Bitcoin Halving: Everything You Need to Know

Every four years, sports enthusiasts are passionately waiting for the Olympics Games or the FIFA World Cup. The Bitcoin community has its own much-awaited event that occurs every four years or so – it’s the Bitcoin halving, also referred to as halvening.

If you’re watching crypto news, you may notice the fuss about the upcoming halving. Indeed, Google searches for the term “Bitcoin Halving” surged to an all-time high. The number of searches more than doubled since the beginning of April and quadrupled since March.

Bitcoin Halving Google Trends - HashFeed
Source: Google Trend – Searches for Bitcoin Halving

Before getting into more details about why halving is such a big event for the crypto community, let’s shortly analyze the intricacies of the halving process itself.

What is Bitcoin Halving?

Bitcoin Halving is a sort of nickname for a specific event during which the block reward of miners is cut by 50%. The way halving takes place is encoded into blockchain – the decentralized network on which Bitcoin resides.

Bitcoin is a deflationary asset, suggesting that it cannot be multiplied the way fiat money is printed. The Bitcoin creator capped the crypto’s total supply at 21 million. However, not all coins put into circulation when the project was launched in late 2008, and today there are over 18.3 million BTC out there.

The rest of the coins gradually see the light when miners hunt for the block reward in exchange for their effort to maintain the blockchain network and create new blocks. In this way, Bitcoin retains its scarcity. One day, when Bitcoin reaches the 21 million cap, miners won’t get any block reward, though they may still be stimulated by the transaction fees.

The whole concept of mining, supply, and reward figures was established by the guy or the group of people behind the Satoshi Nakamoto nickname. Mining is an essential aspect of Bitcoin, as it prevents the network from counterfeiting. Miners perform complex calculations that lead to the validation of transactions and the creation of new blocks in the ledger. Whenever miners create a new block, they are rewarded with newly generated Bitcoin.

The reward size is cut in half every three or four years, and this event is called halving. However, the Bitcoin Halving has nothing to do with a time schedule but rather with the chronology of blocks. It occurs every 210,000 blocks of transactions, and the frequency is around one block every 10 minutes.

When Bitcoin mining was first available in early 2009, the block reward was set at 50 BTC per block. Everyone could easily generate new coins with regular GPU. Competition among miners was nonexistent since no-one really knew about the network at the time. 

Here is a quick overview of the halving schedule:

  • 2009 – Bitcoin mining rewards was 50 BTC per each block created.
  • November 28, 2012 – When the first halving took place. The reward was reduced to 25 BTC.
  • July 9, 2016 – Second halving, the mining reward went down to 12.5 BTC.
  • May 2020 – Third halving event is estimated to take place on May 12, 2020. When the network creates the 630,000th block, the reward will drop to 6.25 BTC.

From the beginning, mining has attracted many enthusiasts. As time passed, miners formed larger groups or pools as the competition became fierce. After a while, the hash rate of GPUs was not sufficient to keep profitable, so mining equipment manufacturers created Application-Specific Integrated Circuits (ASIC) specifically for mining.

CoinDesk analyst Galen Moore explained:

 “I think the introduction of [Application Specific Integrated Circuits] was a watershed moment in terms of changing the way bitcoin was mined and secured.”

“If you know that a more powerful machine will get you more reward, make your business more profitable, you’ll be looking for the next more powerful machine all the time, knowing that your competitors are doing the same,” he added.

Source: CoinDesk – Bitcoin Halving 2020: The ‘Arms Race’ for Miner Efficiency Intensifies

As the mining difficulty increases, miners will require more powerful machines. However, the current ASICs will remain relevant even after the next halving.

What Will Happen After the Next Bitcoin Halving?

As mentioned earlier, the next halving is set for May 12, when the block nr. 630,000 is created. The block reward will be cut from 12.5 to 6.25. The hype over the event is so evident that the Bitcoin price has surged over $2,000 in a matter of days. At the time of writing, the cryptocurrency is trading above $8,800 peaking earlier near $9,500.

You may wonder why the Bitcoin price would be bullish on the halving event. Well, it has to do with the classic supply/demand law. Many crypto market watchers argue that after the halving, the Bitcoin supply will drop, and the resulting supply/demand ratio will push prices higher.

This logical deduction has been already observed during the previous halving events.

