(Financial News) Bitcoin, the worlds first cryptocurrency and the torchbearer for blockchain technology, is expected to undergo another halving in May 2020. The key points to understand are: what is a halving? What happens to the price of Bitcoin during halvings? Why do they exist?
Halvings have been programmed into the Bitcoin protocol by the pseudonymous creator Satoshi Nakamoto to occur approximately every 4 years (210,000 blocks). This event controls the rate of minting new Bitcoins, and aims to control the rate of Bitcoin’s inflation. This is a significant difference between Bitcoin and traditional fiat currencies, along with the fact that Bitcoin has a finite supply while fiat currencies have essentially unlimited supplies.
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In the Bitcoin protocol, a miner who successfully mines a new block is then rewarded with a specific amount of Bitcoin (at the time of writing, 12.5 BTC). This is an essential part of many crypto economic models. A halving is an event in which this number is simply divided by 2. Therefore, in May of 2020 the mining reward of Bitcoin will halve from 12.5 BTC to 6.25 BTC per block. Mining can be an expensive process especially when done at a large scale, as it (proof-of-work consensus mechanisms) requires immense consumption of electricity followed by an expensive electric bill (depending on the location of the operation).
Historically, halving events with Bitcoin have acted as a catalyst for extremely volatile behaviour. In the past, the price has shot to all time highs, followed by huge falls, only to recover significantly above the pre-halving price. Prices have also lagged in comparison to halving dates, taking weeks or even months to significantly be felt by the market. Since there is a finite amount of Bitcoin ever to be created (21 million), and minting this Bitcoin occurs only once a miner creates a new block, then by halving the rate at which the Bitcoin is minted makes it more scarce and therefore can regulate inflation to some degree. As the past has shown, this has resulted in unprecedented levels of volatility, however the end goal of regulating inflation long term seems to be working.
One reason to consider is: Miners must be able to take this Bitcoin and sell it on the open market to pay for their electricity bills from consuming energy for mining (likely paid in fiat currency). Those with cheaper electricity costs have a significant advantage and higher margins, however those with higher electricity costs are more prone to mining unprofitably due to mining being an extremely high consumer of electricity and requiring specialised hardware to compete with the fluctuating difficulty. If the margins are short to begin with (with more expensive electricity), halving the mining reward and thus profits definitely creates some degree of uncertainty and thus potential volatility. At any rate, mining must be profitable to accomplish its goal and maintain a network of decentralised nodes.
Two events to consider are either a) the price of Bitcoin will stagnate and many miners teetering on the edge of zero profitability will no longer find it economically viable to mine, causing a large portion of miners to exit and the equilibrium to readjust, or b) the price of Bitcoin will reflect the intended adjustment of inflation causing it to rise in value against fiat pairs, maintaining the mining network and economic viability for miners (or even increasing it). Whether the price volatility is felt before or after the halving, the mining network is always reactive to major price changes. These events have shown to have major long term effects on the price of Bitcoin, and so far on the side of rising. The moment of readjustment, however, remains inconsistent.