Bitcoin Halving Touted as a Potential Price Catalyst
By Kinoti Edwin on The Capital
The case for Bullish Bitcoin
Bitcoin is having a bullish start to the new decade with the rapid rise in price predicted to continue throughout 2020 and beyond. Top crypto industry experts continue to make bold pronouncements with some predicting that the price could rise beyond $100,000 within the next two years. However, conservative estimates point to a price in the range of $20,000-$50,000 within the same time frame.
Most of these predictions cite the upcoming Bitcoin halving scheduled for 17th May 2020 as the major catalyst that will drive the price up. It is also expected that other catalysts such as growing demand, new developments on the Bitcoin blockchain, and favorable regulatory environment will further fuel the price rise.
Let’s take a deep dive into halving and the other catalysts to establish how they intertwine to make case for a bullish Bitcoin.
Bitcoin halving is a self-sustaining system for controlling the currency’s supply by slashing the block reward by half for every 210,000 blocks mined (approximately every 4 years given 10-minute blocks). In this respect, halving replicates gold mining, albeit in the digital sphere, in that it raises the mining difficulty with time while offering lesser rewards for those efforts.
For context, initially, 50 bitcoins were created every 10 minutes, which was lowered to 25 during the first halving in 2012 and to the current 12.5 after the 2016 halving. This will be lowered further by half with only 6.25 bitcoins created every 10 minutes after the May 2020 halving.
So, how does this affect bitcoin’s price?
Halving is a programmed deflationary measure installed for two purposes; regulating bitcoins supply and extending the life of the reward system. For context, all 21 million bitcoins could have been mined in about 8 years without halving (50 bitcoins generated every 10 minutes). With halving, it is projected that the last bitcoin will be generated in 2140 at the current mining rate.
Reducing the reward size stretches the time required to achieve maximum supply thus raising its scarcity with time. In Bitcoin’s case, from 8 years to 130 years. Ideally, this is intended to help bitcoin sustain its value and register steady prices increases over time. And herein lies the bullish case for Bitcoin.
Evidence from previous halvings
Historically, halving has served as an important catalyst that drives Bitcoin into a new bull market.
Since the upcoming halving is the third one on the bitcoin blockchain we can examine the previous two to unpack the events and use them as model potential behaviour and predict price movements. After all, history repeats itself.
There are 3 key similarities between the first and second halvings:
i. Bitcoin price rose leading up to the halving and maintained an upward trajectory in the following months
ii. Bitcoin reached new All-Time High (ATH) several months after each halving
iii. Bitcoin prices corrected after reaching ATH but remained significantly higher than the pre-halving high
According to pricing data analysis by Rekt Capital, Bitcoin was trading at around $11 a year before the first halving and rallied to a pre-halving top of $15.51, a remarkable 663% rise from its pre-halving $2.01 bottom. Prices rose steadily in the months following halving peaking at $270.94 before retracing back over 80%.
Bitcoin recorded a bottom of $164.01 before the second halving with the price rallying over 383% to hit a pre-halving high of $794.91. The following post-halving rally peaked at $20,074 after 524 days before retracing back to a $3,150 bottom in December 2018.
There are some interesting takeaways from both halvings:
i. Bitcoin price rose over 12,000% from the pre-halving bottom to the post-halving top. It took 513 days to rise by 13,304% and 1,068 days to grow by 12,168% in the first and second halving respectively. The second halving taking twice as long as the first to achieve the same growth.
ii. There was greater post halving exponential growth in bitcoin prices as compared to pre-halving. The post-halving growth was more than 5 times larger than the pre-halving growth in the first halving with this rising to 10.5 times in the second incidence.
iii. In both events, bitcoin set a new ATH, effectively ending the bull run each time. This was shortly succeeded by a bear market that knocked off at least 80% of its value.
History repeating itself?
The patterns exhibited in these previous halvings are already being manifested in the run-up to the third event pointing to a potential repetition of Bitcoin’s price action. At the time of writing, signs are already showing with bitcoin in a bullish run. It is currently trading at around $8,600, a 173% growth from its $3,150 bottom set in Mid-December 2018. Notably, bitcoin has previously recorded its highest price of $13,800 in this prehalving rally translating to 338%, a figure close that recorded during the second halving. With around 120 days left to the halving, the current price action points to a sustained bull run reminiscent of the previous two halvings. With such data, it is therefore unsurprising why analysts remain bullish about Bitcoin hitting a new ATH within the next 2 years.
