Bitcoin halving is a scheduled event where the minting rate of new Bitcoins is reduced by 50%. On May 20th, the upcoming third Bitcoin halving 2020 will occur.
Although, Bitcoin hasn’t fared too well over the past week losing nearly 40% of its value in recent trading. Bitcoin halvings historically led to higher prices for crypto’s pioneer asset, leading many market participants to have a bullish bias for the event this year.
Bitcoin operates on a model of deflation meaning less Bitcoins will be made over time and eventually, the supply will stop. This is different from fiat currencies that use an inflationary model. Inflation is a model where central banks can print extra units of currency at will.
Bitcoins are generated whenever a “block” of transactions are solved by miners and added to the Bitcoin blockchain. This requires special hardware and loads of electricity.
In the return for solving blocks, miners are rewarded with new Bitcoins (BTC). These Bitcoins are awarded by the Bitcoin algorithm and known as the “block reward”.
The process occurs every 10 minutes, so basically, every 10 minutes new bitcoins are made.
Bitcoins first block reward was 50 BTC. This meant that in every 10 minutes a bitcoin miner had 50 bitcoins sent to their wallet for confirming a transaction.
The current block reward is only 12.5 BTC, due to the block reward being cut in half (or halved), twice. This feature is programmed into Bitcoin and occurs every 4 years (210,000 blocks).
This will continue until the last Bitcoin (BTC) is mined in the year 2140.
Timeline of Events
Genesis Block: January 3, 2009 (50 BTC)
November 28, 2012 (25 BTC)
July 9, 2016 (12.5 BTC)
May 2020 (6.25 BTC)
2024 (3.125 BTC)
2028 (1.5625 BTC)
How The Halving Will Affect Bitcoin Price
Halving has already occurred twice, each time boosting Bitcoins price by at least 10x. Halvings have proven to be bullish for Bitcoin in the past. However, will history repeat itself?
Block reward halving had positive long term effects on the price of bitcoin. There are many theories as to why this happens but the simplest reason is supply and demand.
When fewer bitcoins are being generated, this increased scarcity makes them more valuable.
Bitcoin miners use high-spec computers to compete against other machines in the crypto network, racing to add new “blocks” to the blockchain ledger that underpins the cryptocurrency.
They are rewarded with a set number of bitcoin, currently at 12.5. At current rates of block creation, the next halving will take place in May, when the number will drop to 6.25.
In the one-year period after the two previous halvings, in November 2012 and July 2016, bitcoin rose around by 80 times and four times respectively.
A block reward halving is a mechanism that is activated once every four years on the Bitcoin network that reduces the rate in which new BTC is mined.
Halvings should eventually lead to an increase in the price of bitcoin, as less BTC flows into the market approaching its 21 million cap.
The below chart shows similarities in the market structures between the previous market cycle and the current, similarities that a twitter user suggests adds credibility to his bullish argument:
This is also holding up nicely and shows how this particular part of the marketcycle is "sideways" and therefor both hard to buy and hard to hold. Im writing these posts to show you, but also to remind my self not sell any. I actually added to my stack this Friday. pic.twitter.com/VIG2a6OZ8q — Polar Hunt (@polar_hunt) March 1, 2020
However, because halvings are anticipated years in advance by both investors and miners, whether bitcoin prices in halvings prior to the events occur remains unclear.
After the first halving in 2012, Bitcoin reached a record high of $1,000 by November 2013. After the second halving in 2016, Bitcoin took off again and reached its record high of $20,089 on December 18, 2017. Then the price dropped. However, in February of 2019, Bitcoin started to grow slowly as well as the number of its transactions.
In the stock market, a supply decline with demand remaining at the same level leads to higher prices. Bitcoin halving impact is almost the same: when the number of new coins is reduced by half and demand remains unchanged, so a deficit forms over time. It is logical that the Bitcoin exchange rate should then begin to rise.
A more significant part of the crypto community, having taken into consideration the previous Bitcoin exchange rate history, expects that the BTC halving in 2020 will bring about the next active bull market period. It will allow Bitcoin to hit new heights.
However, there exist other opinions on this subject. There’s still the question about how the Bitcoin price will behave, and when, if it will rise. The critical point is the continuous growth of the Bitcoin demand, but it has to be noted that the real volume of Bitcoin sale and purchase is not so easy to track.
It is believed that the reward halving makes mining unprofitable and can make many people quit. Judging by the previous periods, it can be noticed that sooner or later after the halving, the following price increase will balance the market out, permitting miners to continue a profit-making, despite the halved reward.
Jason Williams, Morgan Creek Digital co-founder, shares the opinion that the forthcoming bitcoin halving will not affect the bitcoin price:
Unpopular Opinion – Bitcoin halving in May 2020 won’t do anything to the price. It will be a non-event. — JWilliamsFstmed (@JWilliamsFstmed) December 1, 2019
While the Bitcoin halving is essential to traders and investors, it is significantly more critical to miners.
After the halving, miners who don’t find it profitable to mine anymore will give up. Most miners will continue to mine and will only sell their bitcoins at a profitable rate, thus increasing Bitcoin price.
Due to low barrier of entry, mining is barely a profitable activity, as a perfectly competitive market does not allow for large margins.
If rewards become significantly more valuable, then new entrants will join the market in the search for larger profits. New entrants increase the overall mining difficulty, thereby reducing Bitcoin mining’s profitability.
When profits are too low, miners will eventually leave the market because they are operating at a loss. Entrants leaving the market will cause the overall network to decrease in difficulty while increasing profitability.