Exploring Bitcoin Halving and Its Effect on Crypto Prices
Bitcoin halving is around the corner. But what is it? And how will it impact the cryptocurrency's price? Learn more.
Unlike every single fiat currency on the planet today, Bitcoin was designed to have a finite supply. Satoshi Nakamoto, the cryptocurrency’s creator, made the decision to limit the total number of tokens in circulation to 21 million. The process of creating Bitcoins up to this limit is called ‘mining’ and requires users to solve complex mathematical calculations by dedicating large amounts of computational power. Blocks containing new Bitcoin are mined in 10-minute intervals.
Back in 2009, when the cryptocurrency first debuted, miners would receive 50 BTC for every successfully mined block. After every 210,000 blocks, however, that reward was designed to be halved. This meant that by the end of 2012, miners would receive 25 BTC per block instead of 50. The 50% reduction algorithm went on to be colloquially termed as ‘block reward halving’ in the cryptocurrency community. In the following sections of this article, let’s explore this concept in greater detail and understand its effects on Bitcoin’s valuation over the past decade.
Bitcoin Halving and Valuation: Is There a Connection?
By cutting the rate of production in half every four years or so, Satoshi Nakamoto designed a currency supply that mimics the influx of precious commodities such as gold. Furthermore, it offers a unique way for new coins to enter circulation, even in the absence of a traditional authority such as a central bank or government. Nakamoto explained this aspect in the Bitcoin white paper as well, saying, “The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”
Today, miners earn 12.5 BTC from each block, down from 50 just a few short years ago. As a consequence of this increasing scarcity, the dynamics of supply and demand come into play. With a larger segment of the world’s population trying to buy the same limited amount of Bitcoin, its price has nowhere to go but upwards.
Historically, Bitcoin halvings have always set spectacular price rallies into motion. In the aftermath of the most recent halving event in mid-2016, for instance, Bitcoin’s valuation jumped from around $800 to an astounding $20,000 in January 2018. While the cryptocurrency’s price has since settled at the $9,000 benchmark, the next halving is already on the horizon. Some trackers estimate that the block reward will halve sometime in the first half of May 2020. Since blocks are not mined in exact 10-minute intervals, small variances over time can cause the halving to occur sooner or later as well.
Now that halvings are a known phenomenon though, it is possible that major mining pools and investors alike are preparing for its effects ahead of time. As such, it is possible that the market will react extremely slowly to the changes in the supply, if at all.
Halvening 2020: Impending Price Rally
According to Morgan Creek Digital Co-founder and partner, Jason Williams, while large mining farms will likely pave the way for price activity, it is unclear if the effects will be positive. He said,
“Large miners that are holding BTC will have to sell to cover operational expenses or use cash as revenue halves. New buyers have to come in to move this market up. So other than a new headline, the halving is being dealt with now by those who are operationally affected by it. Those that don’t will be priced out of the mining business.”
Even in previous instances of Bitcoin halving, price movement was not exactly immediate. Back in 2012, Bitcoin’s price remained mostly dormant around the $10 level for a year. It wasn’t until late 2013 that the cryptocurrency soared to a then record-breaking $1,000.
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