On 12th May 2020, one of the most anticipated events in Bitcoin’s history is expected to take place. The month will see something that is aptly titled as “Bitcoin Halving” and the quadrennial event has only happened twice before.
The event is gaining so much traction because of the possible ramifications it will have on the industry. Bitcoin Halving will reduce the number of bitcoins (BTC) entering circulation every 10 minutes. However, with demand remaining the same, it could possibly lead to driving up the cryptocurrency’s price. It is this simple economics phenomenon which is making the Bitcoin Halving a highly anticipated event.
Here’s What It Means
Bitcoin is a scarce commodity, with a finite supply of around 21 million bitcoin. To obtain a bitcoin, a global network of computers compete to verify bitcoin transactions. The reward for this activity is the bitcoin, which is given out every 10 minutes. Presently the number of bitcoins (BTC) entering circulation every 10 minutes (Also known as block rewards) is 12.5.
However every 4 years, the size of the reward is halved. This is a way to ensure that the speed of issuance is reduced over time until the entire supply of bitcoin is issued. This is estimated to happen around the year 2140, after which it will be impossible to mine any more Bitcoin.
This activity is known as Bitcoin Halving. Therefore the event coming up will halve the Bitcoin created every 10 minutes, reducing it to 6.25 new bitcoins per ten minutes.
When Bitcoin mining first started, 50 Bitcoins were rewarded to miner per block produced. This reduced to 25 Bitcoins in 2012 post the first Bitcoin Halving, and to a further 12.5 Bitcoins in the 2016 second halving.
The event is considered to be important as many expect it to increase the price of the cryptocurrency. The functionality of the network relies upon the Bitcoin retaining its monetary value. It is also important because it marks another step in reducing Bitcoin’s supply. Right now, there are 18,361,438 Bitcoins already in circulation, leaving just 2,638,562 that can be circulated as block rewards.
Will The Price of Bitcoin Increase After Halving?
Well, this question is a bit tricky to answer. The simple principle of economics would say that since the supply is low and demand for the cryptocurrency is high, the prices are sure to rise. But it’s not as simple as that.
The 2012 halving gave us an insight into how the markets would respond to Bitcoin halving. As it turned out, the price of Bitcoin certainly rose after the halving, with prices rallying from under $4 at the start of 2012 to reach $13 by year-end.
However, the market response at that time was also based on the fact that the Bitcoin community didn’t know how the halving would affect the market. Therefore, the second instance in 2016 was highly anticipated beforehand.
The prices actually dropped initially, as a result of a sell-off by some investors before the event. However, the prices shot back up again after the halving as by early 2017 the prices had reached $1,000, with them being close to $20,000 by the end of the year.
However, another argument claims that the price of Bitcoin isn’t likely to change much despite the Bitcoin halving. Since the bitcoin halving follows a predictable schedule, traders know since a long time that the price of the block reward will half. This, in theory, gives them adequate time to prepare and thus the change in minting rate is unlikely to shift the price.
It is also possible that as people are already anticipating the Bitcoin Halving, they will buy bitcoin beforehand. This can actually lead to pushing the price of the cryptocurrency higher even before the halving takes place. Many experts believe this is already the case, with them stating the halving is already 'priced in'
What Experts Have To Say About Bitcoin Halving
As the bitcoin halving looms near, hype and anticipating is steadily building within the community. Before the expected halving date of May 12, many experts and traders have been predicting how the event will pan out, and what we should be looking out for as D-day approaches.
Professor Fabian Schar from the University of Basel believes that which way price of bitcoin moves after the halving is uncertain. “Forget about price prediction. You might as well flip a coin. There is really no way of telling which way it’s going. Also, it’s the least interesting thing about the halving. Because there are so many interesting parameters and so much stuff going on behind the scenes, so many observations we have to make.”
Some of these other parameters were spoken about by American investor Anthony “Pomp” Pompliano while speaking to Cointelegraph. “I believe that the Bitcoin halving being executed at the same time that the Federal Reserve (and other central banks around the world) is injecting trillions into the financial system will serve as rocket fuel for Bitcoin.”
While experts haven’t refrained from making predictions, the majority of them are pointing towards a bullish outcome post the Bitcoin halving. Looking at that, it may be just the right time to invest in the cryptocurrency.