In the grip of a deepening crypto winter, the Bitcoin Faithful are looking ahead to the next Halvening to inject new life into the market.
The Halvening is Bitcoin’s only adjustment in Monetary Policy. Unlike fiat currencies, where inflation targets and monetary supply are typically set by politicians and central banks respectively, bitcoin’s supply is algorithmically determined. Every block – on average 10 minutes – a new tranche of bitcoin’s are created. And every 210,000 blocks, or around 4 years, the size of that tranche is cut in half.
Thus decreasing new supply is built into the Bitcoin protocol. The laws of supply and demand suggest that this should have a significant effect on price, since – all things being equal – there are fewer new coins coming onto the market.
To date, history appears to have borne out that idea. The first Halvening took place on 28 November, 2012, when Bitcoin’s rewards dropped from 50 BTC per block to 25 BTC. At the time, bitcoin cost just $12. Looking at the log chart, price action was flat at the time but it’s clear that this was the point that the huge run-up to over $1,000 at the end of 2013 began, almost exactly a year later.
The second Halvening occurred on 9 July 2016. Once again, the chart suggests this was a key point in the next run-up, from around $620 at the time to almost $20,000, 17 months later.
Important though these events are, they’re not nearly enough on their own for making reliable predictions. The ecosystem was very different in 2012, when bitcoin was barely known. By 2016, the growing influx of retail money was making an enormous difference to price – the Halvening helped but did not fundamentally change that dynamic.
Still, basic economics points to the next Halvening as a major event for Bitcoin. Right now, it’s expected to happen in May 2020, and block rewards will drop from 12.5 BTC to 6.25 BTC. You can keep track of it at http://www.thehalvening.com. One factor noted elsewhere is that this Halvening will see Bitcoin’s inflation rate drop below that of the target rate for central banks: 900 BTC per day will put inflation at just 1.8% and falling.
We have to repeat that we don’t have enough data to know what will happen, as so much depends on the state of the market. So far, the price run-up in the year before each Halvening might just be a coincidence – though intuitively, it makes sense. The event is known in advance and expected, so traders factor it in. Nothing really happens for a while. But then the fundamental fact of reduced supply gradually takes effect, causing incremental changes and helping drive the market higher. In the context of increasing global demand, that’s powerful. Of course, the market gets overheated, the bubble pops and the cycle starts again.
We also have to look at the timeframe. The bubble tops do not coincide with the Halvenings, they take place between them, and the offset has been different – around 12 months and 17 months afterwards in each case. Looking at it a different way, the bull market seems to begin around a year before each Halvening. That would put the start of the new uptrend in May this year, which allows very little time for consolidation but could potentially fit with the bottoming of the market.
One last point, from the other side of the coin. The Bank of International Settlements recently published a report that falling block rewards would ultimately kill Bitcoin, as there would not be enough money to pay miners, impacting speed and security. ‘Whenever block rewards decrease, the security of payments decreases and transaction fees become more important to guarantee the finality of payments. However the economic design of the transaction market fails to generate high enough fees. A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered “final”.’
So for various reasons, we await the 2020 Halvening with interest.
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