The next bitcoin halving event is just around the corner, estimated to take place on May 11, 2020. Crypto enthusiasts, profiteers, and the casual observer can’t help but ask what it all means. To answer that question, it’s important to examine what the bitcoin halving event actually is and why it is programmed into the Bitcoin network in the first place.
It’s also important to understand that bitcoin is not the only cryptocurrency that incorporates halving events into its network. There are many versions of halving events which, in a broader sense, are supply and demand controls designed to address inflation and economics in innovative ways.
Let’s explore the bitcoin halving and its implications on both supply, demand, price, and market sentiment. Halving affects all of them.
What is bitcoin halving?
Bitcoin is produced by miners, who earn a defined amount of bitcoin whenever they produce a block. When bitcoin first started, miners earned 50 bitcoins per block. Halving is the reduction of that reward by one half after every 210,000 mined blocks. The current reward is 12.5 coins per block, which will decrease to 6.25 coins per block at the halving event.
As the reward decreases, so does the global bitcoin supply as miners get less currency per unit of effort. The mining of bitcoin resembles the mining of a dwindling supply of a precious metal such as gold. Eventually, there will be no earnings at all for mining bitcoin (although the breakeven point of mining energy cost matching profit will arrive long before that).
The bitcoin halving event is preprogrammed and built into the Bitcoin network. It creates scarcity to control inflation in a predetermined fashion.
Inflation Is Why Cryptocurrencies Implement Halving Events
Some governments have the power to print more national currency as their leaders see fit, and increasing the supply of money can be seen as a positive until the demand for the currency is low. This can lead to inflation, as the real value of that currency drops. Outside agents might become reluctant to do business with countries who purchase goods or services with an inflationary currency, and their citizens could have to spend more money to acquire basic commodities and goods necessary for daily life.
Venezuela is one example of a country that is experiencing hyperinflation and economic crisis due to the mass-printing of money to account for a growing national debt. Some citizens are fleeing Venezuela as they realize the money they worked so hard to earn is no longer worth nearly as much as it was when they earned it. The inflation rate is drastic with no immediate end in sight (although we at ShapeShift do have a solution in mind).
Bitcoin’s built-in halving mechanism causes the new supply of bitcoin entering the market to be cut in half approximately every four years. Bitcoin supply will therefore slow and eventually end, so steady demand will allow it to maintain its value.
Past Bitcoin Halving Events
The 2020 halving event will not be the first to occur on the Bitcoin network. Past halving events have eventually led to increases in the price of bitcoin at different times, for different reasons.
The first halving event occurred on November 28, 2012. It didn’t have an immediate impact on the price but by the end of 2013, bitcoin’s price had increased by more than 9,100%. The earliest price jump after that halving occurred within 90 days and saw the price nearly triple.
The second halving event in bitcoin’s history was triggered on July 9, 2016, and the price of bitcoin dropped 5% within 90 days. It wasn’t until the end of 2017 that bitcoin and other cryptocurrencies reached their highest all-time values.
One thing that is different in 2020 is that the blockchain industry has gained more traction. Bitcoin is much more readily available to the average consumer today than it was in 2012 or even 2016. It is also more widely known and talked about in mainstream media, which gives beginners more information. Investors are much more comfortable with the idea of cryptocurrency now than they were in the past. It’s difficult to predict what will happen to the price of bitcoin after the next halving event, anticipated in May of this year.
Is halving good for bitcoin?
There are three schools of thought about whether or not the bitcoin halving event is positive or negative. Enthusiasts naturally believe that the halving event will decrease the supply of new bitcoins entering the market (which is good) and ultimately drive up the price of bitcoins. Others believe that the halving event will not matter in the long run nearly as much as other fundamental factors and market sentiment. Then of course, there is a third group that thinks the bitcoin halving event will harm the network and the price. Let’s take a look at all three perspectives more closely.
The Case for Bitcoin Increasing in Price
This argument mostly comes from proponents of the stock-to-flow ratio. Stock-to-flow weighs the total supply of bitcoins versus the new supply. Since the new supply will make up smaller and smaller percentages of the total supply as halving events occur, proponents of the stock-to-flow ratio argue that the price should go up. The fact that the anticipated decrease of the new supply is an event known to the public means that bidding the price of bitcoin up is something the general public can participate in months before the halving event actually happens.
The Case for Bitcoin Price Being Unaffected
Some investors and experts argue that halving events are only one factor among a multitude of factors that determine bitcoin’s price at any given time. This is true, as the market is always gauging fundamental value and technical analysis at every moment. This argument again posits that everybody knows about the halving event in advance. In free markets, investors (in this case, those interested in bitcoin) should have access to the knowledge, which makes the market more efficient.
The Case for Bitcoin Price Going Down
Miners earn less for their work after a halving event. Larger miners might be able to swallow the increased costs and still turn a profit, but smaller ones will have trouble keeping up. This means that they may have to sell new coins for less than anticipated, driving the price down for all.
When is the bitcoin halving event?
Bitcoin’s third halving event will occur when block number 630,000 is successfully mined. The exact date is uncertain but data extrapolation indicates that the halving event will occur on May 11. The exact time and date depend on the overall performance of the Bitcoin network. While the network is designed to mine a block every ten minutes, this timing can vary, depending on the amount and consistency of hash power driving the network at any given moment.
What does this halving event mean for bitcoin’s future?
Many believe that bitcoin’s price has appreciated over the last several months partly because the upcoming halving event has already been accounted for. Even if the price drops after halving, one offsetting benefit may be that more people could become aware of bitcoin and blockchains simply because crypto projects might be prominently featured in the news again.
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These blog posts serve as a general overview of the crypto industry. No content in these blog posts or on the ShapeShift website constitutes purchase or investment advice. Digital assets are experimental, volatile and risky, and we therefore recommend that you seek professional advice from a qualified advisor before making any financial decision.
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