Bitcoin Halving

I was listening to a podcast last weekend in which the speaker talked about the upcoming Bitcoin halving. They said (and I quote), "after the Bitcoin Halving, Bitcoin price will definitely go up".

I found this statement to be incredibly interesting because, finance and economics experts tend to avoid using certainties when talking about the future because nothing is guaranteed. Remember the guaranteed global recession of 2023 and how that panned out.

But let's explore the question: what is Bitcoin halving and what could it mean for Bitcoin's price?

What is Bitcoin halving?

Bitcoin halving is the reduction of the rewards for mining Bitcoin by half after each 210,000 blocks of Bitcoin are mined.

The longer version... (feel free to skip to the end of Bitcoin halving 101 if you understand what the halving is)

Start of Bitcoin Halving 101

Like actual gold, Bitcoin is mined, just not physically. To mine a block of Bitcoin, miners have to solve really complex mathematical problems. These problems are so difficult that the average person or computer can't solve it. So specialised computers burn a lot of energy to solve the problems and mine Bitcoin.

To reward miners who successfully solve the complex problem (i.e. mine a block of bitcoin), the miner receives additional Bitcoin as rewards.

In 2009, the reward for mining Bitcoin was 50 Bitcoins (BTC) for every block mined. In 2012 when the 1st halving occurred, the reward reduced to 25 BTC. In 2016 it halved to 12.5 BTC, and since the halving event in May 2020, it is now at 6.25 BTC. The next halving in 3 days should reduce the reward to 3.125 BTC.

It costs a lot of money to mine Bitcoin. When the rewards halve, some miners will have to go out of business because it is less profitable to mine. Even if all the miners remain, less rewards means less Bitcoin to sell after each block is mined.

End of Bitcoin Halving 101

Like a rising tide lifts all boats, a rising Bitcoin price tends to lift other cryptocurrencies

Why are people so confident that the Bitcoin halving should cause Bitcoin's price to soar?

2 key reasons:

1. History says so: Bitcoin's price grew at least 10 times 6-18 months after the last 3 halvings
2. Demand and supply: when supply of a thing falls, the price should rise if demand remains the same (Economics 101). After the Bitcoin halving event, the supply of Bitcoin should go down. If the demand for Bitcoin remains the same or falls at a slower rate than supply, the price of Bitcoin should go up

Here's the problem with this line of thinking

On History

History is only relevant until it isn't.

Consider a chicken that is fed every day. Every single feeding will confirm the bird's belief that it is the general rule of life to be fed everyday by generous members of the human race. One day though, something unexpected will happen to the chicken. The hand that fed it will end it. It will end up in a pot or oven.

What can a chicken learn about what is in store for tomorrow from the events of yesterday? A lot perhaps, but certainly a little less than it thinks, and it just might be that "little less" that may make all the difference.

The point is every point of historical reference could be useless in figuring out what is about to happen in the future.

History is only relevant until it isn't. Maybe this should have been one of the investment myths I debunked last month.

Some famous last words:

"In all my experience, I have never been in any accident... of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort" - E. J. Smith, 1907, Captain of the Titanic

We all know how the Titanic ended.

So the point on history is not sufficient proof that Bitcoin should rise after the halving. What about the law of demand and supply?

On demand and supply

For the longest time, most bitcoin billionaires have not sold their bitcoin holdings. If a large number of crypto holders rush for the exit after this halving (demand falls), then it doesn't matter if supply falls. The price of bitcoin may not go up.

Also, the problem with everyone believing that the price of Bitcoin should rise 6-18 months after the halving (and fall not too long after) is, everyone may want to sell at the same time. If most people try selling at once, the halving boost may not come.

The point on demand and supply assumes that demand for bitcoin will remain the same, rise or fall by a lower amount than supply has fallen. There is no guarantee that this will happen. If this does not happen, no halving boost.

The law of large numbers

After the 1st halving: Bitcoin's price grew over 396x. That is, if you bought $1,000 worth of Bitcoin 1 year before the halving, 2 years after, that Bitcoin would be worth over $396,000.

After the 2nd halving: Bitcoin grew over 75x. A $1,000 investment in Bitcoin 1 year before the halving, grew to over $75,000 at the post halving peak.

After the 3rd halving: Bitcoin grew 9.5x. The same $1,000 rose to $9,500 after the halving boost.

What can you observe?

Large gains. But smaller gains with each subsequent halving.

This could be due to several reasons. One of which being the law of large numbers. From the 1st halving to the peak, Bitcoin went from $2.54 to $1,007. But the most recent halving, Bitcoin went from $9,000 to $69,000.

The larger the price of one Bitcoin goes, the more difficult it is to grow further. How large is large enough? $70k? $1m? No way to know, but we know history may not have the answer.

Final Thoughts

The goal of this article is to encourage some caution with the cryptocurrency expectations. Cryptocurrency remains a very risky investment vehicle. As always, I try not to tell people what to invest in, rather I suggest points to consider when thinking about what to invest in.

So, to the question, will the price of bitcoin definitely go up after the halving? No one knows. There are no guarantees.