Everything You Need to Know About Bitcoin’s 2020 Halving

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Contents

Bitcoin Halving — Everything You Need to Know

The amount of Bitcoin that gets created every 10 minutes gets cut in half every four years.

This is known as the Bitcoin Halving. The next Halving will be Bitcoin’s third and will take place in May 2020. This is when the current block reward of 12.5 Bitcoin every 10 minutes will be cut in half to 6.25 Bitcoin.

Seeing as the maximum supply cap for Bitcoin is 21 million, halving the block reward means that it will take longer for all Bitcoin to enter circulation.

But this also means that less and less new Bitcoin will be created over time and due to its limited supply — Bitcoin will continue to become increasingly scarce.

And scarcity enhances value.

Historically, the Bitcoin Halving has proven to be an important catalyst that propels Bitcoin into a new Bull Market.

In fact, Bitcoin tends to begin its new bull trend at least a year before its Halving.

But what effect does the Bitcoin Halving have on Bitcoin’s price?

In this article, I will address the following questions:

How did each of the previous two Bitcoin Halvings affect Bitcoin’s price?

Are there any recurring tendencies as to how these two Halvings affected Bitcoin’s price?

How could Bitcoin’s upcoming third Halving potentially affect Bitcoin’s price?

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Bitcoin Halving #1 — November 2020

Bitcoin’s price in the context of its first Halving

The first ever Bitcoin Halving took place at the end of November 2020.

It took approximately 513 days for Bitcoin to rally over 13,000% from the $2.01 bottom to the Market Cycle top of $270.94.

Bitcoin’s first Halving was a key catalyst that spurred significant growth and a new bull cycle for Bitcoin.

As soon as Bitcoin reached its post-Halving peak of $270.94, the 2020 Bear Market began as Bitcoin’s price declined 80%. This Bear Market lasted approximately 87 days.

Bitcoin Halving #2 — July 2020

Bitcoin’s price in the context of its second Halving

The second Bitcoin Halving took place in early July 2020.

It took 1068 days for Bitcoin to rally over 12,000% from the $164.01 bottom to the Market Cycle top of $20,074.

After the $20,074 peak — Bitcoin entered a 51 week bear market that bottomed in mid-December 2020.

Key takeaways after comparing both Halvings

1. The Bitcoin Halving is a key catalyst to beginning a new Bitcoin bull market

Historically, the Bitcoin Halving has been a key catalyst in propelling Bitcoin into a new bull market.

Bitcoin’s price appreciates both leading up to the Halving as well as many months after the Halving has taken place.

In fact, Bitcoin has reached a new All-Time High as a result of the Halving.

But it is many months after the Halving that this new All-Time High in Bitcoin’s price is set.

2. Bitcoin has rallied between 12,000%-13,000% in each of its Halvings to date

There are similarities in Bitcoin’s price growth across both Halvings.

Let’s first consider Halving #1.

It took Bitcoin 513 days to rally as much as 13,304% from its pre-Halving bottom of $2.01 to its post-Halving top of $270.94.

Now let’s look at Halving #2.

It took Bitcoin 1068 days to rally as much as 12,168% from its pre-Halving bottom of $164.01 to its post-Halving top of $20,074.04.

The similarity across both Halvings is that Bitcoin rallied approximately 12,000–13,000% from the bottom of the pre-Halving bear market to the top of the post-Halving bull market.

But a crucial difference is that it took Bitcoin twice as long to experience that similar growth around the second Halving period (1067 days compared to the 513 days around Halving #1).

How do these insights compare to what we already know about Bitcoin’s upcoming third Halving?

Bitcoin Halving #3 — May 2020

Bitcoin’s price in the context of its third Halving

The third Bitcoin Halving is estimated to take place on the 17th of May 2020.

As of this writing, it has taken Bitcoin over 260 days to rally over 340% since its $3,152 bottom set back in mid-December 2020.

