By Natalie Lord
It’s less than 150 days away and the countdown has already begun to the next Bitcoin halving. The move risks changing the value of Bitcoin permanently, and even though it’s already happened twice before, few understand the process or know much about it. We explore what Bitcoin halving is, how the currency is likely to react and why it’s an important event to note for your portfolio of crypto investments.
On May 20, 2020 it is widely expected that Bitcoin will halve for the third time. According to Bitcoin, there will only ever be 20,999,999.9769 Bitcoin in existence. Let’s call it 21 million. This limit means that, unlike fiat currencies which can be printed by central banks at will, Bitcoin is a deflationary asset as opposed to an inflationary one.
The Bitcoin system works in such a way that every 10 minutes a “block” of Bitcoin transactions is resolved by miners and added to the Bitcoin blockchain. This process requires specialised hardware, electricity and is complicated and costly work. The miners do it because the algorithm in place rewards miners by giving them Bitcoins, which are generated and added to the supply in circulation at 10-minute intervals. The distribution of the new Bitcoin is called the “block reward”.
To begin with, in the early days of Bitcoin, the block reward was 50 BTC. Effectively what this means is that every 10 minutes someone, somewhere around the globe would get 50 Bitcoins delivered to their wallet if they were in the mining game. At this juncture, Bitcoin had little value and could be mined using just a laptop. Nowadays, Bitcoin is mined in gigantic warehouse-like mining rigs and the block reward is down to 12.5 BTC. This is because the block rewards have been halved, twice.
The halving of Bitcoin is a feature that is programmed into it and happens every four years or 210,000 blocks. It’s a predetermined event and will continue to happen until the last Bitcoin is mined about 120 years from now. This is what Bitcoin halving is and it’s soon to happen again.
So what happens to the price of Bitcoin when it halves? Historically, block reward halving has had a positive impact on the price of Bitcoin. This is because of supply and demand. If fewer Bitcoins are being generated, the new scarcity increases their value.
At the time of the first halving in November 2012, 1 BTC was worth around 11USD. A year later the price of Bitcoin had reached USD1100. The price later plummeted to around USD 220 where it was stuck for the next few years.
In July 2016, the second halving happened. Bitcoin stayed around the USD600-700 mark for a few months before rising towards the end of the year when it skyrocketed to hit USD20,000, before later falling to hold at around the USD4000 mark.
The clear correlation between Bitcoin reward halving and a significant initial spike followed by a reasonable rise in the price of the token, naturally has investors looking forward to the next halving event. The difference the third-time round is that the crypto space is more evolved. Public awareness is far greater around Bitcoin and there will be increased interest by institutional investors. If financial institutions take significant positions, Bitcoin could be impacted in a way that hasn’t been seen before. It’s no wonder the countdown has already started.