It has been a highly volatile week for Bitcoin as the flagship cryptocurrency has taken a huge dive a day before the highly anticipated third halving. The price of BTC was soaring last week with the cryptocurrency shooting across $10,000 for a brief period. According to analysts, this move was fuelled by the notion that BTC is set for a Bull Run post halving.
Why did the price tank?
However, BTC saw a massive sell-off over the weekend and the steep correction saw its price drop as low as $8100. In just an hour, BTC dropped 9% after it failed to break past the resistance at $10,200. The $10,200-$10,500 region has always been acting as a significant resistance level for the flagship crypto.
According to Rich Rosenblum, co-head of trading at Hong Kong-based crypto market maker GSR:
“The move back down to $8,000 wasn’t a big surprise, it’s likely that we’re going to see increased volatility through May, with the pandemic, ongoing stimulus measures and the halving.”
According to some analysts, the drop was the result of high volatility on platforms trading BTC derivatives products. The Chicago Mercantile Exchange (CME) saw record high open interest, while Deribit options contract recorded all-time-high (ATH) trading volume.
As new traders race to buy Bitcoin, it opens up a room for existing BTC holders and whales to sell their holdings and take profits. The cumulative open interest for Bitcoin, of the four biggest derivatives exchanges crashed significantly.
Open interest is the total number of Buy and Sell contracts open at a given period of time. A declining open interest is a sign of huge selling pressure. The ‘funding rate’ metric turning negative is another sign that the majority of the market is holding short positions and indicates a future downtrend.
This isn’t something new as prior to this; the 2016 halving also saw the price of Bitcoin drop 30% before halving.
What to expect after Halving?
One of the key reasons why halvings are associated with a price surge is due to the fact that cutting mining rewards into half further increases the scarcity of Bitcoin while the cryptocurrency continues to garner the attention of more and more investors.
As of now, 1800 BTC is being produced every 24 hours and the number will drop down to 900 post halving.
Historically, the price of Bitcoin has always fared extremely well after a mining reward halving event. The halving has now become less of an event in the eyes of investors, and its impact on the price of Bitcoin is even more confusing and uncertain.
While BTC has previously hit new all-time-highs post halving, it’s difficult to estimate how long it will take before we reach such a price point. The first halving in 2012 saw BTC touch new highs 12 months after the halving, while the second halving in 2016 saw the price reach an ATH 18 months later.
According to Jose Llisterri, co-founder of cryptocurrency derivatives exchange Interdax, this time we could see even longer times. He said:
“If we have progressively longer cycles for bitcoin, we could see a fresh high 18-24 months after May, meaning Bitcoin could reach a new all-time high between October 2021 and May 2022.”
Another factor affecting the price of Bitcoin post halving could be the COVID-19 crisis. As we have seen previously, safe-haven assets like Gold and Bitcoin have failed to perform amidst the crisis. While Gold managed to sustain the damages, BTC took a massive hit.
Hence, analysts have mixed feelings on how this pandemic could affect Bitcoin over the coming months. Some believe Bitcoin’s price will be positively impacted, while others believe the pandemic could be an obstacle on the road to previous ATH.
Bitcoin bullish sentiment over the long run
However, while there’s no certainty about a bull run just after halving, Rafael Schultze-Kraft, Co-Founder and CTO of Berlin-based on-chain market intelligence startup Glassnode claims that BTC’s fundamentals show bullish signs and the overall network is seeing massive growth.
In a series of tweets, Kraft shared in-depth metrics of how “Network fundamentals are compelling” and expressed that he is bullish on the long term. He wrote:
As of now, Bitcoin halving is playing a major role in promoting the entire cryptocurrency industry as a whole. It is yet to be seen what happens after the halving.