This means that Bitcoin’s price bottomed approximately 519 days before Bitcoin’s third Halving.

This is very interesting because there are some key similarities in comparison to Bitcoin’s second Halving.

Here are the figures in question for Bitcoin’s second Halving:

Bitcoin’s price bottomed 544 days before its second Halving.

Bitcoin rallied 383% to reach its pre-Halving top prior to its second Halving.

At this moment in time, Bitcoin’s pre-Halving #3 price action very closely resembles Bitcoin’s pre-Halving #2 price action.

This is a powerful recurring theme so let’s break down Bitcoin’s price in relation to its Halvings further.

Let’s divide Bitcoin’s price into “Pre-Halving” and “Post-Halving” periods in an effort to spot any further recurring tendencies or themes that could inform our understanding about the upcoming third Bitcoin Halving.

Bitcoin Halvings #1 and #2 — A Detailed Breakdown

Halving #1: Bitcoin’s price Pre-Halving & Post-Halving

Halving #2: Bitcoin’s price Pre-Halving & Post-Halving

Key Tendency #1

Most of the exponential growth in Bitcoin’s price as a result of the Halving occurs after the Halving.

Leading up to Bitcoin’s first Halving, Bitcoin rallied 663% to reach the pre-Halving top of $15.51.

Once Bitcoin bottomed after its -50% pre-Halving retrace, Bitcoin rallied over 3400% post-Halving to reach its Market Cycle top of $270.94.

Leading up to Bitcoin’s second Halving, Bitcoin rallied 383% to reach the pre-Halving top of $794.91.

Bitcoin rallied 4080% in 524 days to reach the Market Cycle top of $20,074.

In Halving #1, the post-Halving growth was over 5 times larger than the pre-Halving growth.

In Halving #2, the post-Halving growth was over 10.5 times larger than the pre-Halving growth.

Clearly, most of the exponential growth in Bitcoin’s price as a result of the Halving has occurred after the Halving.

In fact, Bitcoin has managed to set a new All-Time High in price after each of the previous Halvings.

After reaching a new All-Time High, Bitcoin would top out to end the bull market and subsequently enter a bear market period that would see Bitcoin retrace at least -80%.

Key Tendency #2

Bitcoin experienced stronger and quicker growth prior to Halving #1 compared to the growth prior to Halving #2.

Prior to the first Halving, Bitcoin rallied almost twice as much (663%) to reach the pre-Halving top compared to Bitcoin’s 383% price rally to reach the pre-Halving top prior to the second Halving.

In fact, it took Bitcoin almost half the time to do so.

It took Bitcoin 273 days to rally 683% to reach its pre-Halving #1 top compared to the 518 days it took to rally 383% to reach its pre-Halving #2 top.

Key Tendency #3

If Bitcoin rallies less pre-Halving, then it will rally more post-Halving.

Prior to the first Halving, Bitcoin rallied 663% to reach its pre-Halving#1 top but later rallied 3,400% after the Halving.

Prior to the second Halving, Bitcoin rallied 383% to reach its pre-Halving #2 top but later rallied 4,080% after the Halving.

Key Tendency #4

There has always been a pre-Halving retrace (i.e. “shake-out”).

This pre-Halving retrace has been a Bear Trap for many investors in the past.

Many investors would sell their Bitcoin to book their profits whereas others would sell in fear of a strong downtrend and get shaken out of their investments.

In any case, both types of investors would miss out on the future exponential uptrends.

Simply knowing about this tendency could potentially help investors avoid such a fate leading up to Bitcoin’s third Halving, should history indeed repeat itself by presenting such a retrace yet again.

Which is why it may be useful to further dissect these retraces and compare them to one another in order to aid our understanding.

Let’s first look at the retrace prior to Halving #1.

The pre-Halving retrace prior to Halving #1:

a) Occurred over 100 days before the Halving,
b) Was -50% deep,
c) Lasted only 2 days.

