Why the Bitcoin halving should be a non-event
In less than a month from now, probably on or around May 12, 2020, the rewards for mining Bitcoin will drop from 12.5 BTC per block (today) to 6.25 BTC afterwards. The so-called “Bitcoin halving” seems like a major event. But is it, really?
Searches for “Bitcoin halving” have never been so frequent — ever. There are hundreds of tweets and blog posts and media articles about the halving. And several countdowns are trying to approximate — to the second! — the remaining time before the event… Is all the excitement truly justified? I’m afraid not.
You may think that something extraordinary is about to happen in a month. That this “Bitcoin halving day” will be a very special day indeed. Or that Bitcoin will be completely different afterwards. And, of course, that the Bitcoin price will skyrocket, just before or soon after this major deadline. But none of this is really true.
First, Bitcoin halvings are part of Bitcoin’s life. They have happened before (the next one will be the 3rd halving since the creation of Bitcoin), and their real effects on Bitcoin (and especially its price) are quite blurry. More than anything else, halvings are the (technical) way for the network to adapt itself to its own evolution. No need to get truly excited about this.
Halvings happen on a regular basis for crypto-currencies based on proof-of-work mechanisms. Do they necessarily have strong consequences on the success or the price of a crypto? No, far from it.
Take Litecoin, for instance. The 7th biggest cryptocurrency in market cap had its second halving on the 5th of August, 2019. Did it help Litecoin to become more mainstream? No. Did the halving significantly increase Litecoin’s price? Nope. In fact, the price was falling just before the halving and, despite a small bump for a few days, kept falling afterwards. The Litecoin price is now back to what it was… a few months before the halving. It’s fair to say that, from a usage or financial point of view, the Litecoin halving hasn’t had any noticeable — and, even less, positive — impact on Litecoin.
And it’s even worst for other cryptos. Bcash and BSV, some infamous Bitcoin clones, both recently had their respective halvings. Did they positively impact their prices? No. Did anyone care? Even less. Bcash and BSV were dying anyway. But the fact that their coins are created two times more slowly didn’t increase their value — it actually lead most miners to stop mining them (both coins are now “officially dead” — a good thing, if you ask me).
The important thing to keep in mind here is quite simple: scarcity alone doesn’t explain (or increase) the value of something.
By the way, this is not limited to cryptos. One of the rarest metal on Earth is called Osmium (Os). It’s almost 2 times more rare than gold. But its price is not even a quarter of gold’s price. More, “Osmium’s price has held steady for more than two decades.” So why is it that something so rare is still relatively cheap, and not subject to speculation? Simple explanation: nobody gives a damn about Osmium. It has close to zero utility. Truth be said, it is used in some fountain pens and was used in the past century in phonographs. But use cases are very limited and, as Osmium has never been seen as a possible store of value, its price is low, stable and shows little financial attractivity. As I said, nobody cares about Osmium.
Bitcoin is not Osmium. Bitcoin has intrinsic value. It is the center of a rich ecosystem of thousands of start-ups, exchanges, services, apps, wallets, and developers. And it has demonstrated over 11 years that it can serve as a novel form of money with many benefits: decentralized, secure, trustless, efficient, convenient, and transparent.
This, and this alone, should drive people to adopt Bitcoin, with a direct effect on its price.
Don’t get me wrong. The Bitcoin price may rise significantly just before or soon after the halving. But it will be overall meaningless. It will be yet another round of speculation — and day-traders making profits over amateur traders. But it will certainly not prove or show that Bitcoin is gaining traction, or suddenly got more value.
Put differently, if the only reason why Bitcoin price rises is because it has become more rare, it’s a bad reason.
The Bitcoin halving IS important. It’s part of what Bitcoin is and how it works. The more we progress in time, the more newly created bitcoins will become scarce. Over the long run, this “should contribute” to increasing Bitcoin price.
But, at the end of the day, Bitcoin will have real value if (and only if) it becomes mainstream. That is if people — merchants, companies, governments, and citizens — use it on a daily basis, and do so because it’s a better form of money. Not just because the rewards for Bitcoin miners have been cut in half.