Bitcoin Halving Math

In the last week’s newsletter I spoke about the $600 to $800 sweet spot:

“If we stay in this price range post-halving then the rewards are similar to the levels we had pre-halving. A price of $300 to $400 pre-halving dissuades new mining operations. Cutting that subsidy in half, that leads to an equilibrium of $600 to $800. Below $600 miners start exiting, above $800 miners start entering. The question is how many miners would exit at a price around $600. If this is a non-trivial percentage of the network, that could cause the price to decline quickly. The hash rate would drop, blocks would take longer, confidence would decline, and that would lead to a sharp price correction.”

The baseline case for halving is that it will have no impact on the Bitcoin assuming the price remains in the sweet spot. I don’t see any upward pressure on the price due to the block reward being halved. However, there is considerable downside risk for large holders of Bitcoin.

No one knows whether the current rally will last through the summer. If the price begins to leak lower, the risk of unprofitable miners shutting down operations grows after the halving. It is prudent for large holders of Bitcoin to protect against this downside scenario.

We will know by the end of August if the halving has pushed a significant percentage of miners to cease operations. Therefore locking in the USD value of your Bitcoin holdings today while the price is high, is a prudent strategy to avoid this event risk.

The BitMEX Bitcoin / USD swap, XBTUSD, should be sold to protect the USD value of your Bitcoin. Each contract is worth $1 of Bitcoin. If you own $10,000 worth of Bitcoin, you sell 10,000 XBTUSD contracts. The profit and loss is in Bitcoin, but the amount of Bitcoin you make or lose will maintain a constant value of $1 per contract.

XBTUSD does not have an expiry date. Sell XBTUSD today, and after the dust settles buy it back to resume your long Bitcoin exposure. Hedging is never fun, but the downside risk is not trivial.