Will the number of my bitcoin holdings be reduced to half? No it doesn’t work like that.
Will the bitcoin price be discounted by 50%? Nope, it’s not like a 1:2 stock split where price goes down by half while number of shares owned is doubled. Though prices might go down actually. We’ll see.
So what is bitcoin halving then? Caveat emptor. This is not advice to buy or trade Bitcoin.
Bitcoin halving occurs every 4 years (just like the Olympics!) and the next halving is set for May 12, 2020! Hence all the buzz on Bitcoin right now.
To simplify, Bitcoin is mined, not underground but through super-computers solving complex math problems and algorithms. Note, super computers and complex math problems, so the bitcoin mining cannot be done by a person using a pen and paper.
Halving means the reward for mining new bitcoins is reduced by half. Every 210,000 blocks mined (around 4 years), the reward for Bitcoin miners for doing the mining is cut in half, with the premise that the rate of release of new bitcoins in the system will be cut in half too. This halving was programmed by Satoshi Nakamoto since the beginning of bitcoin. At the genesis block of bitcoin in 2009, miners received 50 BTC reward for every 10 minutes of mining. Every cumulative of 210,000 blocks mined (~4yrs time), reward is reduced in half:
- Nov 2012 (first halving): Reward is reduced to 25 BTC
- Jun 2016 (second halving): Reward is reduced to 12.5 BTC
- May 2020 (third halving in 2 days): Reward will be reduced to 6.25 BTC
Note that it is the reward that is halved, not the prices (which is market driven).
Why the halving?
The reduced reward will give less economic benefits for the miner to continue mining. Either make the operations more cost-efficient to merit a 6.25 BTC reward or some miners might opt to stop the mining altogether. Overall, the aim is to control supply. The theory is that there will be less BTC to buy if miners have less BTC to sell. The mining process will end by around 2040 when all 21-million bitcoins have been mined — right now there are around 18.4-million in circulation.
The 21M limited supply is on purpose as Natoshi ensured that there is only a limited supply of bitcoin in the world — similar to how we look at oil and precious metals, there is only a finite amount of it on Earth. Will all the gold and oil last until 2040 or bitcoin will run out of new supply first? This finite supply is unlike foreign currency which the central banks control whether to add or subtract supply from the system (e.g. subject to devaluation if central banks print more money for economic purposes). Remember that this one of the key goals of Bitcoin, to have a decentralized currency not controlled by any central bank, but based on a “ledger” or blockchain accessible to all authorized nodes (computers) around the world who have the power and capacity to store all the transactions (for common reference of every one).
Effect of Halving on Price
We’ve established that Bitcoin has a finite supply and with every halving, less and less bitcoin is “mined” and “discovered”. This causes a limit in supply, and assuming demand remains constant, by basic law of supply and demand of economics, this can push the prices upwards. In theory. It’s not that simple though.
Imagine if we say the whole world is running out of oil supply, there is no Covid-19 pandemic, demands are high, electric cars are not yet mainstream, what do you think will happen to the price of the remaining oil? This same theory is being applied to Bitcoin. Again the basic assumption is that there is still demand for Bitcoin, meaning more parts of the world is embracing Bitcoin as means to transfer value, meaning more and more stores and businesses and countries accept Bitcoin as payment, a recognized currency. Will this happen more and more in the future? Whether you agree or not with this theory is another matter.
But what if the prices do not go up as intended?
According to Investopedia, in case the prices don’t go up because of the halving, the “difficulty of mining would be reduced to keep miners incentivized” commensurate to the smaller reward. “This means that the quantity of Bitcoin released as a reward is still smaller but the difficulty of processing a transaction is reduced.”
Another question is, how high is the intended price increase? Is the Bitcoin price now already sufficient, or will the control in supply push prices higher? I think the creators intended to control the supply but let the market decide how much it will be — market driven pricing.
Let’s see what happened after the first 2 halvings in 2012 and 2016. Below is a chart from investopedia (note that the chart is logarithmic, not linear). From here it seems the first 2 halvings were indeed successful in driving the prices up, but this does not necessarily mean the 3rd halving will do the same.
Will the 2020 halving do the same? Though it’s still a 50% reduction in reward, the reduction in actual Bitcoin is much smaller compared to previous halvings (less by 6.25 only and not by 25 or 12.5 as in the previous halvings).
Buy or Sell?
Caveat emptor. You money, your rules. Unlike the usual stocks, Bitcoin is very volatile and can make very big swings even while you’re asleep. This is literally money never sleeps as it is traded day and night all over the world.
Note that as of this writing, BItcoin is trading at eToro for 8603, down 10%!
A quick look at the weekly chart shows a psychological resistance at 10,000 (green line) and the more long term resistance (blue line) possibly showing lower highs. Bitcoin is also trading at its 50MA, although in the past it seemed to ignore 50MA and respected the 200MA more.
If Juan is looking to buy, I don’t think this is the right timing. After 7 weeks of uptrend, Bitcoin is showing some pullback (which may or may not result into a massive correction). If I’m looking to buy, I will wait past the halving and see how prices react to the halving (if any). Let the dust settle first. Anyway the price surge post-halving, if any, is not immediate anyway (based from previous halvings) and the next halving is still in 2024. So no need to be FOMO.
If Juan is looking at selling and profit-taking, this may be a good time to lock in some profits especially if you we’re able to enter at a decent price prior to the run-up. I think other short-term holders and traders are also cautious on what will happen next, and may look into “selling on news” and taking some profits off the table, then they’ll see what happens next.
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Images from Unsplash, Investopedia and Investagrams.