Explaining the Bitcoin (BTC) Halving – Sazmining
Let’s regroup. So far we know three important things, first, Bitcoin has a limited supply that is distributed through blocks to miners, secondly, this supply inflates at a decreasing rate over time, and third, Bitcoin has experienced only two halvings in its history.
If you’ve been involved with Bitcoin or have Googled it in recent times you’ll notice a trend of people referencing the halving. With the 630,000th block scheduled for May 2020 the difficulty to mine bitcoin will double pushing a lot of miners out of profitability. The inflation rate will also reduce to 6.25 Bitcoin every 10 minutes, so each miner will now have a reduced supply of Bitcoin coming in. This will cause a natural reduction in available supply to the market. Assuming miners sell 50% of their Bitcoin to cover costs and keep the other 50% then the available new supply available on exchange markets will also drop in half. They will also have to sell the half they are receiving at double the cost to mine in order to maintain the same margins.
A doubling of the power required to mine each block is an ideology meant to help sustain and scale a blockchain. Early adopters are rewarded greater for supporting a chain that is in it’s infancy. Once the chain matures it reduces its inflation rate in a direct attempt to bolster price and give those with vested interest more reasons to keep supporting the growth and scalability of the network.
Bitcoin’s price is tied to fundamental economic theory of how free markets work. The two primary factors that affect price are supply and demand. Assuming demand stays constant if supply reduces then the price will go up. If supply stays the same and demand goes up then the price will go up.
Based on the last section we know that the Bitcoin halving is going to reduce the available supply to the market. This, based on the theory of supply-demand should have a long term positive impact on price. Demand, however, affects the rate at which price inflates and deflates at a much more dramatic speed.
With the global tensions skyrocketing, the US/China trade war, and multiple developing countries’ economies collapsing (Turkey, Argentina, Venezuela), there has been more interest in Bitcoin and digital assets as an alternative form of reserving wealth not tied to the political ecosystem of one’s country. This is a potential increase in demand as digital assets are introduced as solutions to the people of the world as an alternative.
But since humans and their demands are fickle, let’s ignore it for now and focus on the historical impact of previous halvings on price. Based on the chart below we can see a a pattern that occurs around each halving. Bitcoin halves (in this case we will reference the genesis block as an event equivalent to a halving) and shortly after appreciates into a bubble, retraces into a correction, then remains fairly stable before repeating the cycle.
Let’s tie what we learned to this by looking at the halving in late 2012 as an example. Bitcoin halved and now miners were receiving 25 coins per block rather than the 50 they were before. People mining bitcoin using their everyday computers were almost entirely pushed out of relevance and now you needed a small data room to generate real profit. With this reduction in supply we see an uptick of almost 100x in price within a year.
By taking these examples as reference we can draw the conclusion that when the halving occurs in 2020 we should see, at minimum, a retest of the previous maximum price within one year of the event as long as demand stay relatively constant. An increase in demand could cause the “bubble” phase of growth to far exceed what was seen after the halving in 2016.
Published at Tue, 11 Feb 2020 16:35:32 +0000
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