The third Bitcoin halving - What's it all about?
There’s been a lot of buzz around the upcoming Bitcoin Halving on the 11th of May. But what’s it all about?
One of the characteristics that gave rise to the fascination with Bitcoin is the way its creator, Satoshi Nakamoto, tied the creation of bitcoins to the work needed to prevent counterfeiting them.
Where do baby bitcoin come from?
Bitcoins are generated by so-called miners - people whose computers perform complex calculations that validate the transactions on what’s known as the blockchain, a public digital ledger. The miners compete with each other to earn newly issued tokens known as a block reward.
The halving is when this block reward for mining new bitcoin is – you guessed it – halved.
At Bitcoin’s launch in 2009, miners received 50 Bitcoin per block, but that reward was reduced to 25 in the first halving in 2012, then reduced to 12.5 in 2016, and it will fall to 6.25 tokens in the next.
A brief history of the halving
The third halving happens when the number of blocks verified hits 630,000. This makes the exact date of the halving unknown, not just to confuse the newbies out there, but because it’s dependent on the time it takes to generate new blocks. At the moment, the network is averaging a new block every ten minutes.
A halving occurs every 210,000 blocks - roughly every four years - and this will keep happening until around 2140 when the total supply of 21 million bitcoins will have been released.
Why? The infamous Satoshi Nakamoto programmed the halving into Bitcoin’s source code from the very beginning, specifying that there would only ever be 21 million bitcoins issued.
Some say the halving was designed to distribute coins more quickly at the beginning. This is a way to incentivise people to join the network early and mine new blocks, with block rewards programmed to halve at regular intervals, and it assumes that the value of each coin rewarded was likely to increase as the network expanded.
History lesson aside, why should you care?
The halving reduces the number of new bitcoins being generated by the network as a side effect of reducing the reward for mining bitcoin. In turn, this limits the supply of new coins, which can cause the price of Bitcoin to rise - if the demand for Bitcoin stays strong.
The fact that the total supply of Bitcoin is finite appeals to people who fear that fiat money -- the kind issued by governments like GBP, USD or ZAR -- can lose its value to inflation if too much is printed.
Supporters argue that Bitcoin’s value, by contrast, is guaranteed to increase. Halving also prevents inflation by acting to periodically slow the pace at which Bitcoin is created, so as to not outstrip demand.
To other observers, halvings can be seen as a hurry-up-and-buy signal by suggesting that slower growth could be accompanied by a bump up in price.
So, what will happen to the price of bitcoin?
What’s interesting is that the market reaction usually comes ahead of time, in the lead up to the halving, rather than on the day, and then it tends to carry on far past the date itself.
Typically, we see Bitcoin’s price bottom out 12-18 months before the event, with lows 15-months ahead of the halving.
This is usually followed by a price rise ahead of time thanks to increased news coverage that increases demand, and then again after the event as the supply of new coins becomes constrained and increasing demand. We usually continue to see significant gains in the 12-14 months that follow.
In 2012 we saw the price increase from USD $12 in November 2012 to a peak of USD $1,100 in November 2013.
In 2016 we saw a sharp increase 11 months later, rising from around USD $650 in July 2016 to over USD $2,500 in May 2017.
So, if the past two halvings are anything to go by, we could assume Bitcoin’s recent rise is likely just the beginning of a 13-15-month period of strength.
But does the halving always boost Bitcoin’s price?
That’s a matter of heated debate.
Skeptics argue that attributing price hikes to halving is specious, at best. The second halving came at a time when bitcoin was already gaining greater mainstream recognition, and coincided with the boom in initial coin offerings, many of which had to be bought with bitcoin.
Plenty has changed since the last halving in 2016. So, let’s come a little closer to the upcoming halving and take a look at what’s happened to the price of Bitcoin in the last month.
- We’ve seen the price of BTC rise by over 130% since it bottomed out at $3,867 on March 13
- Then its price jumped from $6,700 to $9,400 in the last 10 days of April
- Before gaining over 15% last week
- That’s a seven-week winning streak, and it’s first in 12 months
These gains are similar to the price rallies we’ve seen in the lead up to the last two halvings...
But wait, Corona
The year is 2020 and it’s been a wild one to say the least. You don’t need me to tell you that due to the black swan event that is COVID-19, we’re living in totally unprecedented times.
COVID-19 has brought about economic uncertainty that is unprecedented for all assets, Bitcoin included.
But, as every central bank around the world has expanded their balance sheets and issued unprecedented sums of money, the average person is starting to see that alternative assets like Bitcoin, tokenized Gold or stable coins like USDC can act as a real safe haven for their hard-earned money.
This has never been truer as we witness a debasement of global currency values like we’ve never seen before.
For me, this increase in demand for alternative stores of value – like Bitcoin – make this halving all the more intriguing.
So, what will happen this year?
We can’t say for sure, but one thing we do know is it’s an exciting time to be Bitcoin HODL’er... Sit back and enjoy the ride!
-
About Revix
Revix is an investment platform that allows anyone to create a diversified portfolio or “Bundle” of assets in just a few clicks. They bring simplicity, trust and great customer service to investing.
Investing is as easy as signing up, choosing an asset, and then watching your portfolio grow.
For more information, head to www.revix.com