There is light at the end of the tunnel, or so they say. Some BTC holders believe that light is called lsquo;Bitcoin halving’ mdash; an event that takes place once every 4 years and has proven itself effective in triggering massive growth for the world’s most popular cryptocurrency. But will the next halving fire up prices again? Here’s what history says about it.
To start talking about Bitcoin halving, we should understand how this cryptocurrency is created in the first place. As you probably know, unlike fiat currencies, Bitcoin is not regulated by a central authority. Instead, millions of computers (aka lsquo;Miners’) around the world work on recording transactions and verifying their accuracy.
Simply put, the job of Bitcoin miners is to add new blocks of information to a database commonly known as the lsquo;public ledger’. For their efforts and to cover all the associated expenses of mining, the network rewards them with Bitcoin.
Central banks control money supply to keep inflation within a reasonable target. There is no limit to how much money they can print. But with Bitcoin is a different story. The upper limit for Bitcoin supply is 21 million. In other words, once the blockchain reaches that capitalization, no more BTC will be generated.
So how to prevent inflation as the currency is distributed?
Satoshi Nakamoto addressed this question in an email back in 2008:
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase. Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
By halving the reward for miners mdash; initially 50 BTC mdash; the network guarantees that Bitcoin does not suffer from high inflation during its progressive distribution.
The default design dictates that the reward must be reduced by 50% once every 210,000 blocks are added to the blockchain. At the moment, the reward stands at 12.5 BTC. The next cut mdash; expected in May 2020 mdash; will take the reward down to 6.25 BTC.
As seen in the graph above, Bitcoin’s annual inflation rate is now close to 3.8 percent. Next year lsquo;halvening’ will push down inflation to 1.8 percent.
How The Halvening Plays Over Time?
Considering that Bitcoin is only a decade old, it’s a bit hard to speak about history. However, some valid patterns can be identified when looking at the charts.
If you pay attention to the following one, you’ll notice that the previous two Bitcoin halving dates marked the beginning of major bull runs. Casualty?
That’s not all. Almost a year prior to each halving date, an uptrend began to take shape. According to this chart, mid-2019 will be the starting point for a next bullish cycle as the market approaches a long-awaited 2020 halvening.
But Bitcoin halvings are not only useful when it comes to inflation control. This method also encourages sustainable growth of the cryptocurrency by incentivizing miners to remain engaged in the network for an extended period of time.
Despite the fact that 83 percent of Bitcoin’s total supply has already been mined, the final Bitcoin is estimated for release in 2140.
Less Reward, Still Mining?
As it was previously mentioned, Bitcoin halvening reduces by half the reward miners receive for their services. What is the effect of Bitcoin halvings on mining activity?
Back in 2016, the Bitcoin blockchain moved from releasing 3,600 BTC per day to 1,800, and the block reward was reduced from 25 BTC to 12.5 BTC.
While this might sound like a big pay cut for anyone, miners did not switch off their computers. In fact, the hash rate mdash; the computing power consumed by the Bitcoin network mdash; remained steady. But… why?
If Bitcoin price rises high enough to compensate the reward reduction caused by the halvening, then the chances are the hashrate will suffer no significant changes.
Bitcoin mining profitability multiple factors. The block reward is only one of them. To understand whether mining is truly a good business, miners should also look at:
The cost of electricity depends on where your mining hardware is physically located. Countries such as Argentina, Russia or China offer very competitive rates in comparison to the US or EU.
The performance of the equipment used by miners also impacts on the result. The more sophisticated the equipment, the better the performance per watt.
At Bitcoin’s current rate of $3,896, mining is unprofitable in many countries. Venezuela seems to be one of the cheapest locations to do it. According to previous year estimations, the cost of mining a single BTC in the Caribbean nation is nearly $500.
The Bottom Line
While predictions on the impact of these events might differ dramatically from one another, something is clear: the next halving date will play a major role in defining crypto market conditions for years to come. It is certainly a date to closely monitor for crypto miners, holders, and all enthusiasts out there.