If you’re not already familiar with the idea of a Bitcoin Halving Event — or as some say, “The Halvening” — let’s take a few steps back. One of Bitcoin’s unique qualities is that it’s verifiably scarce. While Central Banks can print more of their currencies, as we’re seeing in real time with the trillions of new U.S. Dollars entering circulation this month, the total amount of Bitcoin that will ever enter circulation is limited to 21 million.
Every day, more Bitcoin are brought into circulation through a process called mining. Currently, there are more than 18 million Bitcoin in circulation, each of which have been brought into circulation through a predictable supply schedule over the last 11+ years. Miners play an important role in this supply schedule — as they contribute computational resources to the Bitcoin network to confirm transactions taking place between network participants, they receive Bitcoin as a reward. An important component of the Bitcoin protocol is that the amount of Bitcoin awarded to miners per block is cut in half every 4 years (or, more specifically, every 210,000 blocks of confirmed transactions on the network). The first Bitcoin halving event took place in 2012 — which reduced the mining reward from 50 Bitcoin to 25, the second in 2016 — which reduced the reward to 12.5, and now the third halving event is slated for mid-May of 2020 — which will bring the reward to 6.25 Bitcoin.
Economic theory tells us that if demand for an asset remains constant while supply decreases, the value of the asset will rise. Since the halving is a known and predictable event, we can monitor when and by how much the mining reward (and the supply of new Bitcoin) will be reduced.
The real question investors need to ask is:
Is the halving already priced in?
Past performance is not indicative of future returns, but let’s take a look at Bitcoin’s price action following the last two halving events. In the chart below, you can see in the one-year periods following the first and second halving events, Bitcoin’s price rose by roughly 81x and 3x respectively.
It’s important to highlight several changes in the digital currency ecosystem since the last halving event in 2016:
- Infrastructure developments: There have been tremendous developments in onramps and investors have more ways than ever before to access and express a view on Bitcoin, including regulated futures markets and options to go long and short, as well as products and services offered by legacy financial services firms. Both legacy and newer firms that have solidified their role with investors have worked proactively with regulators to build compliant reputable onramps to Bitcoin for a global community.
- Participation: With increased onramps to Bitcoin, as well as broader awareness of the digital currency asset class, more investors have entered the market, most of whom have not yet been invested during a halving event.
- Market shocks: Asset prices spanning all markets and asset classes have been tested by unpredictable shocks, including geopolitical uncertainty and fiscal policy changes. Further, global uncertainty around the current COVID-19 crisis continues to be reflected in large market swings. As investors navigate these rapid and pronounced movements, they continue to seek out diversification in their portfolios to insulate themselves from market shocks. Increasingly, investors look to digital assets like Bitcoin as it has historically been uncorrelated to other assets they may invest in.
It’s impossible to predict the impact of the upcoming halving event on Bitcoin’s price, but historically, these re-pricings have created compelling investment opportunities. Consequently, it may be a great time to learn more about Bitcoin and consider the role Bitcoin could play in your portfolio.
We invite you to read further analysis in our The Next Bitcoin Halving report, which also covers the core characteristics of Bitcoin’s economic model as well as analysis of price action and network fundamentals: Grayscale.co/halving.
Prefer a visual aid? We created this video to help investors better understand the next Bitcoin Halving event: https://gryscl.co/Halving.
A more detailed look at the halving in the context of central banks’ quantitative easing is explored in our April 2020 report, Bitcoin’s Quantitative Tightening vs. Central Banks’ Quantitative Easing: https://gryscl.co/2WAxHLS.