On May 20, 2020, the Bitcoin “halving” or “halvening” event is scheduled to take place, where the production of Bitcoin will be cut by 50%. There is no cause for alarm though, since block halving has been ingrained into the Bitcoin code by Satoshi Nakamoto. It has happened before and will continue to occur every four years, until the 21 million BTC coins in existence are completely mined.
The basic economic principle states that lower supply and higher demand leads to price rise. The halving event will spur just that. When miners’ rewards are cut in half, the price of 1 BTC will go up. This is the reason why BTC price has been increasing consistently for some time now.
Did you know? About 85% of all Bitcoins would have already been mined by the time of the 2020 halving. This would mean that after the halving, only 3.15 million Bitcoins will be available for mining. That is like 0.0004 BTC per person on Earth, considering that there are 7,577,130,400 people on the planet, as of June 2019.
A Brief History of Halving
The first halving event took place on November 28, 2012, when BTC was worth somewhere around $11. That year, when the event took place, miners’ block reward dropped from 50 to 25 BTC. As a result, BTC price rose nearly 8,200% that year. Similarly, during the 18 months since the second halving in 2016, prices climbed 2,200%.
Of course, we cannot deny the presence of other factors that influence Bitcoin’s price, such as excessive media attention both in 2012 and 2017, leading to something of a “crypto bubble.” But the basic economic theory cannot be overlooked. Low supply means higher price; particularly, when BTC is turning out to be a safe-haven asset in this slowing global economy and is in demand.
Historically, the Bitcoin halving event has generated a bull run in the market, and economists expect that this time will be no different.
However, the world is less enamoured by cryptocurrencies today than it was at that time! Bitcoin’s long-term structural issues are evident, and its energy-intensive mining process (almost equivalent to the energy consumption of a developing country for a whole year) is also known. But a price hike could definitely be on the horizon, although it might be not in the league of the 2012 or 2016 surge.
What is Halving?
Unlike fiat currencies that can be created at will by Central Banks like the US Fed, Bank of England and Bank of Japan, Bitcoin supply is limited at 21 million. It is a deflationary asset. Every 10 minutes, miners solve complex equations to add a “block” of BTC transactions to the Bitcoin blockchain.
To use their expensive hardware and electricity that can light up an entire village, they get rewarded with new BTC coins, also known as “block rewards.” So, every 10 minutes, new BTC coins are added to the circulating supply. Currently, this stands at 12.5 BTC for generating 1 block of transaction.
Now, every 4 years, when 210,000 blocks or so have been generated, the block reward is cut into half. So, in 2020, the block reward will be cut to 6.25 BTC/block. The simple theory here is that BTC will become scarcer, and thus its price will increase.
How? Bitcoin halving will lead to two effects:
- Miners with low efficiency machines will pause and re-evaluate their operations. Many of them can simply give up or refuse to sell Bitcoins at a price anywhere below $10,000. In short, they will hodl BTC. No more hobbyists or small players in the game and definitely less selling pressure.
- Mining could get concentrated in the hands of international companies, who have access to powerful mining software and cheaper source of electricity.
Ultimately, it will depend on what BTC prices are at the time of halving. Will the price surge before the event be enough to cover 50% fewer coins in the market? All these factors are important to take note of. Moreover, block reward is just one aspect of miners’ profits. Profitability depends on other factors like the hashrate, mining difficulty, cost of electricity, pool fees and power consumption.
Did you know? Depending on where mining happens, there can be a dramatic difference in the cost of mining 1 BTC. For instance, mining is concentrated in a few areas where there are large sources of untapped renewable electricity like Canada, Sweden and Iran.
What can Traders Expect?
While some believe that the market has already factored in the event, others, like the Winklevoss Twins, are not sure. They maintain that the market never factors in this event, and a bullish run is expected as always.
Supply will be halved, and FOMO might creep in. The Bitcoin derivatives market definitely expects a surge in price activity and trading volumes, which is good for high-frequency BTC traders who might want to capitalise on the fluctuating crypto prices. For miners, on the other hand, this volatility will be a hindrance to the valuation of their BTC holdings. In the absence of price stability, predictability of investments could suffer.
Also, apart from scarcity, the price will be driven by the risks in the global economic climate, such as the ongoing Iran-US conflict, US Presidential impeachment and Brexit-related uncertainties, which will keep fiat investors on tenterhooks.
Experts believe that BTC could reach a price of $16,000 by the end of 2020.
An uptick in volatility is expected around the halving event. So, be prepared with proper risk management tools. The hashrate could be negative for the first few days after the event, since some speculators might sell their BTC holdings, while some miners could exit the network. In fact, Litecoin’s halving event in August 2019 led to a price decline and ultimately a decline in hashrate of 32.86%.
However, if the price increase is higher than expected, new miners may enter the network and have a positive influence on the hashrate.