Recently, blockchain data and research platform Glassnode concluded that multiple on-chain data metrics pointed to bullishness. The company said that investors were optimistic about the halving’s impact on the Bitcoin price. The report reads:

“In the weeks leading up to this milestone, a number of on–chain metrics are suggesting that investors agree with this bullish sentiment and are increasing their positions and hodling tight.”

Source: Glassnode – Buying the Dip: Investors Accumulate and Hodl Before Bitcoin’s Halving
Glassnode: Bitcoin Miner Revenue - HashFeed
Source: Glassnode – Bitcoin Miner Revenue

However, many analysts say that the Bitcoin price might actually deep significantly after the halving. Nevertheless, after reaching a certain support level, prices might bounce back and surge to new all-time highs. Some analysts prefer to mention the stock-to-flow (S2F) model, which explains the relationship between the halving and Bitcoin price. We’ll explain this model more in detail below.

If you’re reading this before the halving event, don’t expect the price to explode right after May 12, because there are no reasons for this to happen. In fact, the market has already priced in the hype surrounding it, so the actual event might not affect the price in the short-term at tall.

On the contrary, previous halving events showed that the cryptocurrency used to drop in the short-term. Don Wyper, chief operating officer of Bitcoin ATM network Digital Mint, told The Independent:

What if some miners keep selling bitcoin to pay for overhead, holding out for said difficulty adjustment, increasing supply, and putting significant downward price pressure on the market? That being said, after the previous ‘halvenings,’ the price of bitcoin skyrocketed, so my opinion is that long term bitcoin is currently undervalued.”

Source: Independent – Bitcoin Halving ‘Event’ Inspires Record Price Predictions

Interestingly, those analysts who anticipate a short-term drop in price are also bullish in the long-term.

Danny Scott, CEO of UK-based cryptocurrency exchange CoinCorner, said that Bitcoin used to reach an all-time high within three to nine months after the halving. He told the Independent:

“Looking at the stock-to-flow model, which assumes scarcity drives value through supply and demand, we can hope for the $100,000 region to hit within the next 12 to 18 months.”

Yes, you read it right – the next long-term price target for Bitcoin is at around $100,000, at least according to a couple of analysts.

If you think that such predictions are bold, you should hear what Raoul Pal has to say. The former Goldman Sachs hedge-fund manager, who predicted the 2008 financial crisis, claimed that the Bitcoin price could hit $1 million before the next halving event in 2024. He said in an April report that the cryptocurrency would act as a safe haven during the stock market crash and the economic crisis caused by the COVID-19 pandemic.

Gold can go up 3-times or 5-times in the next three to five years. Bitcoin, well, that’s a different story. I think [bitcoin] can get to $1 million in the same time period,” Pal said.

Source: Bitcoin News – The Greatest Wealth Transfer: Economists Predict the Emergence of New Bitcoin Millionaires, BTC Capturing 3% of Gold Market

All in all, while almost everyone agrees that the halving is bullish in the long-term, we don’t know which direction Bitcoin will go immediately after the event.

Who Will Be Affected?

The Bitcoin Halving event will impact the Bitcoin industry in many different ways. Here are the main groups that might feel a big difference:

Miners – Will be directly affected by the halving, as their income will be cut in half. It means that more small players will be forced out of the market. Miners who deal with older hardware will have to lose. Large miners, like pools and mining-oriented companies, will continue to generate profits, especially if prices will go higher. The hash rate – a gauge of the blockchain’s computational power – might decline as some miners will not be able to profit and thus will power down.

Bitcoin Holders and Investors – The halving will impact the price in the long-term. The current short-term volatility is also related to the event. Investors and traders can benefit from the short-term changes, while hodlers can hope that the price will update the all-time high in several months. Thus, the reduction of the block reward affects both traders and hodlers.

Newcomers – The global pandemic has turned investors’ attention to safe havens, and Bitcoin is among the most reliable assets of this kind. The crisis has forced many people who never dealt with cryptocurrency to make their first Bitcoin purchase. Given that the halving event will cause much volatility, newcomers should make sure to enter the market at best possible rates.

Exchanges – Unlike miners, crypto exchanges will be among the main beneficiaries, as they will be in the center of any market reaction, whether it will be bullish or bearish in the short-term. The trading volumes will keep close to record highs.

Should I Care About It?

