Everything You Need to Know About the Bitcoin Halving

With less than two months to go before the next Bitcoin Halving (referred to by some as “the halvening”), you may have some unanswered questions. To start with, what is the Bitcoin Halving, why does it matter, and will it have an impact on bitcoin’s price? Let’s take a look at the facts and examine some previous data.

What Is the Bitcoin Halving?

If you’re not exactly sure what the Bitcoin Halving is, rest assured, you’re not alone. In fact, in a global population approaching 8bn, it’s estimated that there are only around 100mn bitcoin owners. That’s not even close to 1% of the world’s population. If you own bitcoin today, you’re part of a pretty small club.

The reason that you’ve been hearing a lot about the Bitcoin Halving is lately is because it’s a significant event in Bitcoin’s evolution - and it’s approaching quickly. The latest estimate places it at around 50 days away (less than 8,000 more blocks to go). So, what exactly is it?

You probably know by now that adding transaction records to the Bitcoin blockchain is done through a process called mining. By using specialized mining equipment to solve cryptographically hard puzzles, miners add new transactions to past transactions. This creates a chain of blocks - a public ledger known as a blockchain. Miners are compensated with a block reward each time they discover a new block.

This is comprised of newly mined bitcoins (the block subsidy) and the transaction fees paid by every transaction included in the block. The subsidy remains by far the largest part of the reward and is currently 12.5 BTC.

However, the number of bitcoins paid out to compensate miners is reduced by 50% every four years (210,000 blocks). This is known as the Bitcoin Halving and will ultimately end with 21mn bitcoins in circulation. At this point, the network should be sustainable on transaction fees alone.

After the Bitcoin Halving 2020, the block reward will be slashed in half to 6.25BTC plus transaction fees.

Why Have a Bitcoin Halving?

If miners are effectively getting their wages reduced by 50%, why do many people consider the halving to be a bullish event? Won’t it cause problems and squeeze some small-time mining operations out of the game?

Well, that’s certainly possible, especially amidst today’s uncertain climate. The Bitcoin Halving 2020 will have a temporary negative effect on miners’ earnings. We may also see some miners forced to leave the network.

However, looking back at previous halvings, while they both a had short-term impact on mining activity, it was followed by an extremely positive effect on Bitcoin’s price not long afterwards.

Bitcoin’s Capped Supply

One of the key factors that set Bitcoin apart from government (fiat) money is its fixed supply of 21mn. This is also known as a “hard cap.” The significance of this cannot be overstated. Unlike governments who can elect to inflate their monetary supply by printing money at will (just look at global central banks’ response to the coronavirus), Bitcoin’s supply will always remain the same.

This is what makes bitcoin such a good store of value over time. The US dollar has lost over 95% of its purchasing power in the last century. $100 in 1913 would be the equivalent of $3.87 today. Bitcoin, unlike fiat currencies, will never lose its purchasing. In fact, its capped supply dramatically increases its odds of steadily increasing in price in the future.

This rise in price over time is what allows the miners to continue to make steady profits, despite the reward reduction. The compensation may be less in BTC terms but that BTC is more valuable, making it sustainable over time.

Previous Bitcoin Halving Events

Let’s take a look at previous Bitcoin Halvings and their effect on both Bitcoin’s price and hashrate. The first-ever Bitcoin halving took place on Nov 28, 2012. The block subsidy was cut from 50 bitcoins to 25. The price of BTC at the time was approximately $11. What happened next was an unforgettable bull run that would see Bitcoin’s price rise all the way to $1,135 on Nov 29, 2013. That’s a mind-blowing increase of 10,218%.

The second halving happened on July 16, 2016, when the reward was cut to 12.5 BTC (its current rate). However, this time around, the price failed to react right away. In fact, the flagship cryptocurrency was locked in a sideways trading range between $500-$800 until the end of the year.

Finally, on Dec 21, 2016, the price broke through $800 and the infamous bull run was ignited. During 2017, Bitcoin would skyrocket to reach its all-time peak of $19,862 on Dec 18m 2017. A 2,827% percentage hike. Let’s take a look at the chart below:

Bitcoin Halving Chart - Price

With these massive price gains from previous halvings, it becomes clearer why the community cites the halving as a bullish event for Bitcoin. However, since Bitcoin is still new and we have little data to examine, there is no hard and fast rule that says history must repeat itself.

Moreover, as recent events have proven, BTC appears to be more correlated to the stock markets than was previously thought. Under these current conditions, it seems unlikely that we can expect a meaningful price hike in the short-term.

Bitcoin Halving Effect on Hashrate

If you look at the following chart, you can see that hashrate has increased substantially over Bitcoin’s lifespan as more miners joined the network.

Source: Blockchain.com

This shows growing confidence and a more robust network since more miners are needed to add stability to the system. If miners start to leave the network, this can cause clogged up or slow transactions or even leave the network vulnerable to a 51% attack.

Looking back at both previous Bitcoin Halvings, hashrate immediately after the event decreased. In 2012, It fell from 27.61 THash/s to 19.98 THash/s within two weeks. However, following the sharp drop, it soared quickly to 60 THash/s around six months later.

In 2016, a similar drop occurred. The hashrate fell from 1.56 EHash/s to 1.40 EHash/s. However, it was to improve shortly afterwards to reach 3.85 EHash/s in just seven months.

At the time of writing, Bitcoin’s price has suffered badly. It started the year posting gains of over 35% only erase them all and register YTD losses of around 16% today. Look at the below graph on hashrate as well. Hashrate has started to dwindle over the last few days and follow Bitcoin’s price. This is not a good sign for the network.

In fact, the difficulty level of finding new bitcoins looks set to reduce by 13% this coming week to help prevent a mass miner exodus. The global pandemic that no one expected will likely cause pain for the Bitcoin network.

Will this Halving Have a Positive Effect on Bitcoin’s Price?

There seems to be little positive news at the moment. However, you’ll know by now that Bitcoin is a long game. Many analysts still believe that BTC price will soar, but not for a few months after the halving. Fundstrat Managing Partner Thomas Lee, for example, believes bitcoin’s price will reach $40k by the end of the year.

It should be noted that he made that call before the coronavirus impacted all global markets and daily life. Bitcoin, like all other assets, is subject to supply and demand. The halving reduces supply therefore if demand is consistent, the price will go up. But demand has been steadily dropping with no signs of increasing any time soon.

But let’s take a positive perspective and assume that the pandemic will be under control within a few more months. It’s still unlikely that Bitcoin will see the same dramatic price hike in terms of percentage points as before. If you look at the last two halvings, you’ll notice that the gain from 2016 was 72% less than in 2012 (even if the price was significantly higher).

So let’s assume that this time around, the same thing happens. The rally is 72% less than the 2016 Bitcoin Having. That would mean BTC would make gains of 796% after the Bitcoin Halving 2020. Based on a BTC price of $6000 on the next halving, we could see a price of $47,760 within some 12-18 months after the event.

Wrapping It Up

Of course, it’s impossible to make an accurate price prediction on any speculative asset (particularly during times of mounting global uncertainty). However, two things look to be very likely from the 2020 Bitcoin Halving:

We’ll see a short-term mining shakeout followed by a surge in both price and hashrate as we move into the following year. Bitcoin may be in for some turbulent times ahead but the long-term outlook is very bullish indeed.