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Everything You Need to Know About the Bitcoin Halving in 2020
The Bitcoin halving is a scheduled event in which the minting rate of new Bitcoins is reduced by 50%.
It is about to be the 3rd time that this has happened since the genesis.
Timeline of Events
Genesis Block: January 3, 2009 (50 BTC)
- November 28, 2012 (25 BTC)
- July 9, 2016 (12.5 BTC)
To make sense of the importance surrounding the event, we’ll first need to cover some of the basics. For starters, let’s understand how the network mints Bitcoin in the first place.
How Are Bitcoins Minted?
The network mints new Bitcoins to compensate miners for offering their computational power to the Bitcoin network. The hashing power verifies transactions and to defend the integrity & immutability of the blockchain.
Miners compete against each other to be the first one to verify a block successfully. The network rewards winners with some new, freshly minted Bitcoin.
Typically as the rewards increase, the competition between miners increases as well. As total computation power in the network grows, mining difficulty will also increase.
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The goal of raising the mining difficulty is to make it exceptionally difficult to corrupt blockchain data, relative to the total computational power available in the network.
To corrupt the network, a bad actor needs to dedicate at least 51% of the total computation power to double spend.
There will only be 21 million Bitcoin minted, ever. Currently, there are 18.3 million in circulation, leaving about 2.7 million unmined.
A More Technical Explanation on Bitcoin Mining & Rewards
Bitcoin miners compete against one another to guess the correct nonce for a block.
A nonce is an arbitrary number that starts from 0 and is increased incrementally by one on every guess.
When a miner hashes the data together with the nonce, the output hash renders an entirely different result every single time.
The network difficulty specifies how many zeros the hash must start with
To successfully “mine” a block, a miner has to end up with a hash in which the first 18 alphanumeric characters must be zero.
There is no way to arrive at any final hash pattern on purpose. The best way to get the final hash pattern is by guessing.
The best and only way to get the desired hash pattern is by incrementing the nonce and re-hashing, again and again.
Price Speculation — How Will The Halving Impact Bitcoin’s Price
Now to address the most pertinent topic on peoples’ minds,
just how much is Bitcoin’s price going to be impacted by the Halving?
There are two schools of thought:
- The Halving is going to increase the price.
- The market has already priced in the Halving.
Reasons Why The Price Will Increase
The Halving will reduce the supply of Bitcoin available to purchase
Per day, the net supply of new Bitcoin minted is:
144 blocks/day x 6.25 BTC/block = 900 BTC/day
At the current price, that is supply reduction of:
900 BTC x $ 9,200/BTC = $8.28 million USD per day.
The above estimate assumes that miners are instantly selling their Bitcoin rewards, instead of holding onto them in the anticipation that they will increase.
At this given moment, there is roughly $500 million supply of Bitcoin available on all exchanges to buy within 10% of the market price. An $8.28 million reduction represents only a 1.6% decrease in the total supply. On a short-term basis, a supply reduction does very little to increase the price of Bitcoin.
However, if we take a longer approach. Over a year, that is
900 BTC x $ 9,200/BTC x 365 days= $3.02 billion USD
Now we’re talking about a sizable decrease in supply.
The Bitcoin halving does not introduce a supply shock immediately into the market. But over time, reducing the minting of new coins will cause the overall supply to shrink.
The Halving is generating additional attention to Bitcoin, causing the demand to increase.
Bitcoin’s Halving is garnering an enormous amount of attention from journalists, traders, and the like.
Many are clamouring that another bull run is impending because a price hike always accompanied previous halvings.
Are price increases from halving a self-fulfilling prophecy?
An increasing number of searches on Google for the term “Bitcoin halving” is evidence of this phenomenon. Everyone in cryptocurrency is talking about it.
Supply elasticity is a measure of how sensitive supply is to changes in price.
Bitcoin is supply inelastic and extremely price-sensitive to demand changes
Unlike other assets like currencies and even commodities, there will never be more than 21 million Bitcoin, making supply highly inelastic. No matter how much prices increases, there is a finite amount of Bitcoin.
Inelastic supplies are more sensitive to changes in demand, as prices will more easily soar or plummet. Due to this, we may see higher volatility after the Halving.
Reasons Why The Price Will Increase
We’ve already experienced a mini-bull run since January. The price of Bitcoin has shot up roughly 50% since January.
If you examine the relative mentions of halving in crypto publications overlaid with price, you’ll see a stark correlation since the beginning of 2020.
Demand leaving up to the Halving has already been priced in as marked by the recent bull run.
While correlation does not imply causation, this data persuasively indicates that the market has already priced in the hype.
Bitcoins in circulation make up 87% of total future supply. Halving the trickling of the remaining 13% may not altogether have such a tremendous impact.
Perhaps, the number of willing sellers of existing Bitcoin on the market is significantly more critical than miners who are selling new coins.
The network has already minted most of the Bitcoin supply. Halvings far out into the future does little to depress the supply of Bitcoins in the market.
While the long-run supply of Bitcoin is inelastic, the short-term supply may be elastic. A large number of whales & hoarders may be waiting on the sidelines until the price is right.
In 2020, ~10M Bitcoins haven’t moved in a year, the highest since 2017.
If most of these Bitcoins are inactive because more and more people are HODLing, then a price increase may encourage many to offload some of their coins.
Bitcoin hoarders and whales will sell off their Bitcoin if prices are favourable, keeping prices from soaring too high.
The Most Affected Group — Miners
While the Bitcoin halving is essential to traders and investors, it is significantly more critical to miners.
Due to the low barrier of entry, mining is a barely profitable activity, as a perfectly competitive market does not allow for large margins.
Mining rewards are close to the cost of operating a mining operation. The two may sometimes lag each other but eventually reach an equilibrium in the long-run.
If rewards become significantly more valuable, then more new entrants will join the market in search of large profits. New entrants increase the overall mining difficulty, thereby reducing profitability.
When profits are too low, miners will leave the market because they are operating at a loss. Entrants leaving the market will cause the overall network to decrease in difficulty, increasing profitability.
Since the Halving is reducing 50% of the mining rewards, we will either see:
In scenario 1, it’s business as usual.
In scenarios 2 and 3, we will see the equilibrium shift out of wack, and the mining market plays out as we have described.
In the short-run, large capital expenditures and shortages in the supply of mining hardware may slow the rate in which entrants enter the market. But both of these factors are resolved in the long-run.
- The price of Bitcoin increase such that rewards are just as valuable from a dollar perspective
- The price of Bitcoin increases such that rewards are more valuable from a dollar perspective
- The value of rewards decreases, so mining becomes less profitable.
In the short run, mining operations may operate at a loss to recoup sunk costs invested in hardware. However, this is not sustainable in the long-run.
Long-Run Inflation & Monetary Policy
The next Halving will decrease Bitcoin’s inflation rate to 1.6%, lower than the US currency inflation rate.
Traditionally currencies require some amount of inflation to be good for spending. Inflation incentivizes people to spend instead of hoard.
This next Halving reinforces Bitcoin’s usefulness as a store of value, and not so much as a currency.
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Originally published at https://www.hodlbot.io on February 29, 2020.
Everything You Need to Know About the Bitcoin Halving in 2020 was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.