What is THE BITCOIN (BTC) Halving?
The Bitcoin Halving is when the block reward received by BTC miners is halved every 4 years.
When IS THE NEXT BITCOIN HALVING?
The next Bitcoin Halving is estimated to occur in 2024.
When was the last BITCOIN Halving?
Below is the history on when the previous Bitcoin Halvings occurred and its reward amount:
Why does the BITCOIN Halving occur?
Bitcoin Halving occurs as a design feature of the Bitcoin block chain protocol to ensure that BTC currency is issued at a steady, predictable rate until the maximum limit of 21 million BTC is reached.
A maximum limit of the number of BTC in circulation was set by its creator Satoshi Nakamoto to ensure the rampant inflation which occurs in fiat currencies would not happen to BTC so that it would retain its inherent value. For fiat currencies, central banks can take several actions (i.e., printing money, buying government and corporate bonds, reducing capital requirements on banks, etc.) to increase the supply of currency in financial markets. By increasing the supply of fiat currency, this makes fiat money less scarce and therefore reducing its value. By setting a maximum number of BTC that will ever be available, BTC should retain its scarcity and value and is deflationary in nature.
Bitcoin Halving is set to occur at every 210,000 blocks, which is approximately every 4 years assuming a 10-minute mining period for each BTC block. Thus, this is the 3rd Bitcoin Halving, and the 1st and 2nd Bitcoin Halving occurred in November 28th 2012 and July 9th 2016, respectively.
From the graphic below (Figure 1), we see that the rate at which BTC is supplied for circulation decreases over time. At the 1st halving about 10.5M BTC was in circulation. At the 2nd halving, 15.75M BTC was in circulation. Currently, there are approximately 18.3M BTC in circulation, and at the 3rd halving, this will be 18.375M BTC. There will only be 32 Bitcoin Halving events until the maximum limit of 21M BTC is in circulation.
What are the bulls saying about the BITCOIN Halving?
1. Reduced supply and greater demand lead to higher BTC prices.
Crypto-bulls are saying that the Bitcoin Halving should lead to higher BTC prices. When the halving occurs, the supply of new coins is reduced from 12.5 to 6.25 BTC each time a block is mined. As the traded volume of BTC is higher than ever, this should be a proxy for the greater demand for BTC. According to classical economics, if supply goes down and demand is steady or increases, prices should go up.
This assumption is somewhat evidenced in previous halvings. In the first and second halving, BTC increased by almost 40 times ($31.50 to $1178) and 16 ($1178 to $19800) times, respectively (Figure 2). Some estimates project that if BTC increases by 7 times during the 3rd halving, this may translate to prices in the USD $138,600 range.
The crypto-bulls also project that demand for BTC is likely to be much higher today than in 2016 based on the fact that the traded volume for BTC has been growing steadily since 2018. In Dec 2017, when BTC was trading at its peak of USD $20k the highest traded volume was 16 billion (Figure 3). In Feb 2020, the highest traded volume of BTC was 81 billion (Data and Graph from CoinGecko). Using traded volume as a proxy for demand, this translates to a four fold increase in demand for BTC.
2. Stock-to-flow indicator shows that BTC will have the same scarcity as physical gold.
Stock-to-flow is a measure of new supply rate over total supply and indicates the “scarcity” of an asset. If BTC has the same level of scarcity as physical gold and demand stays the same or goes up, BTC prices will increase.
3. Halving will lead to greater prices due to the upcoming BTC network upgrade.
The BTC blockchain network will be upgraded with a soft fork in late 2020. This soft fork is backward-compatible and will include features to improve BTC’s scalability and privacy. The halving will act as a catalyst for the soft fork.
4. Economic turbulence leads to BTC becoming more of a safe haven asset.
Due to the COVID pandemic, governments are pledging multi-billion or trillion stimulus packages that are funded via central banks performing quantitative easing, many economists fear will lead to hyper-inflation of fiat currency and destabilization of financial markets. As BTC is a “store of value” given its scarcity, more investors will purchase BTC as a safe haven asset and as an inflation hedge against depreciating fiat currencies.
5. Recent DeFI developments reduce BTC selling pressure by miners.
DeFi (Decentralized Finance) has improved substantially such that holders of cryptocurrency such as miners can borrow fiat currency against their crypto holdings. As a result, although miners have to pay for their operational costs in fiat currency, they do not need to liquidate all of their BTC mining rewards to pay for expenses, and can take advantage of the DeFI to access fiat currency liquidity. As such, BTC prices will not experience increased selling pressure during the halving.
What are the bears saying about the BITCOin Halving?
1. Expect consolidation in the BTC mining industry.
BTC miners have to pay for their operational costs in fiat currency, thus they often sell the BTC mining rewards immediately upon receiving them. For some BTC miners, receiving block rewards at 6.5 BTC will result in increased selling pressure and a drop in BTC prices. Non-profitable mining operations will either capitulate and shut down their operations, thus leading to sales of mining equipment and cancellations in power supply contracts.
The consolidation of the BTC mining industry can lead to security concerns. There is a danger that if BTC mining pools consolidate to the point where more than 51% is being held by a single miner, a hash attack can occur on the BTC blockchain that will completely disrupt or destroy it altogether.
2. BTC becomes an even riskier investment.
The price volatility that accompanies the Bitcoin Halving will result in greater risk and thus more investors are likely to avoid investing in BTC.
3. The halving effect is already priced in.
As BTC is much more popular and well-known today than back in 2014-2017, it is likely that higher BTC prices due to the halving have already been anticipated by investors and are already priced into the market. Thus, it is unlikely that BTC prices will go much higher than present levels.
4. COVID will have a negative impact on BTC prices.
During the previous halvings, BTC prices had positive 90-day returns thus the halvings accelerated macro uptrends in BTC prices. At present, BTC prices have a negative 90-day return due to the COVID pandemic. BTC was not the digital safe haven it was thought to be when the price of BTC crashed just as much as stock markets globally on March 12 and March 13 2020. As the COVID pandemic continues to roil financial markets globally, it is likely to have the same negative impact on BTC prices. As investors are more fearful, they may not be willing to take risks and purchase BTC.
What’s my opinion?
Cryptocurrency continues to baffle many traditional experts as it encompasses so many topics such as economics, computer science, psychology, technology, law and finance. Within these broad study areas specialist understanding is required in game theory, cryptography, behavioural economics, databases & distributed ledgers, regulatory frameworks, and business use cases. Most economists and lawyers are not technophiles, and most computer scientists have little interest in law and economics. As It is virtually impossible for any one individual to claim absolute expertise in all the above areas, thus we will always have divergent opinions and views on cryptocurrency.
Based on my degrees in computer science, engineering and finance, and my professional experience at engineering & technology conglomerates as well as banks and asset managers, I am bullish on cryptocurrency and a believer in DeFI. DeFI has developed to a point where it is a strong contender and challenger to the existing traditional financial system. Although, I do not think it will overtake our financial system any time soon, it is now sufficiently user-friendly that individuals can easily participate in this burgeoning new financial network. The development of DeFI means that crypto is not just for traders or speculators. DeFI allows everyday financial activities such as fund transfers and connects lenders and borrowers of capital in a simple, efficient, and transparent financial network.
My opinion is that the 3rd halving will lead to a price increase in Bitcoin as demand for DeFI and use of the cryptocurrency network will only grow over time.
Although other currencies such as ETH or DAI are more effective for DeFI due to their smart contract functionality, Bitcoin will continue to be the reserve currency that underpins the cryptocurrency financial network, just like the US dollar is the reserve currency that underpins the traditional global financial network.
An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading