You may have heard talk of the Bitcoin halving, or ‘the halvening’ as it’s sometimes called. But if you’re wondering what it is and why it’s so important, keep on reading below.
The unpredictable nature of Bitcoin
Bitcoin is a hugely unpredictable asset. Just as the entire community was preparing for a bearish trend last week, the world’s number one cryptocurrency proved the naysayers wrong.
The astounding lurch in price appears to have been due to a culmination of factors led mainly by the Chinese President Xi Jinping’s endorsement of blockchain technology.
BTC is certainly influenced by macro factors, but it’s not always possible to predict whether they will affect its price.
Take Bakkt, for example. Its long-awaited and highly-celebrated launch was meant to be the catalyst for massive investment from institutions, but its first month saw Bitcoin futures contracts being traded in the single digits over 24 hours. Rather than be the starting gun for the next Bitcoin bull run, Bakkt appeared to have been the false start. Until now.
∙ Today's volume so far: 1131 BTC
∙ Last traded price: $8,622.50
∙ Trading day progress: 54% (if this continues: 100% equals to 2095 BTC)
— Bakkt Volume Bot (@BakktBot) October 25, 2019
Bakkt’s record-breaking trading day occurred right after the announcement of its new regulated options contract. It also coincided with Bitcoin’s highest intraday gain since 2011 with a 42% price bounce.
But let’s be honest, no one knows for sure whether Bakkt’s record day had any impact on the bull run, or whether it was the CME futures expiration dates, China, or the S&P all-time high.
In such a nascent industry, it’s very hard to find events that have a predictable effect on Bitcoin’s price. However, the Bitcoin halving has historically sent the price of BTC into the stratosphere.
The Bitcoin halving
Coming up in May 2020, many people in the industry expect the Bitcoin halving to have a major impact on the asset’s value. So, what exactly is it and why could it drive the price?
The Bitcoin halving (sometimes referred to as ‘the halvening’) is an event programmed into Bitcoin’s code. It happens after every 210,000 blocks have been mined (approximately every four years) and the block reward paid out to miners for keeping the network secure is cut in half.
When Bitcoin began in 2009, the block reward was 50 BTC. Currently, after two halvings in 2012 and 2016, the block reward stands at 12.5 BTC. The next Bitcoin halving in May will reduce the reward to 6.25 BTC.
Why does this matter and how could it affect the price? Because the Bitcoin halving has so far shown a perfect track record for ascending its price.
Bitcoin’s capped supply and why it matters
As you may know, one of Bitcoin’s most important features is that it has a fixed supply of 21 million Bitcoins. This means that once they have all been mined, no more can ever be created. This makes it scarce by nature with a deflationary effect over time.
This is in stark contrast to fiat currency, which can be (and is regularly) printed at will, diluting its value for its holders.
If Bitcoin did not have a capped supply, its purchasing power would be slowly eroded over time, as is the case with fiat currencies. By restricting the supply, Bitcoin owners will never have to deal with this problem, which makes it and other cryptocurrencies a good store of value.
The Bitcoin halvening and in-built scarcity also increase Bitcoin’s stock-to-flow ratio. The stock-to-flow ratio of a commodity is the amount of the asset held in reserves divided by the amount produced every year. The higher the stock-to-flow ratio, the reduced annual inflation on the asset. Commodities like gold have a very high stock-to-flow ratio as they are scarce, which means that less is produced over time.
Currently, Bitcoin has a considerably lower stock-to-flow ratio than gold. However, the Bitcoin halving increases the asset’s stock-to-flow ratio over time, which makes it increasingly powerful and valuable. This is also the reason that Bitcoin is often compared to gold or referred to as “digital gold”. Many people, including Bitcoin Quant investor Plan B, are convinced that Bitcoin’s stock-to-flow ratio will increase over time and that its price will also rise.
#bitcoin price and stock-to-flow are cointegrated.
Only prediction I take from S2F model is that btc price will be >$100k before Dec 2021 (I did not calculate the exact time, but if btc is <$100k around that time, it becomes non-stationary). BTW a prediction is not a guarantee! pic.twitter.com/zbCiwCiqWG
— PlanB (@100trillionUSD) September 21, 2019
It appears to be inevitable that over the coming years, we will see Bitcoin’s stock-to-flow ratio increase.
Previous Bitcoin halving events
If we take a look at the past to predict the future, the Bitcoin halving of 2012 happened when the price of BTC was around $11. Over the following year, it would reach a peak of over $1,100.
This translates into an astonishing price increase of 10,218%.
The next Bitcoin halving was in 2016 when Bitcoin was trading consistently sideways between $500 and $800. This time around, the price didn’t immediately go up. For the first few months, in fact, nothing happened. However, at the end of 2016, the Bitcoin bull market began when the price broke $800 and ended in an all-time high in December 2017 at almost $20,000.
The upcoming Bitcoin halving in 2020
So, of course, the question on everybody’s lips is whether the upcoming Bitcoin halving in 2020 will have the same effect on Bitcoin’s price. Many people believe that it will – including John McAfee, who has doubled his price prediction now to $2 million by the end of 2020.
If you look at the last two halvings as evidence, it certainly seems possible that the upcoming halving could propel Bitcoin’s price significantly.
However, it pays to remember that it’s literally impossible to predict how any asset will react in the future.
It’s highly unlikely that the bullish McAfee will be right with his $2 million BTC prediction. But, judging by past performance, it’s also not impossible that we could see a significant run not too far on the horizon.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.