How the Bitcoin halving impacts price action

The Bitcoin halving is finally upon us following months of rampant speculation and jaw-droppingly inaccurate price predictions.

With mainstream media outlets beginning to report on Bitcoin and its price over the past few weeks it’s important that the public keep informed about what the halving is and why it’s so important.

Roughly every four years, or specifically every 210,000 blocks, Bitcoin is designed to slash rewards for miners in half, hence the name of the halving.

Miners are currently awarded 12.5 BTC for each block that is mined and verified, although from tomorrow that number will be reduced to 6.25 BTC.

How will it impact Bitcoin’s price?

A change like this can be perceived in a number of ways, first of all a reduction in new supply means that eventually the price of each individual unit will rise, as long as levels of demand remain the same.

If you imagine that a country consumes 100,000 sacks of imported potatoes every day with the average price being $5, if supply was suddenly cut to just 50,000 sacks per day the price of each sack would naturally begin to rise, unless consumers began to seek alternatives.

Alternatives in this scenario are the more illiquid and volatile altcoins like XRP, Litecoin, Bitcoin Cash and Tezos, all of which has suffered during Bitcoin’s recent rally.

Another view to consider is that of the mining industry as a whole, which will now be receiving half of its previous revenue despite having to cover the same amount of overheads for staff, commercial rent and electricity costs.

Miners can either respond by trying to ensure price doubles so that margins remain the same of they could decide to cut their losses and liquidate all assets, which is a theory known as miner capitulation.

Will Bitcoin go to 50k after the halving?

Several analysts, some more misinformed than others, have been predicting that Bitcoin will undergo a staggering rally through its previous all-time high of $20,000.

While there’s a chance, albeit very small, the most likely outcome following the halving is a correction to the downside so that the market flushes out new investors that are hoping to “get rich quick”.

Once these investors sell at a loss, which could be three, six or even 12 months down the line, the lack of newly minted supply will begin to take hold, allowing those who accumulated a lot of Bitcoin during the downswing to maximise on potential profits.

In 2016 Bitcoin fell by 30.26% in the 25 days that followed the halving before eventually rallying into the start of the 2017 bull market.

Overall, while it’s easy to be bullish and believe that Bitcoin will surge to a new all-time high without any key hurdles, it’s important to manage expectations as a trader or investor so that it doesn’t have as much of an adverse effect if it goes the other way.

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