Halving. What is it and why is everyone talking about it?

“Making a lot of money is courage; save them – wisdom, but skillfully spend – art.”

Auerbach Berthold

Over the past 18 months, the crypto community has faced a significant bear market. Major digital assets like Bitcoin and Ethereum experienced a 70-80% drop, while the rest of the altcoin market looked much worse. Fortunately, 2019 turned out to be a more promising year for digital assets, as Bitcoin and Ethereum surged 55.45% and 48.69% over the past three months. As the outlook becomes more positive, the community is looking forward to one major event coming next year – the Bitcoin halving.

What is halving

In the cryptocurrency space, the term “halving” refers to a process that slows down the rate at which new coins are issued. More specifically, halving is a periodic reduction in the block subsidy given to miners. Cutting in half ensures the crypto asset follows a stable release rate until its maximum supply is eventually reached..

When it comes to Bitcoin, new coins are generated continuously as part of the block reward (which consists of the block subsidy plus transaction fees). Therefore, every time the miner successfully “detects” and verifies a new block, he earns newly created coins as compensation for his work..

Thus, the mining process introduces new bitcoins into the system, and this happens at a predictable and controlled pace. New Bitcoin blocks are mined, on average, every 10 minutes, with block subsidies following a controlled decay rate. Accordingly, halving guarantees that block subsidies will decrease by 50% every 210,000 (roughly every four years).

Starting with the Genesis block – the first block of the network, Bitcoin’s block subsidy was originally set at 50 BTC. It was then dropped to 25 BTC in 2012 and to 12.5 BTC in 2016. The next halving in May 2020 is expected to cut block subsidies to 6.25 BTC. After 64 halvings have occurred, the process will stop and the MTC will no longer be created. Maximum supply of 21 million BTC will be reached.

Why halving is important

As we said, one of the most important features of Bitcoin is that it has a fixed supply of 21 million coins. This means that after all of them are obtained, their further extraction will become impossible. This makes the cue ball inherently scarce with a deflationary effect over time..

This is in stark contrast to fiat currency, which is regularly printed at will, which reduces its value to its owners..

If Bitcoin did not have a limited supply, its purchasing power would gradually decline over time, as is the case with fiat currencies. By limiting supply, bitcoin holders will never have to face this problem, making it and other cryptocurrencies a good store of value..

The shrinking and embedded scarcity also increases the stock-to-flow ratio of bitcoin. The stock to flow ratio is the amount of the asset held in the reserves divided by the amount produced each year. The higher the stock-to-flow ratio, the lower the annual inflation per asset. Commodities such as gold have a very high stock-to-flow ratio as there is little of it. This means that even less of it is produced over time..

Bitcoin currently has a significantly lower stock-to-flow ratio than gold. However, halving increases the stock-to-flow ratio of an asset over time, making it all the more powerful and valuable. This is also the reason why bitcoin is often compared to gold or referred to as “digital gold”. Many people are convinced that the ratio of stocks to bitcoin flow will increase over time and that its price will also rise..

Economic dynamics of halving

Historically, Bitcoin halving has shown an extremely positive impact on price movements. For those who don’t know, Bitcoin is split in half when the network’s release rate (or inflation rate) drops by 50% every four years. Cutting inflation in half not only reduces the number of new coins coming into circulation every day, but also increases the cost of mining to protect the network. This has been one of the driving factors behind previous Bitcoin runs in the past.

Before we dive into the historical implications of Bitcoin’s decline, we first want to outline the economic dynamics of its decline.. 

The issuance schedule states that the block reward will continuously decrease by 50% every 210,000 blocks, which effectively reduces the Bitcoin issuance to zero over time..

Bitcoin started with a block reward of 50BTC. Historical data has shown that a new block is created approximately every 10 minutes. With this in mind, we can assume that the block reward will roughly halve every 4 years. The math looks like this:

210,000 blocks x 10 minutes per block / 60 minutes an hour / 24 hours a day / 365 days a year.

