Bitcoin Halving: Impacts in India and Abroad

The month of May is set to be the most important in the Bitcoin network calendar this year. As the cryptocurrency community looks towards the third Bitcoin Halving - a phenomenon that is scheduled to occur every four years — what exactly does halving mean, why are crypto investors so excited about the event, and how will this year’s halving be different from the first two, amidst a backdrop of global uncertainty due to the Covid-19 pandemic?

For Indian cryptocurrency markets, this year’s halving holds particular potential and has a lot of industry specialists eagerly watching activity within the country’s expanding ecosystem. With the Supreme Court’s recent lifting of an industry-wide banking ban on the local cryptocurrency industry by the Reserve Bank of India, the demand for cryptocurrencies has been surging as consumers gain confidence in the legitimacy of cryptocurrencies as an asset class. Meanwhile, in the face of the ongoing Covid-19 pandemic, national trading volumes have seen major spikes despite global economic uncertainty.

Against this backdrop, Indian cryptocurrency markets may be profoundly altered by the halving event — as the playing field is set to change for all those already holding, or seeking to acquire, bitcoin.

Halving Explained

To understand what halving entails, one has to first have a basic understanding of how the Bitcoin network works and how Bitcoin (BTC) is mined. Bitcoin is a decentralized peer-to-peer network, with BTC as its native currency and medium of transaction. When BTC was first programmed into code by a pseudonymous programmer named Satoshi Nakamoto, the supply was limited at a fixed number of 21 million bitcoins. BTC is created by mining — the process of adding transaction records to the Bitcoin’s public ledger, or blockchain, so that every transaction can be confirmed — where a fixed amount of BTC will enter circulation as block rewards to miners. Prior to the May 2020 halving event, 12.5 BTC is issued every 10 minutes, when each block is mined.

After this May 2020 Bitcoin halving, the block reward is set to halve for the third time, meaning that the block reward issued when each new block is mined on the Bitcoin network will be reduced to 6.25 BTC. This event is written into Bitcoin’s source code, and occurs every 210,000 blocks, or roughly every four years, with the previous two halvings happening in November 2012, and July 2016. The reason for Bitcoin halving was due to its design as a deflationary currency, meaning that Bitcoin’s purchasing power is meant to increase over time. Since there is a finite supply of BTC, if organic demand continues to increase, there will be an exponential increase in BTC’s price, which was witnessed in the past two halvings. Over the years, the block reward will continue to halve until it reaches 0, approximately by the year 2140.

Historical Performance of BTC

Every past Bitcoin halving event has been highly anticipated, with each event encouraging speculations about how the price of BTC would be affected. Much like many day to day commodities, demand, and supply are the two main governing economic forces that affect the price of cryptocurrencies. To look at the effects of past halving events on the price of BTC, it is necessary to look at the cryptocurrency industry and how BTC was being used at that point in time.

The 2012 halving event first demonstrated how the BTC market would respond to a drop in block rewards for the very first time. At this point, BTC was largely known for being “internet money”, used by gamers and cypherpunks to transact over the internet. The price of BTC increased exponentially after the first halving, increasing from US$10 to nearly US$1,150. This was due to the growth in retail demand, where the first adopters and early retail users discovered BTC and began investing in it.

In between the first and second halvings, the price of BTC crashed following the shutdown of Mt. Gox, and by the second halving in 2016, the price of BTC was around US$650. Following the second halving, the market faced consolidation and continued to increase in organic demand. This resulted in the Bitcoin’s biggest bull run, soaring up to nearly US$20,000 by December 2017.

Locally in India, the adoption rate of Bitcoin did not always mirror global levels. It wasn’t until the second halving event that India started to see early retail adopters in cryptocurrencies. Since then, the adoption of cryptocurrencies has been steadily on the rise in India.

The Third Halving

The upcoming halving in May 2020 will be one to watch, as it will be the first halving that occurs in the midst of a global economic crisis. Other than the forces of supply and demand, macroeconomic forces are now impacting the price of BTC. The two previous halvings occurred during the longest market bull run in history. With bitcoin now more globally adopted than ever, the ongoing crisis will have an even bigger impact on the third halving — from the effects of the pandemic on global supply chains and deliveries of mining machines to the mining capabilities of mining farms reportedly being hindered. With May’s hotly-anticipated halving event on the horizon, the current global economic crisis puts a question mark on how Bitcoin will perform, as the world watches closely.

Another important point to consider in halving events is the inflation rate of Bitcoin. Ever since the inception of Bitcoin, its potential as a hedge against inflation has been tied with its relatively low inflation rate, similar to that of gold. Once the third halving kicks in, the inflation rate of BTC is forecasted to fall from 3.65% (in April 2020) to about 1.80%, according to notable crypto analyst Mati Greenspan. With the global inflation rate at 3.41% in 2019, BTC purchasing power will become stronger compared to fiat currencies and BTC’s status as digital gold will begin to ring true.

Conclusion

Slated to be the most important event on the Bitcoin network calendar this year, the halving is set to impact the industry in the long run as the world anticipates this major development. For beginner and experienced investors alike, it is imperative to understand how the Bitcoin network functions, and how major developments will impact the trading of BTC, as well as the factors to consider during each halving. Against a global backdrop fraught with uncertain economic conditions, the third halving will be a historic one and is set to add vibrancy to the trading of bitcoin.

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