With the Bitcoin halving a little over a year away, Bitcoin’s historical behaviour sets a precedent that could breathe a sigh of relief to hodlers everywhere.
In plain English, the Bitcoin halving rewards miners whenever they successfully mine a Bitcoin block. Every four years or so, the ASIC computers which work on updating BTC’s ledger of transactions get half as many Bitcoins as they used to before the event. This halving process was hard-coded into the protocol by Satoshi Nakamoto in order to keep inflation under control right up until 2140, when all Bitcoins will have been mined.
As soon as the next halving kicks in, more than 85% of all total Bitcoins will have been mined, leaving just 3.15 Bitcoins of the 21 million total supply cap. More specifically, sometime in May 2020, Bitcoin rewards will half from 1,800 to 900 Bitcoins per day. In addition, the asset’s monetary inflation rate, which currently stands at 3.8% per annum will also half to 1.8% — rivalling the 2% targets of most central banks. In effect, Bitcoin will have a similar inflation rate to that of Gold, acting as a safe haven and a hedge against broader fiat currency uncertainty.
Prior halving events
From a historical perspective, the halving has always been accompanied by favourable market trends for Bitcoin bulls. On November 28th, 2012, also known as ‘halving day 2012’, Bitcoin’s block reward halved from 50 BTC per day to 25 BTC per day — instantiating Bitcoin’s day-one claim on scarcity in the process. As can be seen below, this process happens every 210,000 blocks.
Before the first halving, Bitcoin went through two bubbles between 2010 and late 2011, followed by a crash of epic proportions. It was at this moment when the flagship cryptocurrency hit an inflection point and began a steady market recovery — just one year before the first halving. Fast forward a couple of months and Bitcoin’s price soared from $10 to $200 — a mere drop in the ocean in today’s terms. After a period of consolidation, BTC rallied to all-time highs, peaking at $1,200.
As with prior cycles, Bitcoin’s price went on to retrace to its next inflection point at about $120,about a year before the next halving on July 9th 2016. As one would imagine, Bitcoin’s price continued to climb right up to the big event where block rewards were cut in half to today’s 12.5 BTC per day, magnifying scarcity and slashing miner rewards for the second time. The subsequent parabolic bull run saw the digital asset reach $20,000 in December 2017, at which point everyone and their mother had heard about Bitcoin.
At the time of writing, we are less than two months away from the historical 12-month marker that has until now been accompanied by incremental moves to the upside.
History to repeat itself?
In order for this to remain a self-sustaining environment that incentivises nodes to support the network, Satoshi compares the halving process to gold mining. In Bitcoin’s whitepaper Nakamoto writes:
“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”
In some sense, this dispels reservations which point to miners not having enough incentives to keep the ecosystem going due to possible lower profit margins. And given that Bitcoin’s hashrate during halving events has either held, exploded to the upside, or increased on a quarter-on-quarter basis, it doesn’t seem like miners are dropping out either.
Based on Bitcoin’s entire history as well as its incentive mechanisms, it seems more likely that miners will continue to sustain the network, especially since demand for Bitcoin will only increase given its limited supply and increasing scarcity — which is not something any fiat currency can say for itself.
As with previous market cycles, anticipation of the halving hasn’t yet grabbed mainstream media attention. When this happens, it may very well be too late for the majority of investors who haven’t jumped on the Bitcoin bandwagon. Then again, being fashionably late has clearly worked before — perhaps it will work again?
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