The supply and demand implications of the halving of bitcoin
One of the most highly anticipated events in the history of bitcoin is less than a week away.
For the third time since its creation, the block reward of bitcoin is going to be cut in half, this time from 12.5 to 6.25 BTC. This means half as many bitcoins will be entered into circulation every time a block is solved (which on average takes place every 10 minutes).
The event itself is certainly no surprise, as analysts and investors from across the globe have been preparing for the halving for more than a year. But what is still uncertain are the short- and long-term ramifications it will have on the price of bitcoin and on the crypto market as a whole.
We can speculate by looking at the unique characteristics of bitcoin and the role they may play in the economic response to the halving, particularly as it pertains to the principle of supply and demand.
A limited resource
The halving is a feature built into the code of bitcoin in order to prolong the amount of time it will take for all bitcoin to be mined into circulation.
Bitcoin is a limited resource, in that there will only ever be 21 million bitcoins in existence. This predetermined number and the fact that the supply schedule of bitcoin is essentially set in stone and able to be anticipated have a significant impact on crypto market movements.
Deflation vs. inflation
Another key distinction to take note of is the fact that bitcoin is a deflationary asset (as opposed to an inflationary asset like fiat currency). This means that over time, its buying power is designed to increase, while fiat currencies like the U.S. dollar are instead experiencing increasingly rapid inflation.
This is especially true in 2020 as we are expected to see unprecedented levels of money printing take place in the U.S. as a result of circumstances surrounding COVID-19 and its effect on the economy. As this reality and inflation continue to put pressure on the U.S. dollar, the case for an impending bull era for digital assets continues to materialize.
Global circumstances aside, there are several other aspects that point toward a bull market for crypto following the halving – namely the economic principle of supply and demand and the trends shown following the previous two halvings.
Supply and demand
When the block reward halves and is reduced to 6.25 BTC, fewer bitcoins will be entered into circulation every time a block is mined. The theory is that this decrease in supply is likely to lead to an increase in price, even if the demand for bitcoin stays the same.
Some analysts, however, argue that the lengthy anticipation ahead of the halving means many are already prepared for the event, and thus the adjustment is already factored into the current price of the coin. Whether or not this is true will remain to be seen, but if the previous two halvings are any indication, a price increase should be expected.
Following the first two halvings that took place in 2012 and 2016, the decrease in supply did correspond to an increase in demand among miners – and to an increase in price, as well. Both events kicked off bull market periods that began up to a year before the halving and lasted for several months afterward.
After the previous two halvings, the price of bitcoin didn’t just increase, but eventually reached new all-time highs on both occasions. Thus, there have been extremely lofty speculations as to the new heights bitcoin’s price could reach in the coming months, with some experts even saying a new generation of millionaires could emerge.
Secure profitability through the halving and beyond
The increased scarcity and mining difficulty inherent in the halving means increased power and efficiency are going to be required for miners to maximize profit in 2020 and beyond.
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