But this was enough to shakeout a fair amount of investors out of their Bitcoin positions (even though Bitcoin had recovered almost the entirety of whatever valuation it had briefly lost on said retrace by the day of the Halving #1).

Once Bitcoin bottomed after its -50% pre-Halving retrace, Bitcoin rallied over 3400% post-Halving to reach its Market Cycle top of $270.94.

Let’s now consider the retrace prior to Halving #2.

It took Bitcoin 521 days to rally 383% from its bottom to its pre-Halving local top of $794.91 before the “shake-out” retrace (interestingly, it took Bitcoin a similar amount of days — approximately 524 days — to reach the $20,000 top)

This pre-Halving #2 retrace was quite different to retrace prior to Halving #1 as it:

a) Occurred 24 days before Halving #2,
b) Was -38% deep,
c) Lasted 44 days,
d) Continued for 20 days AFTER the Halving.

The fact that the retrace lasted 44 days meant that it continued past Halving #2.

So Bitcoin’s price leading into the first Halving was uptrending, whereas Bitcoin’s price leading into the second Halving was downtrending.

The pre-Halving #1 retrace occurred approximately 100 days before the Halving, was -50% deep, and lasted 2 days.

The pre-Halving #2 retrace occurred 24 days before Halving #2, was -38% deep, and lasted for 44 days. The retrace continued 20 days after the Halving.

Though there aren’t any outstanding commonalities among these retraces, it is still important to know about their specifics, even if it is just to manage expectations as to what is possible in the retrace leading up to Bitcoin third Halving.

Key Tendency #5

The pre-Halving top prior to the “shake-out” retrace has historically been Bitcoin’s highest pre-Halving price point, but wasn’t high enough to set a new All-Time High

Leading into the Halving, there tends to be an acceleratory run-up in Bitcoin’s price before the “shake-out” retrace occurs.

Since its bottom in the previous bear market, this happens to be Bitcoin’s highest price point before the actual Halving.

However, this price point doesn’t eclipse the previous All-Time High.

In fact, this price point is approximately -33% (i.e. Halving #2) to -51%
(i.e. Halving #1) below the old Bitcoin All-Time High from the previous Market Cycle.

A new All-Time High in Bitcoin’s price has always occurred many months after the Halving.

Summary of detailed breakdown

Most of the exponential growth in Bitcoin’s price as a result of the Halving occurs after the Halving.

Bitcoin’s price has set a new All-Time High after every Halving.

If Bitcoin rallies less pre-Halving, it will rally more post-Halving (and for a longer period of time than otherwise).

There has always been a retrace prior to each Halving.

The pre-Halving top prior to the “shake-out” retrace has historically been Bitcoin’s highest pre-Halving price point, but wasn’t high enough to set a new All-Time High.

How could Bitcoin’s Third Halving affect Bitcoin’s price?

By now, we have spotted many different compelling tendencies in Bitcoin’s price action as a result of Bitcoin’s Halving.

At this stage, the question is whether we can use this information to deduce the effect that the upcoming third Bitcoin Halving could potentially have on Bitcoin’s price.

People tend to use historical market data to deduce trends and extrapolate that data into potential future trends.

Though historical price action can be useful in predicting future trends, no future price action will ever emulate historical data completely.

Based on Bitcoin’s historical tendencies prior to and after its Halvings, one can only speculate on how Bitcoin’s price could potentially behave as a result of its upcoming third Halving.

Having said that, let’s take the most important tendencies and examine them through the lens of historical price data in regards to Bitcoin’s future price behaviour leading up to the third Halving.

Predicting the “Halving effect” on Bitcoin’s price using data from previous Bitcoin Halvings

1. Bitcoin has rallied 12,000%-13,300% in each of its Halvings to date

The first Bitcoin Halving spurred 13,378% growth in Bitcoin’s price whereas the second Bitcoin Halving spurred a 12,160% rally.

