Will the Bitcoin halving in 2020 cause a rapid increase in the price of Bitcoin?
In a year’s time (on May 27th 2020, unless wild swings in the mining hash rate change anything) the reward for mining new blocks on the Bitcoin blockchain will drop from 12.5 Bitcoin to 6.25 Bitcoin — and this already has people speculating about how this could affect the Bitcoin price.
A lot has changed for Bitcoin since the last Bitcoin halving, which happened on July 9th, 2016, and each time it happens no one is entirely sure how price of Bitcoin, or the cryptocurrency market will respond.
A Bitcoin halving is a fixed event which occurs after every 210,000 blocks are mined, or confirmed, by miners.
Previous Bitcoin halving’s and how it’s price was affected
Since Bitcoins creation in 2009, there have been two halving’s, the first halving occurred November 28th 2012 and the second halving on July 9th 2016.
Some 12 months after the first Bitcoin halving event in November 2012, the Bitcoin price reached what was then an all-time high of $1,000.
The 2016 halving heralded 2017’s bull run which peaked in December 2017 with the price of one Bitcoin reaching an eye-watering $20,000.
Since the price has fallen back — but the same thing happened after the 2012 halving and subsequent boom, with the Bitcoin price falling as low as $200 per coin before picking up in the lead up to the 2016 halving.
The price of Bitcoin has spiked after both of the previous halving events
While the price of Bitcoin has climbed somewhat ahead of both subsequent halving events, the price has gone on to boom in the subsequent 12 or so months.
Many financial experts think this is similar to the way traditional markets prices change due to interest rates or changes to commodity supply.
“Previous halving’s have shown negligible impact on Bitcoin’s price. This is because, rather like a much anticipated interest rate cut, everybody already knows it’s going to happen way in advance,” said Glen Goodman, Bitcoin analyst and author of forthcoming book The Crypto Trader.
If the market knows the supply is due to be reduced at a certain time, and by what it will be reduced by, it will begin applying that reduction to the price gradually — avoiding sharp spikes and dips.
“Historically the cut has had very little immediate impact, although the price usually rose after,” said Chris Wilmer, professor at the University of Pittsburgh and co-author of Bitcoin for the Befuddled.
The rise in price makes sense in so far as large buyers of Bitcoins have to either buy on the market or get them through mining, and after a halving event it forces more people to buy on the market.
“Cryptocurrency markets are often very event driven, and as we get closer to the next halving bitcoin’s price will receive a boost from those anticipating the forthcoming reduction in new supply,” said Garrick Hileman, head of research at Blockchain and co-founder of Mosaic. “In the months leading-up to the last two halving events we saw bitcoin’s price steadily trend upward, and then power higher following the reward halving.”
There are more factors in play, however…
Thorsten Koeppl, professor of economics at Queen’s University in Canada, said:
“It appears to us, any cryptocurrency should economically do the opposite of what Bitcoin is doing.”
“The value of Bitcoin is partly driven by its potential as a payments tool and, before the fees rose along with the price, there were people using Bitcoin for international transfers. This has become more expensive to do now. But the price is still being supported.”
The increase in fees over the last couple of years — along with the rise in Bitcoin price — is a direct result of more people using the Bitcoin network.
Right now there are roughly 400,000 transactions per day on the Bitcoin network with a market price of $7,825.
How the Bitcoin halving will affect miners
As the Bitcoin block reward reduces, miners will increasingly rely on fees, which they get as an incentive to confirm Bitcoin transactions.
Miners use the miner fees attached to transactions to decide which ones to confirm — choosing the biggest ones first.
Eventually, once all the 21 million possible Bitcoins are mined, miners will rely entirely on these fees for their income.
The first people affected by a Bitcoin halving are the miners, with new Bitcoin coming at the expense of computer processing time and electricity.
In recent years the cost of mining has risen significantly, although both big Bitcoin mining consortium and smaller miners are still able to make a profit.
But for miners, a halving means a big drop in revenue.
Ahead of the second halving in 2016 the price of Bitcoin at the time meant one block mined resulted in new Bitcoin worth around $16,000. That would have fallen to $8,000 directly after the halving.
However, it’s possible for the network to balance itself. As mining difficulty increases, fewer miners might continue to secure the network.
Wrapping things up
If history has shown anything we can expect a negligible different at first, followed by a possible price increase following the event.
How much will the halving affect Bitcoin’s price in the long run? That is something we cannot tell for sure, the biggest factor affecting the price of Bitcoin is the amount of users on it’s network.