As the Bitcoin halving clock ticks closer to the May 10 D-day, we take a look at what this monumental event will mean for the largest crytocurrency by market cap amid the Covid-19 pandemic.
First, a few definitions:
What is the Bitcoin Halving (or Halvening)?
New bitcoins are issued by the Bitcoin network every 10 minutes. For the first four years of Bitcoin’s existence, the amount of new bitcoins issued every 10 minutes was 50.
Every four years, this number is cut in half. The day the amount halves is called a “halving” or “halvening”.
In 2012, the amount of new bitcoins issued every 10 minutes dropped from 50 bitcoins to 25. In 2016, it dropped from 25 to 12.5. Now, in the 2020 halving, it will drop from 12.5 to 6.25.
The halving happens every 210,000 blocks. The 2020 halving will happen on block 630,000. The 2024 halving will happen at block 840,000.
What is the Significance of the Bitcoin Halving Event?
The halving decreases the amount of new bitcoins generated per block. This means the supply of new bitcoins is lower.
In normal markets, lower supply with steady demand usually leads to higher prices. Since the halving reduces the supply of new bitcoins, and demand usually remains steady, the halving has usually preceded some of Bitcoin’s largest runs.
Here is a look at previous halvings and their effects on Bitcoin prices 150 days later:
The November 28th block halving was the first halving:
- New BTC Per Block Before: 50 BTC per block
- New BTC Per Block After: 25 BTC per block
- Price on Halving Day: $12.35
- Price 150 Days Later: $127.00
The second halving occurred on July 9th, 2016:
- New BTC Per Block Before: 25 BTC per block
- New BTC Per Block After: 12.5 BTC per block
- Price on Halving Day: $650.63
- Price 150 Days Later: $758.81
Each halving lowers Bitcoin’s inflation rate. As shown in the image below, note how the price jumps significantly after each halving:
Bitcoin was designed as a deflationary currency. Like gold, the premise is that over time, the issuance of bitcoins will decrease and thus become scarcer over time. As bitcoins become scarcer and if demand for them increases over time, Bitcoin can be used as a hedge against inflation as the price, guided by price equilibrium is bound to increase.
On the flip side, fiat currencies (like the US dollar), inflate over time as its monetary supply increases, leading to a decrease in purchasing power. This is known as monetary debasement by inflation.
Will Miners Stop Mining with a Reduced Bitcoin Reward?
You see, while many always speculate that miners will shut down after the halving, the reality is, most miners are very smart and price in the halving, so they don’t end up shutting down any miners.
In a perfect market, the USD/BTC price would have simply doubled, to compensate for half as much bitcoin being rewarded. This logically would make sense, since the cost of mining isn’t changing significantly, and without a doubling of price miners, are instantly seeing their revenue cut in half.
But we all know markets aren’t perfect. While we don’t have all the answers to this, the most logical conclusion is that any pricing effect from the halving has most likely already happened due to the market anticipating it, and is probably one of the main reason for the huge price increase over the past couple of months.
If you would like to learn more about the upcoming Bitcoin halving and its impact on the cryptocurrency space, join us for this exciting discussion on April 23rd, 2020:
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