A 12,160% rally from Bitcoin’s mid-December 2020 bear market bottom of $3,150 would result in a

By the same token a 13,378% rally would lead to a

A $385,000 Bitcoin is very interesting because that would mean that Bitcoin’s Market Cap (i.e. $189 billion as of this writing) will have eclipsed the current Market Cap of Gold (i.e. $7.8 trillion).

This occurrence would truly cement Bitcoin’s status as a “Digital Gold.”

2. A new Market Cycle high tends to be made just before the Halving but it doesn’t eclipse the old All-Time High

Since mid-December 2020, Bitcoin rallied over 340% which closely resembles the 383% rally that Bitcoin experienced leading up to its second Halving.

If Bitcoin were to rally 383% like it did prior to Halving #2, it would reach a new Market Cycle high of

$15,000 which is higher than the current Market Cycle local top of $13,900 as of this writing.

This turn of events would satisfy the historical tendencies of setting a new Market Cycle prior to the Halving but not a new All-Time High.

This in turn would also satisfy another key tendency: if Bitcoin rallies less pre-Halving, it will rally more post-Halving (and for a longer period of time).

Should this tendency play out once again, this would mean that Bitcoin would have a higher likelihood of rallying over 13,000% compared to the 12,000% rally from Halving #2.

On the other hand however, if Bitcoin were to rally similarly to its 663% uptrend prior to Halving #1, that would mean that Bitcoin would reach a price point of almost $24,000 prior to Halving #3.

Of course, this would lead to a new All-Time High prior to the third Halving which is something that goes against the aforementioned historical tendency.

It is for this reason that Bitcoin’s price action may continue to closely resemble its price action prior to Halving #2.

Should this be the case, it would take Bitcoin a longer time to manage its typical post-Halving growth (after all, it took Bitcoin over 500 days post-Halving #2 to manage an over 12,000% rally to new ATHs).

If Bitcoin’s post-Halving #3 growth resembles Bitcoin’s post-Halving #2 growth, then Bitcoin may see a new All-Time High over 500 days after the Halving (i.e. by Quarter 4, 2021).

3. After a new Market Cycle high is set, a retrace will occur prior to the Halving

A retrace may very well occur prior to the Halving which would figure as a financial opportunity for both traders and investors alike.

4. New All-Time High in Bitcoin’s price will occur after the Halving

Historically, Bitcoin has set a new All-Time High after every Halving.

Whatever All-Time High price Bitcoin reaches, this new record is most likely to take place many months after the Halving.

Conclusion

The amount of Bitcoin that gets created every 10 minutes gets cut in half every four years.

This is why the Bitcoin Halving has figured as an important catalyst that spurs significant growth in Bitcoin’s price.

It is an event that guarantees legitimate scarcity.

And the exponential appreciation in Bitcoin’s price is a testament to a very important principle in financial markets — scarcity enhances value.

It is important to develop an understanding as well as the ability to appreciate, with a level-head, the historical significance of the Bitcoin Halving effect on Bitcoin’s price.

After all, Bitcoin’s historical price action has shown the Bitcoin Halving to be a unique type of event that tends to make investors money — not only heading in to the Halving but many months after it as well.

The Bitcoin Halving is a simple narrative with high probability profits attached to it.

Of course, past performance doesn’t guarantee future outcomes.

But two things can be decisively said about history:

History doesn’t lie.

And in the words of Mark Twain:

“History doesn’t repeat itself — but it often rhymes.”

Everything You Need to Know About the Bitcoin Halving in 2020

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Everything You Need to Know About the Bitcoin Halving in 2020

The Bitcoin halving is a scheduled event in which the minting rate of new Bitcoins is reduced by 50%.

It is about to be the 3rd time that this has happened since the genesis.

