What is Halving
As part of Bitcoin’s coin issuance, miners are rewarded a certain amount of bitcoins whenever a block is produced (approximately every 10 minutes). When Bitcoin first started, 50 Bitcoins per block were given as a reward to miners.
After every 210,000 blocks are mined (approximately every 4 years), the block reward halves and will keep on halving until the block reward per block becomes 0 (approximately by year 2140). As of now, the block reward is 12.5 coins per block and will decrease to 6.25 coins per block post halving .
Seeing as the maximum supply cap for Bitcoin is 21 million, halving the block reward means that it will take longer for all Bitcoin to enter circulation.
In 2012, when the first 210,000 blocks were mined the reward dropped to 25 bitcoin per block. This automatically reduces the available supply to miners and they now have to provide more power to perform the same amount of work while competing among other miners for each block. This is because along with the distribution rate being halved the difficulty of solving the mining algorithms is doubled.
In July of 2016, Bitcoin experienced it’s second halving at the 420,000th block dropping the reward to 12.5 bitcoin every 10 minutes. At the time of writing, the next halving is expected to occur around 12th May of 2020.
This also means that less and less new Bitcoin will be created over time and due to its limited supply — Bitcoin will continue to become increasingly scarce.
And scarcity enhances value.
Why Do Halvings Matter so Much
If you’ve been involved with Bitcoin or have Googled it in recent times you’ll notice a trend of people referencing the halving. With the 630,000th block scheduled for mid-May 2020 the difficulty to mine bitcoin will double pushing a lot of miners out of profitability. The inflation rate will also reduce to 6.25 Bitcoin every 10 minutes, so each miner will now have a reduced supply of Bitcoin coming in. This will cause a natural reduction in available supply to the market. Assuming miners sell 50% of their Bitcoin to cover costs and keep the other 50% then the available new supply available on exchange markets will also drop in half. They will also have to sell the half they are receiving at double the cost to mine in order to maintain the same margins.
A doubling of the power required to mine each block is an ideology meant to help sustain and scale a Blockchain. Early adopters are rewarded greater for supporting a chain that is in it’s infancy. Once the chain matures it reduces its inflation rate in a direct attempt to bolster price and give those with vested interest more reasons to keep supporting the growth and scalability of the network.
What Impacts Will the Halving Have on Price?
Bitcoin’s price is tied to fundamental economic theory of how free markets work. The two primary factors that affect price are supply and demand. Assuming demand stays constant if supply reduces then the price will go up. If supply stays the same and demand goes up then the price will go up.
Based on the last section we know that the Bitcoin halving is going to reduce the available supply to the market. This, based on the theory of supply-demand should have a long term positive impact on price. Demand, however, affects the rate at which price inflates and deflates at a much more dramatic speed.
With the global tensions skyrocketing, Covid19 pandemic, the US/China trade war, and multiple developing countries’ economies collapsing (Turkey, Argentina, Venezuela), there has been more interest in Bitcoin and digital assets as an alternative form of reserving wealth not tied to the political ecosystem of one’s country. This is a potential increase in demand as digital assets are introduced as solutions to the people of the world as an alternative.
But since humans and their demands are fickle, let’s ignore it for now and focus on the historical impact of previous halvings on price.
Based on the chart below we can see a pattern that occurs around each halving. Bitcoin halves (in this case we will reference the genesis block as an event equivalent to a halving) and shortly after appreciates into a bubble, retraces into a correction, then remains fairly stable before repeating the cycle.
Let’s tie what we learned to this by looking at the halving in late 2012 as an example. Bitcoin halved and now miners were receiving 25 coins per block rather than the 50 they were before. People mining bitcoin using their everyday computers were almost entirely pushed out of relevance and now you needed a small data room to generate real profit. With this reduction in supply we see an uptick of almost 100x in price within a year.
By taking these examples as reference we can draw the conclusion that when the halving occurs in next around 12 days we should see, at minimum, a retest of the previous maximum price within one year of the event as long as demand stay relatively constant. An increase in demand could cause the “bubble” phase of growth to far exceed what was seen after the halving in 2016.
Key takeaways after comparing both Halvings
1. The Bitcoin Halving is a key catalyst to beginning a new Bitcoin bull market
Historically, the Bitcoin Halving has been a key catalyst in propelling Bitcoin into a new bull market.
Bitcoin’s price appreciates both leading up to the Halving as well as many months after the Halving has taken place.
In fact, Bitcoin has reached a new All-Time High as a result of the Halving.
But it is many months after the Halving that this new All-Time High in Bitcoin’s price is set.
2. Bitcoin has rallied between 12,000%-13,000% in each of its Halvings to date
There are similarities in Bitcoin’s price growth across both Halvings.
Let’s first consider Halving #1.
It took Bitcoin 513 days to rally as much as 13,304% from its pre-Halving bottom of $2.01 to its post-Halving top of $270.94.
