You’ve probably heard me talk about the Bitcoin halving in some of my videos and posts here on this blog and now that this event approaches fast, I think it’s time to give you an update on it and explain what it’s all about.
What is the Bitcoin Halving
The Bitcoin halving is an event that is programmed in its base code and it cuts in half the production of bitcoin.
This is intended as a deflationary measure to protect the coin from losing value. It happens approximately every 4 years (every 210 100 blocks to be precise) and cuts the number of coins that are awarded for the mining of each block by half.
On average, every 10 minutes a new block is mined and added to the blockchain. Miners are using specialised software and hardware to perform computational work and validate transactions that are recorded in each block for which they receive a mining reward as a compensation.
The mining reward started as being 50 bitcoins per block and has been reducing ever since with each halving. This is how new coins are created and these mining rewards are reduced every 4 years until the total cap of 21 million coins is reached (this will happen in 2140 according to my estimate).
How many halvings so far?
The first halving occurred in November 2012 when the block reward was halved from 50 BTC to 25 BTC.
The second halving occurred in July 2016 when the block reward was halved from 25 BTC to 12.5 BTC. This is currently the mining reward that is received for mining a block (approximately every 10 minutes).
When is the next Bitcoin halving?
Expected Bitcoin halving date: May 14, 2020
Based on latest figures the next Bitcoin halving will be on May 14, 2020, when Bitcoin mines its 630,000th block. The date is an estimate because of fluctuations in Bitcoin block times. While Bitcoin’s target block time is 10 minutes, each individual block may take slightly less or more time to mine due to the variability of hash power being contributed to the network.
In May 2020 when Bitcoin is due to reach its 630,000th block, the block reward will be cut in half for the third time, reducing the production of new coins from 12.5 BTC to 6.25 BTC per block.
Why does the halving matter?
Bitcoin’s supply is fixed (capped) at 21 million coins.
By design these coins are not produced instantly and released in advance, but are being mined periodically with every block at a decreasing rate until the total cap is reached.
A key property of this decreasing issuance rate is that it slows down the amount of bitcoin that is released into circulation over time.
This way we can estimate that while the current Bitcoin supply is around 18 million, which is about 85% of the 21 million cap, Bitcoin will not reach its 21 million cap until 2140.
Bitcoin’s issuance rate and supply cap were implemented by Satoshi Nakamoto with specific intent in mind. The main reason why this is done, is to keep inflation under control.
One of the major faults of traditional (fiat) currencies controlled by central banks is that the banks can print as much of the currency as they choose to. If they print too much (and they often do), the ratio of supply and demand becomes disproportionate and the value of the currency drops which results in economical inflation (prices of goods go up due to the deflationary effect from printing more money).
In contrast to money, bitcoin was intended from the very start to simulate a commodity, like gold. There is a limited amount of gold in the world and as a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over 6000 years. In a similar manner, Satoshi intended that Bitcoin do the same.
The halving matters because it provides predictability about Bitcoin’s issuance rate and enforces Bitcoin’s scarcity. Scarcity in fact is one of the core value propositions of the asset. It is this predictable issuance rate and scarcity that lead many to compare Bitcoin to gold, one of the oldest and scarcest monetary metals in the world.
On the other hand, the halving also matters for Bitcoin’s security. Miners receive bitcoin as a compensation for their work and this compensation is considered revenue for them. They have expenses to cover and as they receive bitcoin, they need to sell some of it in order to pay for their expenses. After each halving, miners receive half as many bitcoins in revenue and this is how the halving has implications on the security of the network. When miners are not motivated to maintain the network and keep mining new blocks, the number of miners becomes less, the hashrate drops and the network becomes less secure, more vulnerable to 51% attacks and hacks.
As time goes on, due to halvings, Bitcoin’s security will begin to rely more on transaction fees to compensate miners rather than newly issued bitcoins. Eventually, when Bitcoin reaches its 21 million cap, Bitcoin will be entirely secured by transaction fees.
How will the halving affect the price of bitcoin?
There’s been numerous speculations about how the halving will reflect in the price of bitcoin and I will share here my personal view.
From what I’ve experienced first hand during the last halving, this will be a turbulent time for the price as traders and speculators will use the event to their advantage.
Every time there’s a major event of this kind, market value should be expected to rise significantly. However, with more and more experienced traders on this market, we can expect a slightly different scenario. We can use the last halving of Bitcoin and the last halving of Litecoin as examples here because they both have similarities. I do believe that they paint a pattern that is most likely to be repeated.
In 2016 bitcoin’s price began jumping in the 2 months prior to the halving, reaching a peak three weeks before the event and then it began correcting (going down). At the time of the actual halving it had lost 20% from its peak and the downtrend continued for another few weeks, reaching a total -40% correction before it rallied upwards again.
Now, let’s take a look at the Litecoin’s latest halving which was last year. Again, we saw a price jump in the weeks prior to the halving but a huge drop in value at the time of the actual event and in the weeks after that, reaching a correction of -75%. Its value is still 50% down from the peak prior to the halving and this trend has been going on for over 9 months now.
Why is still happening?
Well, simply because everyone thinks that cutting production in half means that there’s half supply to cover the demand but in reality, the demand is not really increasing and the trading volume is not really changing so much, these coins have not found enough use-cases in the mainstream yet, so their value is driven largely by speculation and trading. Seasoned traders use these events to pump the price and sell in bulk at the peaks, after which they will accumulate again once the prices drop due to lack of buyers at the inflated prices.
This is also why I am quite confident that Bitcoin’s price will decrease after the halving (even if it’s just for a short while). This will be a healthy correction though and should not put you off. What you should remember is that no matter the short term corrections, these assets are still undervalued and their price appreciation over time will grow, so tighten your belts and enjoy the ride.
Some more about the historical Bitcoin Halvings
The first Bitcoin halving occurred on November 28, 2012. Going into the event, there were uncertainties around how Bitcoin would be affected, with many of the same hypotheses floating around that were stated above. Vitalik Buterin wrote one of the first pieces for Bitcoin Magazine around the potential implications. Although there was no immediate price impact, within 3 months of the halving Bitcoin’s price rose more than 174%, later rising more than 9100% to its cycle peak in December 2013.
The second Bitcoin halving occurred on July 9, 2016. With the backdrop of the first halving, speculators had some historical precedent for what to expect leading up to the 2016 halving. Nevertheless, uncertainty remained and there existed similar hypotheses on how the halving would affect the price of Bitcoin this time around. Initially, the halving passed without any major surprises and within 3 months the price of kept going down. However, a little over a year later the great 2017 bull market took off and Bitcoin’s price began to rise dramatically, ultimately rising more than 2,800% to its cycle peak in December 2017. This was a hyper bubble which resulted in a much-needed correction that lasted a little over a year.
With Bitcoin’s price already on the up, we can expect some more rallies in the coming weeks and then an immediate correction, possibly starting a few days before the actual halving. Time will tell if I’m right about this, don’t take this as a sell signal but as a general information and do more research.