BY GUEST COLUMNIST Marina Petrichenko (Crypto Marina)
Lots of you might know that a very important event for crypto and blockchain world is coming soon — the Bitcoin Block Halving- so today I am going to explain to you everything you need to know about it.
What does Bitcoin Block Halving mean ?
Let’s start from the beginning — what is actually Bitcoin Block Halving?
The term “halving” refers to a programmed-in event in bitcoin’s code, which reduces the reward per block mined by 50% every 4 years to control inflation. Following the upcoming halving, rewards issued will drop to 6.25 BTC from the current 12.5 BTC. The next Halving will be Bitcoin’s third and will take place on 12th of May 2020 ( 04:52:59 UTC ).
Seeing as the maximum supply cap for Bitcoin is 21 million, halving the block reward means that it will take longer for all Bitcoin to enter circulation.But this also means that less and less new Bitcoin will be created over time and due to its limited supply — Bitcoin will continue to become increasingly scarce. And scarcity enhances value.
Why is Bitcoin Block Halving happening at all? Who created it and for which reason?
Shortly after releasing the Bitcoin white paper, Nakamoto summarized the various ways their chosen monetary policy (the schedule by which miners receive block rewards) could play out, pondering the circumstances under which it could lead to deflation (when a currency’s purchasing power increases) or inflation (when the prices of goods and services purchasable with a currency increase).
Because Nakamoto couldn’t have known how many people would use the new online money (if anyone), they elaborated very little on why they chose the particular formula they did: “Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
Genius, isn’t it?!
Who controls the issuance of Bitcoin?
Actually this is the most magnificent thing about Bitcoin — nobody controls it. The network itself controls the issuance of Bitcoins, derived by consensus through all Bitcoin participants.
Ever since Bitcoin was first designed, the following consensus rules exist to this day:
- 21,000,000 Bitcoins to ever be produced
- Target of 10-minute block intervals
- Halving event occurring every 210,000 blocks (approximately every 4 years)
- Block reward which starts at 50 and halves continually every halving event until it reaches 0 (approximately by year 2140)
Any change to these parameters requires all Bitcoin participants to agree by consensus to approve the change.
Another unique aspect of Bitcoin is Nakamoto programmed the block reward to decrease over time. This is another way in which it differs from the norm for modern financial systems, where central banks control the money supply. In stark contrast to Bitcoin’s halving block reward, the supply of the dollar has roughly tripled since 2000.
How does the Halving influence Bitcoin’s price?
Historically, the Bitcoin Block Halving has proven to be an important catalyst that propels Bitcoin into a new Bull Market.
But of course nobody knows for sure how the market is going to react this time.
Some specialists predict growth.
The coronavirus pandemic that we have been experiencing since the beginning of March 2020 was the trigger for the great economic crisis that has been expected for several years. The month of March 2020 has been loaded with important news with the Fed taking several historic decisions.
The result of these historic decisions is a large increase in the U.S. dollar money supply. Such a rapid increase is likely to produce a currency devaluation that will impact what all citizens own. Such a scenario seems to have been written in advance to highlight the advantages of Bitcoin over the current monetary and financial system. At the very moment when the Fed admits of itself that it can print an infinite amount of U.S. dollars, Bitcoin’s unique monetary policy is being discovered by more and more people.
Many people are realizing that the current monetary and financial system is not working as it should. These people are simply wondering why the Fed can arbitrarily decide to inject more than $8T into the fiat system. The questions of those disappointed with the current system often lead to the discovery of Bitcoin.
What is extremely interesting is that the people who are discovering Bitcoin today are discovering it at the same time that its superior monetary policy is coming to light. Indeed, the Bitcoin Block Halving is what reduces the inflation of the Bitcoin supply over time.
From the Halving date onwards, only 900 new Bitcoins will be produced each day. That means Bitcoin supply inflation will drop below 2% for the first time in its history in 2021 to 1.8%. In the future, this inflation of Bitcoin supply will irremediably tend towards zero. This figure that guarantees the value of what you own in Bitcoin will be reached around 2140.
Nevertheless, there are also other opinions, some experts talking about possible drop as well. On-chain data suggests both small and large investors are accumulating coins in the run-up to the event. As a result, a bout of profit taking may be seen after May 12. Some investors, especially short-term traders, may sell their coins after halving, putting downside pressure on prices.
What’s is possible to say for sure — this Halving will be different.
The May 2020 halving is different from the previous two events because it is happening against the backdrop of the coronavirus crisis. The COVID-19 pandemic has shaken the global economy and forced governments and central banks across the globe to add trillions of dollars of stimulus to the financial system. People currently have a strong reason to search for alternatives like bitcoin, which are getting scarcer with every halving. As a result, notable price dips, if any, could be short-lived and the odds of bitcoin setting new highs next year look strong.
The halving is grabbing so much attention mostly because many believe it will lead to a price increase. The truth is, no one knows what’s going to happen.
The 2012 halving provided the first demonstration of how markets would respond to Nakamoto’s unorthodox supply schedule. Until then, the Bitcoin community didn’t know how a sudden decline in rewards would affect the network. As it turned out, the price began to rise shortly after the halving.
The second halving in 2016 was highly anticipated. Each halving has encouraged vigorous speculation about how the event would affect bitcoin’s price. On July 16, 2016, the day of the second halving, the price dropped by 10% to $610, but then shot back up to where it was before. There was little evidence the sudden reduction in bitcoin’s minting rate had a long-term impact on the price. While the immediate impact on the price of bitcoin was small, the market did tally a gradual increase over the year following the second halving. Some argue this increase was a delayed result of the halving. The theory is that when the supply of bitcoin declines, the demand for bitcoin will stay the same, pushing the price up. If that theory is correct, then we could observe similar price increases after future halvings, including the one scheduled for this year.
It’s possible that if enough people know about the halving in advance, they will buy bitcoin in anticipation, pushing the price up before the halving instead of after. This is what people mean when they argue the halving is “priced in.”
We don’t know for sure if the Bitcoin price will go up or down, but at least thanks to analysis of previous Bitcoin Block Halving events, we can highlight 5 main tendencies:
- Most of the exponential growth in Bitcoin’s price as a result of the Halving occurs after the Halving.
2. Bitcoin’s price has set a new All-Time High after every Halving.
3. If Bitcoin rallies less pre-Halving, it will rally more post-Halving (and for a longer period of time than otherwise).
4. There has always been a retrace prior to each Halving.
5. The pre-Halving top prior to the “shake-out” retrace has historically been Bitcoin’s highest pre-Halving price point, but wasn’t high enough to set a new All-Time High.
It is important to develop an understanding as well as the ability to appreciate, with a level-head, the historical significance of the Bitcoin Block Halving effect on Bitcoin’s price.
After all, Bitcoin’s historical price action has shown the Bitcoin Block Halving to be a unique type of event that tends to make investors money — not only heading in to the Halving but many months after it as well.
The Bitcoin Block Halving is a simple narrative with high probability profits attached to it. Of course, past performance doesn’t guarantee future outcomes. But history never lies.
Hope this article was useful for you,
Crypto Marina 👩🏻💻