Bitcoin saw massive growth after the 2016 halving.
On May 20th 2020, the third Bitcoin halving will occur. 50% less Bitcoins will be generated every 10 minutes and this could change the value of Bitcoin. Forever.
This is known as a “Halving” and it has already occurred twice, each time boosting Bitcoins price by at least 10x. Despite increased awareness around Bitcoin, not a lot of people seem to be talking about this.
Today I will explain the Bitcoin Halving, how it could affect Bitcoins price and what to expect.
A deflationary currency:
Bitcoin operates on a model of deflation. This means less Bitcoins will be made over time and eventually the supply will stop.
The supply will end when the last Bitcoin is mined in the year 2140. Bitcoins supply is limited to 21 million units by it’s built in algorithm, no more than that amount can ever exist.
This is different to fiat currencies which use an inflationary model. Inflation is a model where central banks can print extra units of currency at will.
Bitcoins deflation makes it scarce and as we know, when something is scarce, it has more value.
Block rewards:
Bitcoins are generated whenever a “block” of transactions are solved by miners and added to the Bitcoin blockchain. This is an expensive process, requiring special hardware and loads of electricity.
In return for solving blocks, miners are rewarded with new bitcoins. These bitcoins are awarded by the Bitcoin algorithm and they’re known as the “block reward”.
The process occurs every 10 minutes, so in short, every 10 minutes new bitcoins are made.
Bitcoins first block reward was 50 BTC. This meant that every 10 minutes a bitcoin miner had 50 bitcoins sent to their wallet for confirming a transaction.
This was in bitcoins early days when it was less than a dollar and anybody with a laptop or computer could mine it. Nowadays miners don’t make as much as they did back then.
The current block reward is only 12.5 BTC, this is due to the block reward being cut in half (or halved), twice. This feature is programmed into Bitcoin and occurs every 4 years (210,000 blocks).
This will continue until the last bitcoin is mined in 2140.
The next “halving” is set to happen 10 months from now, reducing the block reward to 6.25 BTC every 10 minutes. The next halving could change Bitcoins price forever, like previous halvings have done.
Before we move on, lets quickly look at more factors that affect Bitcoins value and could amplify the halving’s effect.
Mining difficulty & mining pools
Reduced block rewards are not the only factor affecting Bitcoin’s scarcity.
It harder now than it was in the past to solve blocks and generate bitcoins. This is due to the mining difficulty increasing as more miners join the network.
Increased difficulty means miners need more powerful hardware to solve the cryptographic algorithms.
Increased difficulty has led to miners using “mining pools” to collectively solve blocks and share the block reward. A mining pool is a network of miners who share their processing power and split the block reward.
The block reward is shared equally, according to the amount of power each miner contributed towards finding and solving a block.
Lets take Slushpool for example which currently has 15,700 active users who will share the 12.5 BTC block reward if they find a block.
(BTC Price: $11,450 x 12.5 = $143,125).
For the sake of this example lets say every worker contributed the exact amount of processing power. That would net each user $9.5 or 0.00083 BTC for every block they mined.
BTC Price divided by 15,700 users ($143,125/15,700 = $9.11).
Block Reward (12.5 BTC) divided by 15,700 workers (12.5/15700 = 0.00079 BTC)
This 15,700 strong mining pool would earn it’s workers a little under $10 for every block they solved if their resources were pooled equally.
This is a far cry from the $143,125 (12.5 BTC) block reward.
The block reward halving has had positive long term effects on the price of bitcoin. There are many theories as to why this happens but the simplest reason is supply and demand.
When fewer bitcoins are being generated, this increased scarcity makes them more valuable.
After next years halving, the block reward will be reduced from 12.5 BTC to 6.25 BTC. At todays price of $11,450 per Bitcoin that is $71, 562.5.
We’ll use my previous example from the “Mining difficulty & mining pools” section again. Lets take a pool of 15,700 miners (Slushpool) who will share the 6.25 BTC block reward if they find a block.
(BTC Price: $11,450 x 6.25 = $ 71,562.5).
For the sake of this example lets say every worker contributed the exact amount of processing power. That would net each user $4.55 or 0.00039 BTC for every block they mined.
BTC Price divided by 15,700 users: ($71,562.5/15,700 = $4.55).
Block Reward (6.25 BTC) divided by 15,700 workers: (6.25/15700 = 0.00039 BTC)
This 15,700 strong mining pool would now earn it’s users a little under $5 for every block they solved, if their resources were pooled equally. This is half than the rounded off amount of $10 from the previous example.
How the halving will affect Bitcoins price
After the halving, miners who don’t find it profitable to mine anymore will give up. Most miners will continue to mine and will only sell their bitcoins at a profitable rate, thus increasing Bitcoins asking price.
If we look at previous halvings, we can see how Bitcoin’s price was affected.
The First Halving
The first halving occurred on November 28th 2012 when one BTC was worth around $11. A year later, bitcoins price surged to a mouth watering $1,100 in 2013, a price never before seen with Bitcoin.
It had only been one year since the halving and Bitcoin had grown 100x.
Bitcoins price eventually fell to around $220 and it remained below $1,000 for the next few years. Even at its bottom Bitcoin was still up 20x from it’s price before the halving.
The Second Halving
The second halving took place in July 2016. Bitcoin maintained a price of around $600–$700 before flying to $20,000 in the great bullrun of 2017.
Bitcoin had grown over 33x from it’s price before the second halving and over 1,818x from its price before the first halving.
The table below shows the exact Bitcoin prices before and after every halving.
The Third Halving and what to expect
With the next halving only around 10 months away, what can we expect to happen to Bitcoins price?
I believe that it will follow previous trends by reaching a new all-time-high a year after. Bitcoin could likely hit a 10x from it’s price before the halving, so $100k looks possible to me.
Kraken CEO, Jesse Powell seems to be optimistic about Bitcoin reaching $100k after the halving. He believes Bitcoin will reach either a $100k or $1m price tag.
“When I hear people talking about a bitcoin “correction” I’m thinking $100k, maybe $1m. That’s what’s correct. “
Anthony “Pomp” Pompliano, co-founder of Morgan Creek Digital Assets, also believes that Bitcoin could reach $100,000 by 2021.
“Supply-Demand economics remain valid,” said Pomp. “They are a great way to determine the market price. So, if the demand for a fixed-supply asset increases, we continue to see price appreciation.”
Pomp continued to say, “one of the largest drivers of that demand or increase in scarcity is the halving in may 2020 which i think is going to be a big moment.”
You can see Pomp’s prediction in the tweet below:
Pomp & Jesse’s predictions of a $100k Bitcoin by 2021 don’t seem far fetched to me, it is only 5x from Bitcoin’s previous ATH of $20,000.
However we will have to wait and see how the crypto market responds after the halving.
Bookmark this story and check again in 2021 to see if Bitcoin hits the $100k mark. ?
Increased public awareness could also lead to a wave of FOMO buying which could push BTC’s price higher.
Third Generation and Web 3.0 blockchains will cause increased interest in cryptocurrencies. This could then translate into wealth being transferred many different altcoins.
We will most likely see a massive rise in the value of bitcoin a year after the 2020 halving. Other cryptocurrencies will soon follow, crossing their previous all time highs.
Bonus: The Litecoin Halving will happen on August 7th, 2019, that’s less than 28 days from now. The block reward will reduce from 25 LTC to 12.5 LTC.
I can’t wait to see how these events will play out…
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