11
May
20

Bitcoin halving - A bullish event?

We are just mere days away from the third Bitcoin halving and the entire crypto community has one eye locked at the BTC/USD price chart, while the other is firmly planted on the countdown clock. Many investors have started looking at the halving date (12th May 2020) as a seemingly magical day when Bitcoin is suddenly going to jump back into the $20,000 zone. In this article, let’s look at the long-term effects that the halving will have on Bitcoin’s price.

 

Why does Bitcoin go through periodic halving?

 

Bitcoin is a deflationary currency, as opposed to fiat, which is inflationary. Bitcoin has a fixed upper limit of 21 million. To ensure that the influx of coins into the market remains under control, Satoshi Nakamoto hardwired the halving formula into the protocol. The formula states that after every four years or 210,000 blocks, the protocol will cut the block reward in half.

 
Here is a brief timeline of Bitcoin’s halving history:
 

  • 2009: Bitcoin mining rewards start at 50 BTC per block
  • 1st halving on November 28, 2012: Mining reward drops to 25 BTC
  • 2nd halving on July 9, 2016: Mining reward down to 12.5 BTC
  • 3rd halving on May 12, 2020: Reward falls to 6.25 BTC.
  •  

    The image illustrates the reduction of BTC mining rewards by 50% apx. every four years.
     

    Halving’s effect on the price

     
    Historically, BTC has been bullish after the halving
     
    Historically speaking, halving has been a bullish event for bitcoin.
     
    Price of BTC before/after each halving period
     

    After the 2012 halving, the price of BTC/USD spiked by 9,336.36% to go from $12 to $1,038 within a year. The 2016 halving saw the price go from $650.63 to $2,526, within a year. For those doing the maths, that’s a 288.60% rise in price.

     
    Currently, the BTC/USD daily chart looks like this:
     
    The image shows the recent price action of BTC before the block reward halvening
    Image Credit: FX Street
     

  • Currently, the price is trending at around $9,300.
  • From April 6th to April 23rd the price struggled to break above the $7,400 level. Following that, the price had a lengthy flirtation with the $9,000 line before finally breaking above it.
  • As the consolidation period continues, the price could be expected to break above the $10,000 level.
  •  

    However, the year-long effect of this halving may not be as drastic as the previous two because of the following reasons:

     

  • The miners may instantly sell off their rewards to keep their mining operations profitable.
  • The number of bitcoins traded every single day is far more than the number of unmined bitcoins. Eg. Over the last 24 hours, a staggering 5,465,440 BTC were traded. Presently, there are only 2,633,413 unmined bitcoins left. Because of this, even if the block reward reduces, analysts believe that Bitcoin’s price is affected more by the significantly higher daily trading volume.
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    Conclusion – To moon or not to moon?

     

    So, will BTC/USD’s price go up following the halving? We believe it will because of the supply/demand equation. As use-cases increase, the demand for Bitcoin will go up, which will positively affect the price. But do we believe that the halving is solely going to be responsible for the price to return to the all-time high levels? No.

     
    Feel free in learning more about Bitcoin in our ultimate Guide.

    disclaimer

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    Rajarshi Mitra
    Blockchain Researcher