The halving of bitcoin – What will it mean for crypto?
Something big is on the horizon for the world of crypto that could change the value of bitcoin forever. In May of 2020, bitcoin will be halved for the third time, and while this has happened twice in the past, many people still don’t fully understand the impact it could have on the industry.
Here’s a breakdown of what the halving is, why it occurs, and what it means for bitcoin’s price and for miners based on past experience.
What is the halving of bitcoin?
Let’s start by talking about the nature of bitcoin itself. Bitcoin is a limited resource, in that there will only ever be 21 million bitcoins in existence – no more and no less. This makes bitcoin a deflationary asset, as opposed to an inflationary asset like fiat currency.
Every 10 minutes, a block of bitcoin transactions is solved by miners and added to the bitcoin blockchain, producing a block reward for the miners. When bitcoin first began, the block reward was 50 BTC. Now it’s down to 12.5, having halved twice already prior to the impending halving in May – at which point the block reward will be reduced to 6.25 BTC.
But why does bitcoin halving happen at all?
This halving is a feature built into the way bitcoin operates. Approximately every four years (or 210,000 blocks), bitcoin is halved, also extending the amount of time it will take for all the bitcoin to be mined into circulation. The halving timeline is predetermined and will continue until the very last bitcoin is mined, which is currently predicted to occur sometime in the year 2140.
What this means for bitcoin’s price
Since bitcoin has halved twice in the past, we can say that it has shown to be a major catalyst in setting off a new bull market era for bitcoin. The long-term effect has generally been positive, and there are several speculations as to why.
- One has to do with basic supply and demand economics. As bitcoin halves and fewer and fewer are being generated, the increased scarcity leads to an increase in value.
- The other theory deals more specifically with the miners themselves. When the block reward halves, so does the total revenue generated by all miners mining bitcoin. As a result, some miners will simply give up mining bitcoin, while others will refuse to sell bitcoins generated at a price below $10,000. This refusal to sell below a certain threshold is also known as hodling.
The new bull market generated by the halving typically kicks off about a year before the halving itself is set to occur, which means at the time of this post, we’ve already been experiencing the effects of the halving for about six months. If the past is a guide, the bull market will also extend for several months after the halving, which has previously resulted in the price of bitcoin reaching a new all-time high.
The previous halvings
Much of what we’ve come to expect of the upcoming halving is thanks to what we’ve experienced with both of the previous halvings.
The first halving took place in November of 2012 when 1 BTC went for around $11. The next year, that value began to climb rapidly and surpassed $1,100 in 2013 before crashing down to around $230 and staying thereabouts for the next few years.
The second halving occurred in July of 2016. This time, BTC stayed at around $600-$700 for several months before slowly increasing to the end of the year.
In both cases, the price of bitcoin increased significantly leading up to and following the halving – but it took twice as long after the second halving to experience the same growth as after the first. In both cases, the post-halving growth was exponentially greater after the halving than it was before it. This rapid growth has historically been followed by a retrace in which the price decreases once again.
The upcoming halving
While we can’t explicitly predict the impact this third halving will have, we can analyze the past to anticipate and prepare for what will happen. This time, due to past experience and the way bitcoin has behaved leading up to the halving, many believe bitcoin’s price may behave much like it did following the second halving in 2016.
But nothing is for certain. There are a ton of variables in play here – even more than there were at the times of the previous halvings. Bitcoin is now more popular and public than it’s ever been, and institutional investors are playing a larger role than ever before. It’s important for investors to prepare and be ready for changes in the market.
What this means for miners
The increased scarcity of bitcoin means only the most high-performing and high-efficiency mining operations will stand to see steady or increased profits following the halving. This makes outdated miners like the Antminer S9 nearly irrelevant, while an upgrade to a more efficient miner like the Antminer S17 will become somewhat of a necessity for large-scale operations.
Utilization of cheap energy and mining colocation should also be leaned on more significantly leading up to and in the wake of the halving in order to maximize profit in an increasingly competitive market.
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