Demystifying the Bitcoin “Halving”
Those in the cryptocurrency community knew for quite a while that the “bitcoin halving” would take place sometime in May 2020, but it seems that the excitement is finally starting to cross over to more traditional investors.
This article will go over exactly what the “halving is”, its significance, and what you can do to prepare yourself.
What is the “halving?”
To understand and answer this question means to gain a basic understanding of the fundamentals that underlay the Bitcoin network. The non-technical explanation is that every ten minutes a new block is created on the Bitcoin blockchain. Each of these new blocks contains within it what is known as a “block reward.” This is, in the plainest of terms, the number of bitcoins you get if you are successful in mining a block.
Simple, right?
Well, it gets slightly more complicated…
You see, every 210 000 blocks, the amount that is released as the “block reward” is programmatically cut in half. With the current block reward being 12.5 BTC, that means with the upcoming event on May 11th, the new reward will be reduced to 6.25 BTC. This built-in feature of Bitcoin is the protocol’s way of controlling the supply in a predictable and transparent manner. It is an example of a fixed supply schedule.
By allowing all participants in the network to, at all times, know the current circulating supply and have certainty as to what the future supply holds, there is an added element of stability. Compound that with the fact that the block reward gets smaller every 210 000 blocks, and you have a system dictated by programmatic scarcity.
One of the main features of a store of value is that it maintains its value without depreciating, scarcity being a necessary factor. Given that bitcoin has a deflationary supply schedule and will essentially exist in perpetuity, many argue that it serves such a purpose. There are only to ever be 21 million bitcoins in existence, and currently over 18 million have been released via block rewards.
To illustrate the significance, consider a group of people who all love chocolate. They are standing around a vending machine that dispenses a fixed amount of chocolate bars each day. The bars are then distributed among the group and they go on their way until the distribution happens again the next day.
But, every week the amount of chocolate bars that get dispensed is reduced, thus each individual receives less and less each week. Some members of the group freeze their bars for safe keeping, others eat them, and some even trade them for other items, like apples. All else equal, the demand for these bars remains constant and even increases, but the supply is steadily decreasing.
Basic economics teaches us that in such a theoretical case, price increases.
Here is the logic flow:
1) Chocolate bar supply is reduced.
2) There is less available to consume, trade, and store.
3) There is higher demand for the bars.
4) Market value of the bars increase (now you can trade one chocolate bar for two apples instead of one).
It is this line of reasoning applied to bitcoin that is driving some investors into a frenzy trying to accumulate as much of the asset as possible. And, it is these subsequent actions that have attracted the attention of the broader market.
So now you understand what the “halving” is and why it is significant, but how can you prepare yourself?
The answer to that is it depends on what you believe will happen.
There are a number of possible optimistic scenarios and number of possible pessimistic scenarios, as with any event. The most probable of these, is the scenario that lies somewhere in the middle. This is to say that bitcoin is as unlikely to go to zero as it is to $1m USD overnight. Let’s take a quick look at some of the facts:
1) In the first bitcoin halving (November 2012), the price increased from close to $10 to over $1000, an 100x increase.
2) In the second halving (July 2016) saw an increase from $650 to nearly $20 000, a roughly 31x increase.
In both cases, the price then fell over the course of a year but settled at a price much higher than the one it was “pre-halvening.” This has happened twice, and while history tends to repeat itself, it is not a universal truth that it always does. Thus, part of the hype for this event is driven by massive speculation.
Some parties believe that the macroeconomic environment is different this time around and supports the infrastructure needed for bitcoin adoption.
They cite greater institutional interest and the presence of qualified insured custodians as positive influences as well as the change in retail mindsets that comes from endorsements from celebrities/CEOs/finance magnates.
Furthermore, they look to the increases in stimulus being provided by countries worldwide (in response to COVID-19), and cite this is the mismanagement of monetary and fiscal policy. They believe that this will lead to the debasement of fiat currency via inflation and through it all, bitcoin will rise and see real value as a hedge. With financial institutions having the opportunity to adequately restructure their books amidst this crisis, it is not an impossibility that bitcoin be added to their portfolios to the tune of (0.1–1.5%).
On the other hand, there are those that believe that the price increases are not fundamentally supported, existing instead as a product of sentiment and FOMO (fear of missing out). More pessimistic perspectives place the event as something that is already “priced in” to bitcoin and believe buyers entering the market now will face no upside and lose on value when people sell off after the hype has died down.
As mentioned, the likely case usually falls in between. It is much more likely that we will see price increases in the short term with a very slow decay in the long run, ultimately terminating at a price point generously higher than the one currently. The institutional and retail support is not yet quite there to support continuously rapid upward movement, but it and the network itself, has proven it is strong enough that it would be able to support the price at key historical resistance points.
To prepare yourself you have to make a decision about which perspective you hold. On a personal note, I would always say that it is worth owning some bitcoin as the risks of not doing so could undermine any gains made against fiat currency. I also hold a long term mindset (15–20 years) and have not regretted taking any opportunity to accumulate the asset.
Tune in to the bitcoin halving livestream: https://t.co/11RFsbjNON?amp=1
New to Bitcoin? Check out Satstreet: http://www.satstreet.com/create_account?grsf=ru1k3c
Learn more about bitcoin here: https://www.lopp.net/bitcoin-information.html
