1. What is bitcoin halving?
Bitcoin’s halving is the name for the reduction of issuance of new Bitcoins. It happens approximately every 4 years. In simplified terms, the creation of new bitcoins is tied to the number of Bitcoin transactions. New transactions are packed in blocks. Currently, the creation of a new block automatically produces 12,5 new Bitcoins. On 12 May 2020, this number will be halved to 6,25 - hence the name halving event. Essentially this event represents quantitative tightening (reduction of supply), which is the opposite of what is referred to as quantitative easing (increase of supply) we experience in national currencies.
2. Who is producing Bitcoin?
Newly generated Bitcoins are the product of a process called mining. Miners are operators of server infrastructure that records transfers of Bitcoin between users. For this work, which demands intensive computing power, they are paid in newly issued Bitcoins, called mining rewards. For each block of new transactions, the so-called miners have to solve a mathematical puzzle and the first one who is able to solve it gets the mining rewards plus the transaction fees of all the transactions that are included in one block.
3. Who controls Bitcoin’s supply?
The supply of Bitcoin is defined by the program, the Bitcoin protocol. This program describes a mathematical function which divides new Bitcoin production number by two, approximately every 4 years or every 210.000 blocks. The initial reward for creating a block of transactions in 2009 was 50 Bitcoins. During the first four years, 10.500.000 Bitcoins were created. Four years later, the reward dropped to 25 and 5.250.000 Bitcoins were created. During the third wave 2.625.000 Bitcoins were created which leads to 18.375.000 Bitcoins in circulation. In total there will never be more than 21,000,000 Bitcoins in existence, thanks to this endless division of new issuance number every four years. In the next 100 years, the remaining 2.638.700 Bitcoins will be created.
4. What drives the value of Bitcoin between halving events?
From a long-term perspective, it is this diminishing issuance of newly created Bitcoins that is driving the value of Bitcoin. The quantitative tightening and limited total supply mechanism is one of the unique characteristics of this new form of digital money. Halving makes Bitcoin anti-inflationary, in addition to being free of control by any national bank or central entity. It operates on the massive network of independent operators who individually have no influence on the underlying Bitcoin protocol and the network’s functionality. Short term there are a lot of factors influencing the Bitcoin price such as regulatory development in different countries infrastructure development (new exchanges, new websites accepting Bitcoins for payment, hacked wallets, etc.).
5. How much is the Bitcoin supply going to drop?
On approximately 12 May, Bitcoin mining rewards are going to drop from 12.5 to 6.25 per block. Bitcoin network operators who get the newly created Bitcoin normally sell them through exchanges in the market. This means that starting on 12 May, there will be fewer new Bitcoins available to the market participants. Market participants and Bitcoin owners feel the dwindling supply over time, which in turn leads to a gradual increase in the price of Bitcoin.
6. What impact did previous halvings have on price?
Decreased supply has affected the market differently at different times. After the first halving on 12. November 2012 Bitcoin rose from 12 to 1150 $/BTC a year later, giving investors a juicy ~10000%.. After the second halving on the 16th June 2016 it took 524 days to reach the all time high from 696 to nearly 20.000 $/BTC resulting in ~3200% increase. It is possible that the cycle peak takes longer to materialize during the upcoming four-year period.
7. What impact will Bitcoin’s production drop have on price this time?
In general, it’s reasonable to expect Bitcoin’s price rise to all-time highs of $50.000 within next several years. A $50.000 price tag means a modest 450% above today’s price of 8800 $/BTC. Looking at earlier gains of 2050% in the 1st and 3200% in the 2nd halving, this looks like quite a conservative scenario. Some famous investors such as Tim Draper predicted 250.000 by 2022, while the Founder and CEO of SMART VALOR Olga Feldmeier referred to as Bitcoin Queen by Forbes was repeatedly cited in the press expecting 100.000 $/BTC in 2020/21.
8. How is the halving different this time around?
This halving event is different from previous in the understanding and perception of what Bitcoin is. During the first half of Bitcoin’s existence 2009 – 2015, the major narrative was around digital cash, with its major use case being as a means of payment. Starting in 2016, as alternative blockchain-based payment networks began to emerge, the narrative shifted in the direction of storage of value — digital gold. By that time, empirical evidence had emerged of Bitcoin’s negative correlation to stock markets. Recently, the perception has developed further, with many seeing Bitcoin as a financial instrument suitable for hedging against recession and protecting against massive money printing and quantitative easing policies enacted to save the economy, most recently from the coronavirus-based collapse.
9. When should I buy Bitcoin to benefit from quantitative tightening?
It is difficult to estimate when the ultimate price rally to new all-time highs will kick off. The only thing we can say with enough confidence, looking at previous trends is that the price of Bitcoin is certain to reach new highs during three years following the current halving event. For new investors, the ideal time to step in is hard to predict. The possibility of a drop in the Bitcoin price in the next several months is clearly there. Whether and when it will happen depends on overall market sentiment but also on events in the real economy.
10. How can traditional investors benefit from the halving?
For traditional investors unfamiliar with the details of Bitcoin and not following market development on a daily basis, the best approach is the buy and hold. Looking at the four-year-cycle of Bitcoin issuance and price dynamics connected to it, today is one of the best times to get some exposure to this new financial instrument. The lowest entry price is almost impossible to time without following markets and diving deep into daily technical analysis. If you are in Europe, you can start off using one of the leading European digital asset exchanges such as SMART VALOR, which enables purchase with bank wire or credit card in most European currencies. Other good alternatives are US-based Coinbase or the world’s largest Chinese exchange Binance.
--- Disclaimer: The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. SMART VALOR believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. SMART VALOR has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data.