The Bitcoin halving matters, but for different reasons than you might think
The much-anticipated Bitcoin halving event just occurred. Yet, its true impact is often misunderstood
On May 11, 2020 the reward for miners who add transactions to the Bitcoin blockchain and help secure the network decreased from 12.5 to 6.25 Bitcoins.
Some view the reduction in the number of new Bitcoins minted roughly every 10 minutes as a way to strengthen the biggest cryptocurrency’s long-term prospects.
They claim that as a result of the supply squeeze, and assuming demand holds steady (or better yet, grows), the price of Bitcoin should go higher. Plain economics 101, demand/supply rules.
Yet, there’s one major flaw with this theory.
You see, the reduction in daily newly minted Bitcoins from about 1,800 to 900 post-halving is negligible.
Take for example data from April this year. On average, 270,000 Bitcoins were moved on-chain each day. As such, a daily supply decrease of 900 Bitcoins is unlikely to have a dramatic impact on Bitcoin’s sell pressure or the overall demand/supply equilibrium.
Simply put, the drop in new issuance compared to Bitcoin’s daily transaction volume is minuscule. With that in mind, does that mean the halving doesn’t really matter?
No. The halving is absolutely an important event, but for different reasons than pure (minor) supply adjustment.
Allow me to explain.
First, while some may find this notion uncomfortable, the halving serves an important marketing need. The data suggests that this once every 4 years event helps to grow brand awareness and draw media, business and investor attention to Bitcoin and its advantages.
Looking at the numbers, it’s clear that in the months and days leading up to the halving, mainstream media’s interest in Bitcoin intensified significantly.
During that period, Bitcoin once again became a hot topic for discussion across major financial media outlets, providing an opportunity to highlight the unique characteristics of its deflationary model and predictable monetary policy.
And, as more and more people learn just how scarce Bitcoin supply really is, that discussion alone can help generate new business models and buyer interest.
Second, with the halving finally in the back mirror, investors will now benefit from increased price transparency. For a long time, Bitcoin enthusiasts have been arguing whether the halving is indeed “baked in” to the Bitcoin price.
On the one hand, some people argued that since it’s a known event with a clear timeline it’s already factored into the price. On the other hand, some traders claimed in the lead up to the halving that many people outside the crypto bubble were unaware of the upcoming miner reward adjustment.
As such, they expected to see a surge in price as more and more interested parties learned about it via the increased media attention and the FOMO that often follows.
With that discussion now put to bed, a clearer picture of Bitcoin’s supply/demand and share of long-term believers is likely to emerge in the coming months. This could indicate what sort of progress has been made on the adoption front as well, and whether more people buy into the digital store of value narrative.
Finally, with miner reward cut by 50% the halving has significant impact on the network’s security and miner dynamics. Some small Bitcoin miners will need to close up shop as inefficient operations will no longer be sustainable. The price of doing business could simply prove too costly for them.
On the flip side, large miners that possess the latest equipment could become even more dominant and capture a greater share out of the overall mining pool.
Amid concerns about miner centralization and geographic concentration, one should pay close attention to these in the context of the overall health of the Bitcoin blockchain.
Bitcoin is going to play an increasingly important role moving forward
During a period of a global pandemic that impacts the entire world, it’s important to remember that Bitcoin is only getting started.
After all, these are unprecedented times. Times when the U.S. central bank monetary policy is driven by “infinite amount of cash at the Federal Reserve” that’s printed and injected into the markets.
Times when corporate bond issuance more than doubles compared to the same period last year and reaches a record $265 billion.
Times when the Fed’s balance sheet rises to a record $6.72 trillion and is up more than 50% compared to the first week of March.
It is precisely at times like these that a math-based, secure, censorship-resistant, and borderless financial network with a built-in transparent monetary policy is needed more than ever before.
Bitcoin is going to play an increasingly important role moving forward. And it is through events like the Bitcoin halving that more and more people around the globe are gradually waking up to that realization.