Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
When investing in Bitcoin, it’s important to arm yourself with knowledge about future events that could affect price. Though many economic events—like the coronavirus-related crash of March 2020—are impossible to predict, there’s one feature of the Bitcoin economy that affects its price every four years, like clockwork.
That’s the Bitcoin halving—a process, hardcoded into the Bitcoin’s protocol—that cuts the mining rewards for the Bitcoin blockchain by half. Historically, that’s increased the price of Bitcoin, and the next halving event will take place in May 2020. Have no clue what all that means or how it might affect your investments? Read on to armor up.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
What is Bitcoin?
Bitcoin is a peer-to-peer digital decentralized cryptocurrency, first released in 2008. It’s the invention of the Satoshi Nakamoto. Bitcoin is the first cryptocurrency, and still maintains dominance over the cryptocurrency market; it’s the most expensive, too (its price is around $6,500 as of March 31, 2020), and it’s the largest cryptocurrency by market capitalization—around $36 billion.
Bitcoin is completely decentralized. All Bitcoin transactions are documented and verified on a digital public ledger called the blockchain. The blockchain records each and every Bitcoin transaction.
Transactions are lumped together in “blocks,” which allows groupings of bitcoins to be updated all at the same time. Everyone can view the blockchain (you can look it up here), and transactions cannot be altered or deleted once recorded.
Users of the Bitcoin network maintain and verify its ledger. That’s different than, say, banks, which maintain ledgers on behalf of their customers. With Bitcoin, no single person or entity owns or controls the ledger, and anyone can buy, sell, trade or exchange it globally without the involvement of banks or financial institutions.
Explaining the Bitcoin Halving
Before blocks can be added to the chain, they have to be validated by Bitcoin miners. These are individuals or groups who use sophisticated software and computers to calculate and solve complex mathematical equations. Anyone can run a Bitcoin miner—all you need is a powerful computer—but those who do so are compensated for their efforts by the Bitcoin protocol with freshly minted Bitcoin.
It’s a profitable business—huge mining farms, the vast majority of which are in cold regions of China, Canada, Kazakhstan, and Russia (cold regions reduce the cost of cooling powerful computers)—draw in over four billion dollars of revenue, according to Digiconomist, a site that tracks the environmental and economic footprint of Bitcoin miners. Around three and a half billion dollars per year is spent on the electricity to run them all.
But due to a feature hardcoded into Bitcoin’s protocol, the network cuts the mining rewards in half after every set of 210,000 blocks is mined. This happens roughly every four years, and the event is known as the “Bitcoin halving,” or “The Halvening”. After halvings occur, making new Bitcoin thus becomes half as profitable for miners.
Why do this? Well, Nakamoto created Bitcoin in such a way that there can be only 21 million Bitcoins in total. Once the network hits 21 million Bitcoins, the creation of new Bitcoin would cease permanently. The last Bitcoin is expected to be minted in 2140. Since its supply is fixed, Bitcoin is a deflationary asset. The Bitcoin halving ensures that fewer Bitcoin enters the ecosystem over time.
The first set of 210,000 blocks generated 50 Bitcoin per block. After the first halving event occurred in 2012, block rewards dropped to 25 Bitcoin per block. After the second halving, block rewards halved to 12.5 Bitcoin per block. The date and time of the Bitcoin’s third halving is uncertain—it depends on when the final 210,000th block of the current set is mined—but experts think it’ll happen in the middle of May, 2020.
When the 210,000th block is mined, the protocol will cut block rewards from 12.5 Bitcoin per block to 6.25 Bitcoin per block. Halvings are very important occasions for Bitcoin and will persist until the total number of Bitcoin generated by the network hits 21,000,000, which is predicted to be in 2140.
How will the Bitcoin halving affect Bitcoin’s price?
There have been numerous discussions on whether the price of Bitcoin is affected by halvings.
Some people contend that, because Bitcoin’s supply is limited and its cap predetermined, the price will gradually increase over time as more people adopt it. Hence, halvings have little or no influence on the price of Bitcoin as the increments have been factored in already. They point to the fact that Bitcoin’s price increased from $0 to $11 before the first halving occured, simply because demand outstripped supply.
Others argue that the Bitcoin halving will increase Bitcoin’s price: Since there’s less incentive to mine new Bitcoin, there won’t be as much new money coming into the system. Hence, the Bitcoin halving should directly increase the price of Bitcoin, since it will increase the demand and should reduce future supply.
Of course, price speculation is always rife before halvings. (It’s the same for regular trading platforms, like those on Wealthsimple). It is difficult—likely impossible—to predict what will happen immediately after halving events, since there are other extraneous variables that affect the price at any given moment. (Who could have predicted the coronavirus outbreak that coincides with the third Bitcoin halving, for instance?).
