Brace yourselves, BUXsters. Around the 10th of May, we’ll witness a major event in the crypto-world: a new Bitcoin halving. This rare occurrence could have a significant impact on the economics of the Bitcoin network. But what exactly is a Bitcoin halving? What does it imply? And what effect can it have on the price of bitcoins? Hold your horses; let’s answer one question at a time.
🥑 What is a Bitcoin Halving?
The Bitcoin network is kept alive by Bitcoin miners. These fellas verify Bitcoin transactions so that they can be correctly processed and added to the blockchain, which is the ledger that contains all the Bitcoin exchanges that have ever occurred. They all do this job in parallel, competing with each other because only the first who manages to verify an entire block of transactions receives bitcoins as a reward for the service. Currently, the remuneration for mining a block is 12.5 freshly minted bitcoins.
However, this reward is doomed to decrease over time. As a matter of fact, whoever designed the Bitcoin network decided that the compensation will be automatically slashed by half every 210.000 verified blocks. That’s what a halving is, and it happens roughly every four years. In May 2020, we’ll see the third halving in Bitcoin’s history, which will bring the mining reward down from 12.5 to 6.25 bitcoins.
If you want to dive deeper into the technicalities of the Bitcoin halving, you should definitely read this article — later, of course; now bear with us ;).
🧐 What does a halving mean for investors?
As many Bitcoin enthusiasts know, the total supply of bitcoins has been deliberately limited to 21 million to contain inflation. This means only 21 million bitcoins will ever be minted. That makes Bitcoin a scarce commodity by design, and that’s why, like gold, many see Bitcoin as a way to hedge against the inflationary pressures fiat currencies can be subject to.
Since the inception of the network in 2009, roughly 18 million bitcoins have been generated and the total supply of new bitcoins increases daily. As seen, halvings make this increase unwind at a gradually decreasing rate, substantially reducing the number of newly minted bitcoins per block every four years. That will continue until the plateau of 21 million bitcoins has been reached, somewhere around the year 2140.
Currently, there are roughly 54.000 new bitcoins being minted every month, which means that, at current price levels (around €6.500 per bitcoin), the amount of value added to the total Bitcoin supply is roughly €351 million per month.
A large part of these freshly minted bitcoins needs to be sold for cash on the market by small miners to cover their monthly operation costs. Now that the reward for their service is being halved, some of these miners might not be able to make ends meet, and therefore be forced to leave the market. This could decrease the selling pressure from miners in the months after the halving, pushing the price higher in the medium term.
However, let’s not forget that oil prices are at historic lows, which in turn is driving down the price of electricity – miners’ main variable cost – pretty much everywhere. Therefore, in this particular scenario, many small miners could manage to keep running operations for a while after the halving, so the effect described above could be somewhat hampered or delayed.
Furthermore, if we assume the market is efficiently pricing bitcoins (i.e. the current price discounts all available information to date), the expected outcome of the halving should be already priced in. This is a strong assumption though, as the truth is no one actually knows what’s going to happen.
📈 What history shows us
This being the third Bitcoin halving in history, well… there’s only so much history we can look at. Since Bitcoin’s last halving in 2016, its price has grown over 10 times. The slope wasn’t gentle, though — we’ve all seen the spikes and crashes. And we can’t really say this growth was sparked by the halving itself; there’s no proven causation between the two events.
Beyond these remarks, in both of the two earlier halvings, the price of bitcoin mounted in the months leading to the event. Once the halvings occurred, the price dropped in the short term to pick up again and grow significantly in the following year. For an in-depth, quantitative analysis of every Bitcoin halving, you can check out Plan B’s stock-to-flow analysis of Bitcoin’s price levels.
💭 Final thoughts
Some welcome the Bitcoin halving and some fear it. As an investor, understanding the dynamics of the Bitcoin network can give you a competitive advantage. It is clear that, after the halving, fewer new bitcoins will be added to the total supply every day, which will decrease the inflation rate of bitcoin.
However, the market for bitcoins is a very young one, which gives us minimal space to make predictions. Moreover, the short-term fluctuations in the price of bitcoin are subject to a number of variables. Not only do they depend on fundamental changes in supply and in the organisation and costs of the mining industry, but also on speculation and on the attention of the media. Therefore, you should always be careful when investing your money.
🤑 I want to trade bitcoin before the halving: how do I do it?
In case you’ve missed it, BUX Crypto, our platform for cryptocurrency trading, is now officially up and running.
BUX Crypto allows you to buy and sell cryptocurrencies effortlessly and directly using Euros. As a launch promotion, we are offering the first 5,000 users who have fully onboarded to the platform the option to trade with zero-commission and earn free BUX Tokens as a reward.
Sign up for an account here and take advantage of the offer!
Following this initial promotion, users will always have the option to trade with zero-commission as long as they hold 2,500 BUX Tokens in their portfolio. The platform will initially offer a selection of six major cryptocurrency assets and will continue to add more crypto assets throughout the year. Currently the offering includes Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH), Litecoin (LTC) and BUX Token (BUX).