If you own Bitcoin or plan to buy some – definitely yes! If you are hodler, you shouldn’t bother much about it but rather wait for the price to maybe update the all-time highs.

If you are a Bitcoin investor, there is nothing unusual you should do in May or in the following months. The important thing is to watch prices closely and find the right moment to enter or exit the market.

You may hope for the best-case scenario for Bitcoin and wait for the prices to surge in the coming months. At least this is what happened during previous halvings.

After the first halving in 2012, prices surged from $12 to over $650. The second halving ended up with the record high at $20,000, reached in December 2017.

However, the price increase might have been caused by other factors as well, including widespread adoption worldwide, media coverage, and a certain enthusiasm related to the crypto’s anonymity.

So What is The Stock to Flow Model?

The S2F model for the Bitcoin price was first proposed by Twitter user PlanB in a Medium post. He borrowed it from the commodity market.

The stock to flow ratio refers to the ratio between a commodity’s supply, and the amount of it produced in a given period, such as monthly or annually. This gauge helps analysts measure the abundance or scarcity of a commodity. The main point is that the S2F ratio shows the number of years required to achieve the current supply considering the current output rate. The scarcer is a commodity, the higher the stock-to-flow ratio. For example, gold has the highest S2F ratio among commodities.

PlanB argues that there is a direct relationship between the Bitcoin price and its stock-to-flow ratio, which increases gradually as the supply drops. Bitcoin supply is directly affected by halvings, which is why the cryptocurrency becomes scarcer with the time, pushing prices higher.

PlanB Bitcoin and Number of Blocks per Month - Bitcoin Halving
Source: PlanB – Modeling Bitcoin Value with Scarcity

In the chart above, the black line represents the stock-to-flow ratio, while the dots show how much the BTC/USD rate has deviated from the model. As you can see, the Bitcoin price has been trading very close S2F line, suggesting that the $100,000 target is quite possible. Also, note that the price highs came several months after the halving events in 2012 and 2016.

PlanB posted his latest update on April 27, 2020, arguing that the average Bitcoin price by 2024 will be at $288,000, based on his stock-to-flow cross asset model. This new model introduces the concept of “clusters,” as the cryptocurrency moves between various use cases.

Nevertheless, even if the S2F might be the most reliable model for analysis, we cannot be 100% sure that the price will follow it accurately in the coming years. History shows that even the best statistical models can fail in predicting the future.

What About Bitcoin Forks?

You may be curious to know the fate of Bitcoin’s most popular forks, such as the Bitcoin Cash (BCH) and Bitcoin SV (BSV). Will they go through halving events too?

Well, even though Bitcoin Cash derived from Bitcoin and the SV version is a fork of BCH, the two have already passed through their halving events.  

BCH reduced its block reward on April 8, 2020, and BSV followed several days after that. Both cryptocurrencies cut the reward when their blockchains approved their 630,000th block.

The halving of BCH and BSV occurred earlier compared to BTC because Bitcoin Cash, which forked in November 2018, had a different blockchain algorithm for a while. That algorithm eased the mining difficulty, which increased the speed of block generation. BSV forked from BCH when that algorithm was operational.

Interestingly, at the beginning of April, when BCH and BSV cut the block reward, their price surged by over 10%, while Bitcoin was moving sideways. Some analysts hope that BTC will experience a similar bullish sentiment.

Final Notes on the Bitcoin Halving

Technically, the change that will happen on May 12 will affect miners only. However, the speculation about the importance of the Bitcoin Halving event has reached new levels.

The network’s code will remain the same. However, it might experience some disruption from the Bitcoin Halving event. Some analysts worry that the reduction in reward will result in slower block times because many small miners will no longer be able to keep up with the costs and will be forced to leave the business. Nevertheless, that will be temporary.

Also, it’s important to stress that the Bitcoin price might be driven by the current economic crisis rather than the halving alone. The US Federal Reserve has implemented unprecedented measures to support the economy amid the coronavirus pandemic. This means that the central bank is printing trillions out of thin air to buy government treasuries, municipal bonds, and even corporate bonds. While the move is designed to boost liquidity and save the economy from the worst recession since the Great Depression, this will eventually lead to an increase in prices.

In mid-April 2020, the Fed’s balance sheet hit a record $6.62 trillion, as it had used its unlimited buying power to purchase assets.

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