Still, it’s worth considering the impact of previous halvings on Bitcoin’s price. Past is by no means prologue, but it’s important to tell the story in full nonetheless.
The Bitcoin network minted 10.5 million Bitcoin between January 2009 and November 2012—the date of Bitcoin’s first halving. Even though block rewards plunged from 50 BTC to 25 BTC per block, the price remained steady; it even increased a tad in the aftermath. On the eve of the first halving, Bitcoin traded for $11, but increased to $12 immediately after the halving. The real change came later: following a few dips and rises after halving, the price of Bitcoin increased tenfold, and hit $1,100 within the next year.
The second halving occurred in July, 2016, approximately four years after the first one; it ocurred when the Bitcoin network touched 420,000 blocks. The price fluctuated for a while between $500 and $800 before peaking at $20,000 in December 2017—its all-time high. Just like the first halving, the 2016 halving did not have an immediate impact on Bitcoin’s price. It took a while before the price increased. However, it made tremendous gains from January 2017 onward, hitting $20,000 in December. It then crashed to $10,000.
The next halving and how it could impact the price of Bitcoin
The third halving is projected to occur sometime in May 2020, once the 630,000th block is mined. The exact time and date depends on the speed at which the blockchain validates transactions. Bitcoin enthusiasts remain hopeful that the price will follow the same patterns set by previous halvings.
Of course, speculation is an art, not a science. These are not normal times, and the coronavirus pandemic has placed an unprecedented amount of financial and economic stress on the world. In mid-March 2020, the price of Bitcoin halved after investors sold off their holdings en masse after global markets had their worst day since the 80s.
In addition, the coronavirus pandemic has negatively impacted manufacturing industries and has disrupted global supply chains. This raises serious concerns about the crisis’s impact on Bitcoin mining operations following the halving.
After halvings, mining equipment requires upgrading to mine more efficiently. Most mining hardware is produced in China—the country where the virus originated—and supply chains could be restricted. During the outbreak, some mining farms in China were shut down. As the risk of contagion lifts, China’s economy is beginning to wake up. But will mining farms withstand the coronavirus?
The cryptocurrency community is divided about how the coronavirus pandemic will affect the price of Bitcoin following its third halving.
According to the CEO of investment firm BKCM, Brian Kelly, many miners sold enough Bitcoins in 2019 to tide them over in 2020. Thus, a shortage of Bitcoins after the halving could drive the price higher.
“I’ve talked to a lot of miners around the world, a lot of them have said they have sold enough Bitcoin to get us through the next year or so and we are going to hoard Bitcoin at this point in time and we are not going to sell it and the supply of Bitcoin will get cut in half,” he told CNBC in 2019. “Just real simple economics: lots of demand hitting little supply, price goes higher,” he added.
Mati Greenspan, CEO of crypto consulting company Quantum Economics, said the same in an interview with Decrypt in February. 2020. “One of Bitcoin’s main value propositions is the idea of digital scarcity,” said Greenspan. “In less than four months, Bitcoin’s inflation will go from 3.68% to 1.8% a year. All things being equal, if there are less coins on the market the price should go up,” he said.
Samson Mow, chief strategy officer at Blockstream, echoed Kelly’s sentiment in March, 2020, when he predicted the Bitcoin price will hit $10,000 in spite of the coronavirus outbreak. Speaking to Bitcoin Magazine, Mow said, ”I think the Bitcoin price will recover to a point where, post-halving, it will still be profitable to mine BTC. Even if that doesn’t happen, it’s not likely we will see a massive drop in hashrate. Many miners are already on the latest generation of equipment and have already recouped those costs, so they only have to deal with opex [operational expenditures],” he said.
Conversely, Alejandro De La Torre, the vice-president of Poolin, thinks the coronavirus pandemic may have an adverse impact on the price of Bitcoin because of disruptions in the production of new mining equipment. Speaking to CoinTelegraph, he said:
“This is more of a test of the mining manufacturers’ capabilities. The factories where all the parts are manufactured for these machines are in lockdown or are operating at a less than optimal capability. This will slow the production of mining rigs which in turn will affect the continued increase of the Bitcoin hash rate which then may cause some speculators to see this as a bearish signal.”
In an interview with Decrypt, Nic Carter, a partner at Castle Island Ventures, said that he doesn’t believe in the “halving catalyst.” He said that “It defies sense,” Instead, he thinks the halving is already “priced in”: “Information that is market-moving becomes priced in before the event occurs, if it is known,” he added.
The crypto industry has no shortage of opinions, and all should be taken with a grain of salt. As always, if you’re looking to invest in Bitcoin, purchase only what you can afford to lose, regardless of the upcoming Bitcoin halving.