts of capital before the halving to finance their operations in advance in case the price of Bitcoin does not increase right away after the halving.

So, what do we have?

Speaking to Cointelegraph, Alejandro De La Torre, vice president of mining pool Poolin, explained that there are two types of mining companies:

“Some mining farms are highly sophisticated operations with the teams having many years of experience in data centers and finance. These mining farms usually hedge their risk in various ways. You have also mining farms that have been at it for years, these have stocked up massive amounts of coins and expanded their operations further, these farms tend to be huge and usually can withstand a significant decrease in price.”

Simply put, while there are mining firms with complicated financial strategies, there are also large centers that have accumulated a significant amount of Bitcoin over time to be able to cover expenses for longer periods of time. In May 2019, Brian Kelly, the CEO of investment firm BKCM, said that many miners have sold enough Bitcoin to get through the next 12 months:

“I've talked to a lot of miners around the world, a lot of them have said they have sold enough Bitcoin to get us through the next year or so and we are going to hoard Bitcoin at this point in time and we are not going to sell it and the supply of Bitcoin will get cut in half. Just real simple economics: lots of demand hitting little supply, price goes higher.”

Miners and large sellers tend to trade Bitcoin in the over-the-counter market. The price of Bitcoin in the cryptocurrency exchange market takes some time to reflect the OTC market. After Kelly said that miners have sold large amounts of Bitcoin to finance their operations, the Bitcoin price proceeded to drop by around 18%, from $9,000 to $7,500, within the next several weeks.

Related: Half of Predictions Are Right Half the Time — BTC’s Halving Divides Opinions

For miners, it is less risky to obtain enough capital to last for 12 to 18 months after the halving, instead of maintaining strong momentum. In 2012 and 2016, the Bitcoin price consolidated before and after the halving, and it took around eight months for BTC to go on an extended rally.

For instance, the second block-reward halving in Bitcoin’s history occurred on July 9, 2016. Data from Bitfinex shows that Bitcoin’s price dropped from $683 to $572 over a period of 77 days after the halving occurred. Then, the Bitcoin price started to gradually recover over the next three months following the halving, entering a vertical rally beginning in March 2017.

How might Bitcoin perform in 2020?

So far in 2020, the price of Bitcoin has not shown an inverse correlation with stocks and gold. Due to the coronavirus outbreak across Asia, Europe and now the United States, investors have started to frantically sell all sorts of assets, regardless of their risk-on or risk-off nature. In the last two weeks, Bitcoin, stocks and gold have moved similarly, all reacting in the same way to macro events.

De La Torre told Cointelegraph that for now, there is insufficient evidence to claim that Bitcoin’s price has an inverse correlation with stocks or the broader financial market.

“This is a test of the theory that Bitcoin is a hedge against market instability. We tend to see yearly events where this theory is tested. There is conflicting historical data on this theory (sometimes the price increase sometimes not), the results I believe are still inconclusive.”

Other industry executives such as BitGo co-founder Ben Davenport said it is difficult to consider Bitcoin a safe-haven asset or a risk-on asset at this point:

“Bitcoin is neither a risk-on nor a risk-off asset at this point. It still marches to the beat of its own drum. The actions of whales and leveraged traders are far more meaningful than any macro concerns.”

The big impact coronavirus could have on Bitcoin is not necessarily on the price, but rather the supply chain of miners and mining manufacturers. The outbreak has made it difficult for many manufacturers worldwide across various industries to distribute products.

Considering that large mining centers depend on new mining equipment with improved specifications to vamp up their computing power to mine more BTC, De La Torre said that it could affect the Bitcoin network’s hash rate, to a small extent:

“This is more of a test of the mining manufacturers’ capabilities. The factories where all the parts are manufactured for these machines are in lock-down or are operating at a less than optimal capability. This will slow the production of mining rigs which in turn will affect the continued increase of the Bitcoin hash rate which then may cause some speculators to see this as a bearish signal.”

Currently, the hash rate of the Bitcoin network is at a record high and has consistently grown past all-time highs throughout the past two years. As such, it remains uncertain whether the slowdown in the production of new mining equipment would ever have a negative effect on the hash rate of the Bitcoin network.

Hash rate of Bitcoin has continued to rise throughout the past two years. Source: blockchain.com

However, if the hash rate of the Bitcoin network goes down, it would cost less to mine Bitcoin, bringing down the break-even price of mining BTC. When the break-even price goes down, it attracts more miners into the Bitcoin ecosystem, which ultimately leads to a recovery in the hash rate. De La Torre added on the matter:

“The Bitcoin hash rate is at the highest it's ever been. A drop, even a significant drop will most likely still be higher (in terms of hash rate) [...] than what it was this same time last year. Additionally, the network is working as intended and it is still the safest decentralized financial tool ever seen by human society.”

There are contrasting theories as to how the Bitcoin price would react to the halving. In 2012 and 2016, Bitcoin did not have a strong infrastructure to facilitate trades as it does in 2020. Even up to 2017, many exchanges were facing lots of technical issues, losing client funds with no insurance or backup funds in place.

It was not until 2019 that reputable custodians, futures markets and exchanges emerged. Thus, 2020 will be the first time Bitcoin faces a block-reward halving with an efficient market infrastructure in place, with some balance between retail traders and accredited or institutional investors.