Over the past 18 months, the crypto community has faced a significant bear market. Major digital assets such as Bitcoin and Ethereum have endured 70–80% declines while the rest of the “altcoin” market has looked much worse. Luckily, 2019 has shown to be a more promising year for digital assets as Bitcoin and Ethereum have increased by +55.45% and +48.69% over the past three months, respectively. As the outlook becomes more positive, the community is looking ahead towards one major event coming in the next year — the Bitcoin halving.
Historically speaking, the Bitcoin halving has exhibited itself as an extremely positive event for price action. For those of you who are unfamiliar, the Bitcoin halving is when the network’s issuance rate (or inflation rate) is reduced by 50% every four years. Cutting the inflation rate in half not only reduces the amount of new Bitcoin entering circulation every day, but it also increases the mining costs for securing the network. In the past, this has been one of the driving factors behind Bitcoin’s previous bull runs.
Before we dive into the historical effects of the Bitcoin halving, we first want to outline the economic dynamics surrounding its halving. If you’re already familiar with these nuances, feel free to jump to the “Halving’s Historical Effect on Price” section.
The issuance schedule states that block rewards will continually diminish by 50% every 210,000 blocks, effectively reducing Bitcoin’s issuance to zero as time goes on.
Bitcoin began with a block reward of 50BTC per block. Seeing as the network was (and still is) in its infancy, the time associated with the creation of new blocks has gradually changed as computational power is added and removed from the network. Generally speaking, historical data has shown that a new block is created about once every 10 minutes. Taking this assumption into account, we can assume that the block reward will halve roughly once every 4 years. The math is as follows:
210,000 blocks x 10 mins per block / 60 mins per hour / 24 hours per day / 365 days per year.
Here’s a look at how this has played out in the past:
One of the biggest benefits to Bitcoin is its transparency and algorithmic monetary policy — a characteristic the current financial system lacks. Right now, about 1,800 new Bitcoin enter circulation every day. Following the third halving event in 2020, the daily issuance rate will drop to about 900 BTC per day, resulting in Bitcoin’s annual rate dropping from 3.70% to 1.79%. This is an interesting development as Bitcoin’s issuance will now be below the inflation rate of most developed countries. For comparison, the inflation rate in the United States is 1.9% for the 12 months ending in March 2019. The biggest difference here is that Bitcoin is a non-sovereign, fixed supply asset whereas the US dollar has no supply cap and entirely relies on the US government.
Halving’s Historical Effect on Price
For those of us who have looked into digital assets as an investment vehicle, Bitcoin’s historical price action in response to halving events has been very interesting to say the least. While past performance is not indicative of future results, we wanted to analyze some of the past metrics from previous halvings to get a sense as to what may lie ahead.
The first official halving (decreasing the block reward to 25BTC per block) happened on November 28th, 2012. Historical data shows that following a large pump in June of 2011, an upward trend began to form in November 2011, approximately one year prior to the halving.
This “pre-halving” uptrend resulted in a +341.90% price increase in Bitcoin, trading at an average of $12.31 per BTC come the first halving in November 2012.
The 1st halving reduced Bitcoin’s daily issuance rate from ~7,200 BTC per day to ~3,600 BTC per day. Almost immediately, Bitcoin then went on to make historic gains as it skyrocketed by almost 8,000% over a year-long period, reaching around $1,000 in late November of 2013. (depending on the exchange data).
Unfortunately, it wasn’t all fun and games. In December 2013, Bitcoin began a multi-year bear market (largely thanks to the infamous Mt. Gox hack) as the asset declined over 80% before investors saw a reversal nearly two years later in October 2015.
The second official halving (decreasing the block reward to 12.5BTC per block) happened on July 9th, 2016. It’s important to note that the time between the first and second halving was actually 1316 days, or 3.6 years. With this, data shows that an upward trend began to form in October 2015, approximately 9 months prior to the halving.
The “pre-halving” uptrend resulted in Bitcoin increasing 112.0% over the 9 month period and an average trading price of $650 per BTC at the time of halving in July 2016 (52x from the last halving price). The second halving event dropped Bitcoin’s daily issuance rate from ~3,600 BTC to the current ~1,800 BTC per day. This ultimately pushed BTC into the most recent bull run of 2017 where the asset saw a +2,800% increase over the following 18 months. The peak finally hit in mid-December of 2017, with a price just shy of $20,000 BTC (depending on exchange data).
Similar to the previous bear market from the bull run in 2013, Bitcoin went on the drop nearly 80% over a 12 month period where we’re presuming it hit a bottom of around $3,200 in December of 2018.
The third official halving (decreasing the block reward to 6.25BTC per block) is scheduled to happen in approximately 57,455 blocks (based on block height 572545 as of April 20th, 2019). Based on the assumption of 10 minutes per block, the anticipated halving date is set to happen in late May to early June of 2020 (approximately 400 days from now).
If historical data is a good indicator of previous success (traditionally it’s not), we at Fitzner Blockchain Consulting would expect BTC to perform positively this year as we approach the halving event in mid-2020. More specifically, we should expect double-digit or perhaps low triple-digit percentage gains by the end of 2019. If our historical analysis is correct, we’re expecting Bitcoin will likely be trading at around half of the current peak price (approximately $10,000/BTC) with a new expected ATH within 12 to 18 months after the halving event in May 2020.
Future Incentive Mechanisms
As block rewards continue to diminish, Bitcoin’s fixed supply should accrue value as the cost of “producing” one BTC increases with each halving — likely one of the driving factors behind Bitcoin’s cycles. As future block rewards continually diminish to zero, future miners will have to rely on other incentives within the system to secure the network.
The last Bitcoin is estimated to be mined around the year 2140 when the block reward drops to less than 1 satoshi. While the likelihood that Bitcoin will still exist in over a hundred years is anything but certain, it’s quite interesting to speculate how incentive mechanisms *would* work following the last block reward.
Right now, miners are paid through a combination of block rewards and transaction fees. Block rewards act as a base incentive for miners to contribute computing power while transaction fees incentivize the order in which miners validate the transaction.
For those of us who are relatively new to digital assets, we hope that this article can provide some confidence that the future of these markets is still quite bright. After looking at different market trends since inception, the similarity between these cycles seems anything but coincidental.
Fitzner Blockchain Consulting is bullish on Bitcoin leading up to the next halving. At this time, we are strong believers in Bitcoin’s “Store of Value” proposition relative to any other crypto asset in the market today. If you or your business are interested in learning more about how to accept, spend or utilize Bitcoin in any way, shape or form, please contact us to schedule a free consultation on how to get started today.