The next Bitcoin halving event is coming up in May. With so much uncertainty surrounding financial markets thanks to the COVID-19 epidemic and the supply of Bitcoin about to cut down to 6.25 bitcoins per block, there is arguably no time more interesting in the world of cryptocurrencies.
With the price of Bitcoin bouncing around between $3,100 USD and $7,000 USD, sceptics, investors and enthusiasts are looking on trying to figure out what this all means for the long-term future of bitcoin, what investors should do right now, and whether those bullish will finally win over the most bearish detractors of cryptocurrency.
In order to figure out the most plausible answers to these questions, it’s important to first take a closer look at what the Bitcoin halving event really is, why it was programmed into the blockchain from the start and how that compares to government-backed money and competing cryptocurrencies.
In taking a look at this, it’s important to acknowledge that although Bitcoin is indeed the most valuable crypto currency in the world by market capitalization, it’s not the only digital currency that takes advantage of a halving event as a way to control supply, limit inflation and ultimately create a more scarce and valuable asset in the long run. There are different types of halving events and other projects incorporate them into their networks differently.
In a broad sense, it’s probably obvious that halving events are really just supply and demand controls designed to approach complex economics and the idea of inflation and innovative ways aimed at turning the finance world upside down and changing the way society views money and value forever.
While it’s certainly not easy to change the ideologies and habits of billions of people, the end goal of all this is to replace what fiat currencies and governments with centralized authorities have been doing to the financial and social economic freedom of the individual for centuries.
A trying time like this is a great opportunity for anybody really interested in the Bitcoin and blockchain revolution to learn more about not only the technology itself, but how the finer details and features of it’s impact both supply and demand, and the broader market sentiment of everybody watching the price go up and down from the sidelines. Whatever happens right before the halving event and right after will certainly have an impact on all of the above going forward, and the coronavirus might just be the catalyst that gets more and more people moving away from governments, banks and other centralized authorities.
The Bitcoin halving event is an event built into the Bitcoin network intentionally, ever since the blockchain launched in 2008. The intention of it is to create scarcity and it offers an interesting way to control inflation. It’s an approach that a fiat-based, government-backed currencies wouldn’t do, as their answer is often print more money, not take it away. The challenge for the people that make up a society and all levels of traditional government in handling money is that the powers that be can literally print as much money as they want. The world is witnessing that happening right before our eyes at the present moment as governments are lining up to bail out individuals who are losing their jobs or temporarily laid off because of coronavirus.
While it is definitely great for the government to step up in a time of need, rest assured as most of us witnessed in 2008, it is banks, governments, and billionaire hedge fund investors that most often benefit from these bailouts in the long run. Countries like Venezuela are proving that printing money doesn’t solve all problems. Hyperinflation can make societies crumble.
That’s why the halving event is so important. Not only is everything that takes place on the blockchain available to the public (unlike government money), but the supply is controlled in an algorithmic fashion that guarantees future demand.
So what is it? In order to explain that, it’s important to understand that transactions occurring on the Bitcoin blockchain are organized into blocks. Transactions are validated by miners. They confirm that transactions are genuine and when they do so it’s referred to as “mining blocks”. The network is set up to go through a halving event every 210,000 blocks and cuts the number of Bitcoin’s created on every block in half.
There have been two previous halving events in the history of Bitcoin. One occurred in 2012 and the second happened in 2016. While it is possible to estimate that block rewards will cut in half in May, it’s impossible to guess the exact date because it depends how fast miners are moving towards block number 210,000.
This first halving event occurred on November 28th of 2012. Remember that at this time the blockchain was only four years old and people weren’t exactly sure what the market would do as a result. Most investors and enthusiasts one with the simple answer that a decrease in supply would increase demand. Surprisingly there was no immediate impact on the price. It actually took several months before the market saw a spike. Within 90 days however, the price jumped up by 174%. And yet, just over a year after this halving event past, Bitcoin’s value is worth a staggering 9,100% more. Early adopters who gambled on this halving event definitely came out on top to say the least.
The 2016 halving event clearly represents the first time anybody had any historical data to refer to when it comes to understanding the impact halving events can have on the price of a cryptocurrency. Interested parties can lick their chops and wait on the sidelines patiently to try to time the market. By this time the brand name of Bitcoin was beginning to gain steam throughout mass media and popular culture in a way that it never had before. This halving event would also be the precursor to the Bitcoin boom that occurred at the end of 2017 and saw the price skyrocket to an all-time high and the mass media frenzy surrounding digital currencies finally grab hold of the world.