Here’s a look at how it happened in the past:

Economic dynamics of halving

One of the biggest benefits for Bitcoin is its transparency and algorithmic monetary policy – a characteristic that the current financial system lacks. Currently, about 1,800 new crypto assets are released into circulation every day. Following the third halving event in 2020, the daily issue rate will drop to around 900 BTC per day, causing the annual Bitcoin rate to drop from 3.70% to 1.79%. This is an interesting development as the release of bitcoins will now be below the inflation rate in most developed countries. By comparison, the inflation rate in the United States is 1.9% in 12 months. That being said, the main difference is that Bitcoin is a fixed delivery asset, while the US dollar is not..

The historical impact of halving on price

For those of us who viewed digital assets as a vehicle for investment, Bitcoin’s historical price movement in response to halving events was very interesting to potential investors. While past performance is not indicative of future performance, we wanted to analyze some of the past performance from previous halvings to understand what might lie ahead. Here is a table describing some of these statistics..

The historical impact of halving on price

The first official reduction (reduction of block reward to 25 BTC) occurred on November 28, 2012. Historical data show that after the large pump in June 2011, an upward trend began to form in November 2011, about a year before the halving.

This uptrend resulted in a + 341.90% rise in Bitcoin prices, trading at an average of $ 12.31 per BTC in November 2012.

First halving

The first halving lowered the daily bitcoin issue rate from ~ 7200 BTC to ~ 3600 BTC per day. Almost immediately, Bitcoin continued to generate historic profits, soaring nearly 8,000% over the year, reaching around $ 1,000 at the end of November 2013 (depending on stock data).

Unfortunately, it didn’t take long. In December 2013, Bitcoin began a multi-year bear market (thanks largely to the infamous Mt. Gox hack). As a result, the asset fell by more than 80%. After that, the reversal began only 2 years later, in October 2015.

Second halving

The second official cut (reduction of block reward to 12.5 BTC) occurred on July 9, 2016. It is important to note that the time between the first and second decrease was 1316 days, or 3.6 years. At the same time, the data shows that the upward trend began to form in October 2015, about 9 months before the halving.

The uptrend led to a 112.0% rise in Bitcoin over a 9-month period and an average trading price of $ 650 per BTC during a contraction in July 2016 (52 times the last decline price). The second halving lowered the daily bitcoin issuance rate from ~ 3600 BTC to the current ~ 1800 BTC per day. This ultimately pushed BTC into the most recent bull trend of 2017, where the asset rallied 2,800% over the next 18 months. The peak finally came in mid-December 2017 with a price tag of about $ 20,000 per BTC.

Second halving

Similar to the previous bull run bear market in 2013, Bitcoin fell nearly 80% over a 12-month period, and bottomed out around $ 3,200 in December 2018..

Third halving

The third official cut (reduction of block reward to 6.25 BTC) is planned for approximately 57,455 blocks (based on block height 572,545) on 20 April 2019. Based on the assumption of 10 minutes per block, the estimated halving date should occur in late May – early June 2020.

If historical data is a good indicator of previous success, then BTC can be expected to show positive results. It is possible that in early January, Bitcoin is likely to be trading at a quarter of its peak value, but in May-July the price will go up. According to the most conservative estimates, in the region of $ 10,000 for 1 BTC. With new expected ATH (All-Time High) within 12-18 months after halving.

Third halving

Output

Of course, the question is on everyone’s lips: will the upcoming halving of 2020 affect the price of bitcoin in the same way? If you look at previous cuts for evidence, it certainly seems likely that future halving could significantly increase the price of BTC. And more importantly, after the two previous events, the price of the first cryptocurrency never fell below its value before the halving took place..

For those of us who are relatively new to digital assets, we hope this article can provide some confidence that the future of the cryptocurrency market is still pretty bright.. 

However, it’s worth remembering that it’s impossible to predict for sure how Bitcoin will react in the future..

Mike Owergreen Administrator
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