Now let’s look at Halving #2.
It took Bitcoin 1068 days to rally as much as 12,168% from its pre-Halving bottom of $164.01 to its post-Halving top of $20,074.04.
The similarity across both Halvings is that Bitcoin rallied approximately 12,000–13,000% from the bottom of the pre-Halving bear market to the top of the post-Halving bull market.
But a crucial difference is that it took Bitcoin twice as long to experience that similar growth around the second Halving period (1067 days compared to the 513 days around Halving #1).
How could Bitcoin’s Third Halving affect Bitcoin’s price?
In order to answer this question, there is nothing better than to go back to the basics and rely on the famous law of supply and demand.
This law alone is an obvious reason why Bitcoin price will soar in the months following the third Halving.
A quick look at the evolution of the Bitcoin price after the two previous Halvings in 2012 and 2016 reinforces this conviction.
The Law of Supply and Demand
The law of supply and demand is an economic model used to determine the price of an asset in a market.
This law explains that the unit price of an asset will vary until an equilibrium point is found where the quantity demanded will be equal to the quantity supplied.
This law of supply and demand will therefore lead to an economic equilibrium for the price of an asset as well as the volume of trade.
An existing asset in limited quantity for which demand would be strong would necessarily see its price increase if we stick to this law.
Indeed, strong demand from buyers would allow sellers to sell at a higher price.
The Big Question Is the Increasing Demand for Bitcoin
We now need to focus on the demand side of this law.
The big question for the coming months and years is the increasing demand for Bitcoin.
Again reinforcing some of the points we discussed before on the demand side, we know that the world is set to become increasingly unstable economically and politically in the months and years ahead.
Coronavirus is becoming a global health crisis and the resulting economic difficulties in China are likely to affect most of the world’s major economic powers in 2020.
The economic crisis that has been expected for the past ten years will come sooner or later, so it could well be in 2020 or 2021.
Tensions between the United States and Iran have never been so high. The risk of war between the two countries has never been greater than since the beginning of 2020.
The situation between the United States and North Korea eased in 2019, but this is by no means final because the substance of the problem is still unresolved.
The trade war between the United States and China is not yet completely over.
The more than delicate situations in Venezuela, Zimbabwe, Argentina or even Russia will also reinforce this global instability.
This instability will encourage a greater demand for Bitcoin.
In this year of Halving, Bitcoin will get much more media exposure.
We can already feel the excitement around Bitcoin that is reminiscent of 2017.
The mere fact that Bitcoin broke the $10K mark for the third time in its history at the beginning of February 2020 had a strong media impact.
The result is immediate with more and more people asking questions about Bitcoin in order to acquire some.
And all this is nothing compared to the waves of sign-ups on a platform like Coinbase, which are likely to happen as soon as the price of Bitcoin rises above $15K, and then $20K.
As the price of Bitcoin increases, so will the media coverage, which will play a role in increasing the demand for Bitcoin.
Finally, more and more people are becoming interested in how money works. They understand that there is something wrong with the current monetary and financial system.
For a growing number of people, the result is a strong desire to discover something else.
All this will have a positive impact on the demand for Bitcoin which remains the leading cryptocurrency bought by those entering the market.
Scarcity of Supply Will Combine With Rising Demand to Produce a Shock in the Price of Bitcoin
The already limited supply of Bitcoin will become even scarcer as of May 12, 2020. The daily creation of new Bitcoins will decrease from 1800 to 900.
With constant demand, this scarcity of new Bitcoins will inevitably lead to a price increase.
This price increase will be necessary so that an equilibrium price is once again found between sellers and buyers.
Everyone has been waiting for the Halving for many months now.
This high expectation around third Bitcoin Halving will result in a lot of media coverage.
As the price of Bitcoin moves closer to its all-time high at the end of 2017, the excitement around Bitcoin will intensify.
This will create a virtuous circle that will make the price of Bitcoin soar.
Thus, the more people talk about Bitcoin, the more new people will seek to buy Bitcoin. The new money that will come on the market will help the price of Bitcoin to rise again.
The amount of Bitcoin that gets created every 10 minutes gets cut in half every four years.
This is why the Bitcoin Halving has figured as an important catalyst that spurs significant growth in Bitcoin’s price.
It is an event that guarantees legitimate scarcity.
And the exponential appreciation in Bitcoin’s price is a testament to a very important principle in financial markets — scarcity enhances value.
It is important to develop an understanding as well as the ability to appreciate, with a level-head, the historical significance of the Bitcoin Halving effect on Bitcoin’s price.
After all, Bitcoin’s historical price action has shown the Bitcoin Halving to be a unique type of event that tends to make investors money — not only heading in to the Halving but many months after it as well.
The Bitcoin Halving is a simple narrative with high probability profits attached to it.
Of course, past performance doesn’t guarantee future outcomes.