Even those not so enthusiastic about Bitcoin and its competitors will remember the boom because everybody was talking about it. But just because the halving event occurred in 2016, it doesn’t mean the boom itself happened right away.
In fact on this occasion, the price of Bitcoin actually dropped by 5% within the first 90 days after the halving that occurred on July 9, 2016. By the time December 2017 rolled around, Bitcoin’s price was up 2,800%. The price peaked at $19,891.
With all of the question marks surrounding the health of global citizens, the health of the economy as they live in, and of course the health of the cryptocurrency markets, investors may be asking themselves whether or not halving events are actually all that good for Bitcoin. Especially because this time around, mining companies and blockchain projects are far more heavily invested in what’s coming in the future than they were in 2012.
While the most popular view of an enthusiast that halving events are good seems to prevail over the general market sentiment in the long run, the fact that a decrease in supply increases demand is a far too simplistic argument to make when it comes to blockchain technology and the scarcity of digital assets.
In all there are actually three different arguments to be made about the broader impact of a halving event and what it does to a cryptocurrency. Enthusiasts say it’s a good thing, detractors actually believe it will kill the value of cryptocurrencies in the long run and anybody not sitting on either side of that fence is squarely in the middle.
The basic economic effects of supply and demand have already been discussed in this post several times. To dive a little deeper into why the Bitcoin halving event might affect the price positively, it’s important to understand stock-to-flow ratio. Whenever somebody discusses a ratio, they are talking about dividing one number into another number Stock-to-flow ratio considers the overall supply of bitcoins against the new supply. Since the number of coins making up that new supply shrinks over time (every halving event that passes makes that number smaller and smaller), the price is supposed to go up.
Since what happens on bitcoin’s blockchain’s public information and everybody gets to look at the ledger whenever they want, the theory is that investors can pile into Bitcoin in anticipation of the halving event and drive up the price to a new level that it will never reach below again.
The implications of a broader market downturn and COVID-19 notwithstanding, the idea that the price of Bitcoin will crash after the halving is the least popular, but there is still a somewhat valid theory behind it.
The theory is that while a bitcoin halving event will certainly lower the new supply of coins available, it will also mean that miners spending large amounts of money on hardware and electricity are going to get fewer fruits for their labour every time they mined a new block and get the corresponding reward paid out in bitcoins. If their costs keep rising, smaller miners won’t be able to handle their costs and be forced to either scale down their operations dramatically or accept a buyout by a bigger mining company. This is already happening. Decreasing the profitability of mining means less people are doing it and more people are trying to sell coins on a large scale to try to cover costs.
Keeping in mind that the current halving event coming up will cut the reward from 12.5 BTC down to 6.25 BTC, some smaller miners might be going out of business fairly soon.
The argument that this upcoming halving event might see the price of Bitcoin move sideways, or simply that the price of Bitcoin’s much more influenced by other factors is based on the efficient market hypothesis. The efficient market hypothesis says that in a free market where everybody has access to information, nobody has a distinct advantage. In the short term the price of Bitcoin might spike, but that’s just really people flooding it because of hearsay related to the halving. In the long-term, there is no special advantage because the investment value of something is always based on both technical and fundamental analysis in the long run.
While it’s impossible to know the exact date of the Bitcoin halving because it takes time for blocks of the mined and the speed of that is based on several different network factors, the estimated date for its third halving event ever is May 14, 2020. That’s the point at which block number 630,000 should be mined. Keeping in mind that there are only 21 million bitcoins to ever be mined, at the rate that halving events are currently passing by, it will take until the year 2140 for the last Bitcoin to go into circulation.
It seems as though nobody really knows how much the coronavirus is actually impacting the price. Just a few weeks before this writing, the price dip down from $11,000 to $3,100 USD in a relatively short amount of time. Yet now, experts, innovators and whale-sized investors say the up-and-down momentum of the price has nothing to do with the virus or the fact that governments are doling out trillions of dollars in financial aid to businesses and individuals alike.
The most likely outcome regardless of the current bearish market sentiment and the likelihood of a global recession, we will continue to see the value of taking a chance on Bitcoin and the price will rise as it has in previous halvings. Governments around the world are printing money at a record pace. It’s only a matter of time before the economic impact of these stimulus packages are outweighed by the inflationary effects of adding more money to circulation. Our prediction is that as time moves on, people will move towards a currency that is deflationary in supply, can not be manipulated or ‘printed’ and is not seizable. Bitcoin is exactly this.