Why We Won’t See Effects of the Bitcoin Halving for a Few Years
In Blockchain, it’s so easy to be lost in the acronyms, buzzwords, and terminology. Amongst which, is The Bitcoin Halving.
What is it?
In the simplest terms:
The Bitcoin Halving makes Bitcoin twice as expensive to “mine”.
After a halving event, the miners who spend their hard-earned cash on electricity to power their computers, receive half as much BTC for their troubles.
That’s pretty much the crux of it.
This rule is cryptographically engrained in the Blockchain to occur every 4 years or so, and can’t be changed.
Why does it affect the price?
Imagine you’re in the market for a new gold necklace. In our imaginary market, extracting gold out of the ground costs about $100 per gram (These numbers are completely made up, please don’t google it).
Let’s say after it’s extracted, polished, transported across the world to a refinery, moulded, made into a chain, and delivered to a jewelry store in your city, the total cost of that supply chain is now $200 per gram.
Because it’s fairly abundant, there are plenty of jewelry stores with similar necklaces. The store owner still wants to make a profit whilst maintaining competitive, so the final retail price is around $300 gram.
You decide not to buy it, you wait a year…
A year later, gold is now twice as expensive to extract from the ground. The cost is $200 per gram. A gold equivalent to The Halving.
The supply chain still costs around $100, so now it reaches the store for $300 per gram.
Gold is more scarce now because it costs more to get to stores. There are fewer stores with similar products, so the owner can afford to increase their profit margin according to supply and demand because of less competition. Instead of the $100 markup from a year before, they estimate they can make $200. The price of the jewellery now stands at $500.
$200 greater than before The Halving.
Gold is a crummy comparison, but it’s one we can all understand. The same goes for oil. Whenever a huge new oil field is discovered and it becomes cheap to extract (the opposite of The Halving), petrol and diesel become cheap to the consumer.
Predicting future price action
In the history of Bitcoin, we have had 3 Halvings. When the chain started, miners received 50 BTC when they successfully mined a block. In 2012 that reward was reduced to 25 BTC, in 2016 it was reduced to 12.5 BTC, and now in 2020, it stands at 6.25 BTC after the third halving.
Each halving has most definitely had an impact on the price, but let’s analyse how…
Figure 1 shows the logarithmic graph of Bitcoin price action over time and the moments at which each of the first two Halvings occurred.
As you can see, it looks as though both halving events preceded extended bull runs, then a plateau until the next Halving.
So naturally, now that The Halving has happened again, it’s time to shoot for the moon! Buy Buy Buy!?
It’s highly unlikely that we’ll see bull runs as exciting as the ones we’ve seen in the past. This is down to a concept called expanding cycles.
Notice how, in figure 2, we use the same data, but identify the cycles that appear after the previous two halvings (the blue rectangles).
- The first is skinny and tall, indicating that the rise happened very quickly and rose sharply.
- The second is wider and shorter, indicating that the rise happened slower, and rose less than the previous cycle.
This is the expanding cycle principle. As the market matures, these cycles will become more and more expanded, covering years, and eventually decades in their execution.
The first bull market took about a year to execute.
The second, almost 2.
The third may be anywhere between 2 and 5 years for all we know.
These assumptions are from a purely technical point of view. What’s not accounted for is the prospect of a “Killer App” coming along which brings about an age of mass adoption of Bitcoin and Cryptocurrency in general.
The market has grown steadily despite such an app not yet appearing. No one is buying coffee with their Bitcoin, banks aren’t using Bitcoin for cross border payments, etc.
If a Bitcoin-based product comes along in the next few years which disrupts an industry like finance, then the Expanding Cycle theory goes out the window. At which point, no one knows how high it will go.
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