What is Bitcoin Halving?
One of Satoshi Nakamoto’s original motivations with bitcoin was to make it disinflationary. Satoshi wanted to limit the number of bitcoins that would ever come into circulation so that there would be no value erosion through limitless printing. Halving is a design feature in-built within bitcoin to achieve this purpose. There is 50% reduction in block rewards on the bitcoin network after every 210,000 blocks are mined. When bitcoin was born, there was a reward of 50 bitcoins every 10 minutes, which is approximately the time required to mine a block. This number, after two ‘halving events’ as determined by bitcoin code, is now at 12.5 BTC per block, and is expected to go down to 6.25 BTC per block in 2020, barring any abnormal changes in hashrate, due to some sort of massive price movements, for instance.
The maximum number of halvings that will take place is 64, which corresponds to a total of 21 million BTC in circulation.
Why is it important?
Miners are the ones most affected by halving. In an instant, the value of the ‘resource’ that they are ‘mining’ literally halves, and this can often times put many miners out of business. However, there are two other related factors in play. As some of the marginal miners leave the network, the hashrate drops, and profitability increases for those miners that are still standing. If the theoretical demand for bitcoins were to remain constant, a reduction in supply should see a commensurate increase in the price of bitcoin, and hash rate almost immediately bounces back up to pre-halving levels, if past instances were anything to go by. There is often price action around halving events trying to predict BTC prices along these lines. As expected, miners with low/near-zero electricity prices benefit the most during such events.
Satoshi&Co’s take on halving
We are fewer than 2 years away from Bitcoin’s mining reward halving. At the current rate of block rewards, the daily issuance of BTC is close to 1800 blocks per day and equates of approx. $6million of new wealth generated every day, at current prices. Perhaps that is too much to absorb for the market, especially when the sentiment receded from all-time highs in the past few months. With the daily dollar issuance set to reduce by half if prices remain at this level, will the demand inflow finally outweigh the supply side dollar issuance? If past instances are anything go by, there is generally increased volumes and bullishness around halving, and the next halving event due in 2020 could be a catalyst for BTC to escape the doldrums of the current bear market.
In addition to BTC, LTC (Litecoin) is also expected to have a halving event. LTC is expected to hit this milestone sometime in Q3 2019. LTC prices have been picking up recently, in anticipation of the event. However, BTC price movements will also be driven by other events, such as the lightning network rollout (Square is already adopting this), and the progress with Bitcoin ETF.
Whisper it gently, but here, finally, might be green shoots of spring….