Timeline of Events

Genesis Block: January 3, 2009 (50 BTC)

Past Halvings:

  • November 28, 2020 (25 BTC)
  • July 9, 2020 (12.5 BTC)

Future Halvings:

  • May 18, 2020 (6.25 BTC)
  • 2024 (3.125 BTC)
  • 2028 (1.5625 BTC)

To make sense of the importance surrounding the event, we’ll first need to cover some of the basics. For starters, let’s understand how the network mints Bitcoin in the first place.

How Are Bitcoins Minted?

The network mints new Bitcoins to compensate miners for offering their computational power to the Bitcoin network. The hashing power verifies transactions and to defend the integrity & immutability of the blockchain.

Miners compete against each other to be the first one to verify a block successfully. The network rewards winners with some new, freshly minted Bitcoin.

Typically as the rewards increase, the competition between miners increases as well. As total computation power in the network grows, mining difficulty will also increase.

The goal of raising the mining difficulty is to make it exceptionally difficult to corrupt blockchain data, relative to the total computational power available in the network.

To corrupt the network, a bad actor needs to dedicate at least 51% of the total computation power to double spend.

There will only be 21 million Bitcoin minted, ever. Currently, there are 18.3 million in circulation, leaving about 2.7 million unmined.

A More Technical Explanation on Bitcoin Mining & Rewards

Bitcoin miners compete against one another to guess the correct nonce for a block.

A nonce is an arbitrary number that starts from 0 and is increased incrementally by one on every guess.

When a miner hashes the data together with the nonce, the output hash renders an entirely different result every single time.

The network difficulty specifies how many zeros the hash must start with

The network difficulty specifies how many zeros the hash must start with

To successfully “mine” a block, a miner has to end up with a hash in which the first 18 alphanumeric characters must be zero.

There is no way to arrive at any final hash pattern on purpose. The best way to get the final hash pattern is by guessing.

The best and only way to get the desired hash pattern is by incrementing the nonce and re-hashing, again and again.

Price Speculation — How Will The Halving Impact Bitcoin’s Price

Now to address the most pertinent topic on peoples’ minds,

just how much is Bitcoin’s price going to be impacted by the Halving?

There are two schools of thought:

  • The Halving is going to increase the price.
  • The market has already priced in the Halving.

Reasons Why The Price Will Increase

The Halving will reduce the supply of Bitcoin available to purchase

Per day, the net supply of new Bitcoin minted is:

144 blocks/day x 6.25 BTC/block = 900 BTC/day

At the current price, that is supply reduction of:

900 BTC x $ 9,200/BTC = $8.28 million USD per day.

The above estimate assumes that miners are instantly selling their Bitcoin rewards, instead of holding onto them in the anticipation that they will increase.

At this given moment, there is roughly $500 million supply of Bitcoin available on all exchanges to buy within 10% of the market price. An $8.28 million reduction represents only a 1.6% decrease in the total supply. On a short-term basis, a supply reduction does very little to increase the price of Bitcoin.

However, if we take a longer approach. Over a year, that is

900 BTC x $ 9,200/BTC x 365 days= $3.02 billion USD

Now we’re talking about a sizable decrease in supply.

The Bitcoin halving does not introduce a supply shock immediately into the market. But over time, reducing the minting of new coins will cause the overall supply to shrink.

The Halving is generating additional attention to Bitcoin, causing the demand to increase.

Bitcoin’s Halving is garnering an enormous amount of attention from journalists, traders, and the like.

Many are clamouring that another bull run is impending because a price hike always accompanied previous halvings.

Are price increases from halving a self-fulfilling prophecy?

Are price increases from halving a self-fulfilling prophecy?

An increasing number of searches on Google for the term “Bitcoin halving” is evidence of this phenomenon. Everyone in cryptocurrency is talking about it.

Bitcoin is supply inelastic and extremely price-sensitive to demand changes

Supply elasticity is a measure of how sensitive supply is to changes in price.

Unlike other assets like currencies and even commodities, there will never be more than 21 million Bitcoin, making supply highly inelastic. No matter how much prices increases, there is a finite amount of Bitcoin.