Charles Hwang, through his medium post, observes that the drastic decrease in supply will be catalytic to a bitcoin bull run. He points out that the markets have always absorbed the new supply of Bitcoin without distorting the price. However, the upcoming halving may distort these market conditions with the annual supply falling drastically from 657,000BTC to 328,500BTC beginning May 2020. At the same time, Hwang conservatively predicts that possible annual demand will remain at 633,000BTC. Accordingly, this will trigger substantial price changes due to the huge mismatch between demand and supply. As the asset scarcity increases, people will find difficulty accessing it thus triggering huge price upswings.
Interestingly, if the previous patterns are repeated in the upcoming halving then we are in line for a crazy bull run with unprecedented price swings. For instance, repeat of a 12,000% price increase on a $3,150 bottom points to a new ATH of $378,000!!! This surely is a mind-blowing figure that dwarfs the current predictions making even the most outlandish $100,000 price look conservative.
Positive developments on Bitcoin Blockchain
There are many other positive developments happening in the background that could trigger a price rise and a sustained upswing. Bitcoin Suisse CEO, Arthur Vayloyan highlighted this during a CNN interview stating that there are much development and research happening in the background. Yet, he feels that these ongoing developments are not usually priced in as the markets lack awareness about such efforts.
People sometimes think when they don’t see stellar price increases etc., that nothing happens. But so many things happen, and we’re going to see them also this year emerging. And with that interest and network expansion will just continue.
In this respect, Vayloyan alluded that once these developments compound they will draw the market’s attention resulting in upward pressure on Bitcoin price. This assessment seems fair considering some of these developments and their potential implication on Bitcoin use. For instance, scaling the lightning network could increase Bitcoin usage especially for micropayments as it is instantaneous and cheap. Proposals to add smart contracts functionality on the Bitcoin blockchain could also expand its use through layered applications.
Active education, marketing and creating awareness
The blockchain community is also always actively marketing Bitcoin and cryptocurrencies in a bid to attract new users. For instance, the community is actively promoting Dollar Cost Averaging means of investing in Bitcoin through the #StackingSats initiative on Twitter. The movement encourages investments of small amounts over time by buying Satoshis. This is aimed at onboarding more people, increasing demand and accumulating bitcoin for the long term.
There is also a growing list of institutional investors and wealthy individuals buying bitcoins while exchanges and crypto companies are continually pursuing means to bring in more retail investors. Multiple organizations are also pursuing various governments to obtain licenses and approvals for instruments such as Bitcoin Futures and Exchange traded Funds (ETF). Such instruments enable organisations to provide bitcoin investments to the general public. They also help them serve customers that lack bitcoin or blockchain knowledge thus eliminating a major huddle hindering bitcoin adoption.
Political and regulatory environment
On the regulatory front, governments and national central banks are experimenting, pursuing, or adopting of digital currencies. For instance, China plans to roll out its digital Yuan in 2020 while other economic powerhouses like the USA and the European Union are assessing potential adoption. These developments compound Bitcoin’s legitimacy as the first digital currency whilst casting it as the better alternative since its decentralized, censorship proof, and universal. This will in turn boost bitcoin’s acceptance, recognition and price as more governments warm up to digital currencies. With the rapid digitalization and expansion of eCommerce, Bitcoin is poised to become the digital gold which immensely raises its value.
Bitcoin’s demand is growing steadily over the years and is projected to rise with growing awareness, friendly government policies and its suitability as a long term investment.
Additional demand is also projected to arise from other rather unfortunate sources such as the dark web and nations experiencing political unrest e.g. Venezuela and Hong Kong. Escape from financial surveillance or circumventing poor policies such as Australia’s cash ban could also boost its demand thus putting upward pressure on the bitcoin price.
A review of past data shows clear patterns that we can call upon to predict that the upcoming halving will lead to significant bitcoin price increases resulting in a new ATH. This added to other interesting developments point to an interesting scenario of declining supply and rising demand.
But, however much we may call upon history, it is worthwhile remembering that bitcoin price is only affected by the market forces of demand and supply making it difficult to predict its price.
Nonetheless, we can be in agreement that halving is bound to have some effect on price; by how much, we cannot tell for sure. That is up to the users on their network.
Bitcoin Halving image Courtesy of Marco Verch On Flickr
About the writer
Edwin is a naturally curious person with a deep interest in finance and new tech, fields which he dedicates his time to researching and documenting.
He co-founded Coinweez, a website dedicated to creating awareness about blockchain and financial technology in Africa.