Inelastic supplies are more sensitive to changes in demand, as prices will more easily soar or plummet. Due to this, we may see higher volatility after the Halving.

Reasons Why The Price Will Increase

Demand leaving up to the Halving has already been priced in as marked by the recent bull run.

We’ve already experienced a mini-bull run since January. The price of Bitcoin has shot up roughly 50% since January.

If you examine the relative mentions of halving in crypto publications overlaid with price, you’ll see a stark correlation since the beginning of 2020.

While correlation does not imply causation, this data persuasively indicates that the market has already priced in the hype.

The network has already minted most of the Bitcoin supply. Halvings far out into the future does little to depress the supply of Bitcoins in the market.

Bitcoins in circulation make up 87% of total future supply. Halving the trickling of the remaining 13% may not altogether have such a tremendous impact.

Perhaps, the number of willing sellers of existing Bitcoin on the market is significantly more critical than miners who are selling new coins.

Bitcoin hoarders and whales will sell off their Bitcoin if prices are favourable, keeping prices from soaring too high.

While the long-run supply of Bitcoin is inelastic, the short-term supply may be elastic. A large number of whales & hoarders may be waiting on the sidelines until the price is right.

10M Bitcoins haven’t moved in a year, the highest since 2020.

If most of these Bitcoins are inactive because more and more people are HODLing, then a price increase may encourage many to offload some of their coins.

The Most Affected Group — Miners

While the Bitcoin halving is essential to traders and investors, it is significantly more critical to miners.

Due to the low barrier of entry, mining is a barely profitable activity, as a perfectly competitive market does not allow for large margins.

Mining rewards are close to the cost of operating a mining operation. The two may sometimes lag each other but eventually reach an equilibrium in the long-run.

If rewards become significantly more valuable, then more new entrants will join the market in search of large profits. New entrants increase the overall mining difficulty, thereby reducing profitability.

When profits are too low, miners will leave the market because they are operating at a loss. Entrants leaving the market will cause the overall network to decrease in difficulty, increasing profitability.

Since the Halving is reducing 50% of the mining rewards, we will either see:

  1. The price of Bitcoin increase such that rewards are just as valuable from a dollar perspective
  2. The price of Bitcoin increases such that rewards are more valuable from a dollar perspective
  3. The value of rewards decreases, so mining becomes less profitable.

In scenario 1, it’s business as usual.

In scenarios 2 and 3, we will see the equilibrium shift out of wack, and the mining market plays out as we have described.

In the short-run, large capital expenditures and shortages in the supply of mining hardware may slow the rate in which entrants enter the market. But both of these factors are resolved in the long-run.

In the short run, mining operations may operate at a loss to recoup sunk costs invested in hardware. However, this is not sustainable in the long-run.

Long-Run Inflation & Monetary Policy

The next Halving will decrease Bitcoin’s inflation rate to 1.6%, lower than the US currency inflation rate.

Traditionally currencies require some amount of inflation to be good for spending. Inflation incentivizes people to spend instead of hoard.

This next Halving reinforces Bitcoin’s usefulness as a store of value, and not so much as a currency.

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Everything You Need to Know About the Bitcoin Halving in 2020

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Everything You Need to Know About the Bitcoin Halving in 2020

The Bitcoin halving is a scheduled event in which the minting rate of new Bitcoins is reduced by 50%.

It is about to be the 3rd time that this has happened since the genesis.

Timeline of Events

Genesis Block: January 3, 2009 (50 BTC)

Past Halvings:

  • November 28, 2020 (25 BTC)
  • July 9, 2020 (12.5 BTC)

Future Halvings:

To make sense of the importance surrounding the event, we’ll first need to cover some of the basics. For starters, let’s understand how the network mints Bitcoin in the first place.

How Are Bitcoins Minted?

The network mints new Bitcoins to compensate miners for offering their computational power to the Bitcoin network. The hashing power verifies transactions and to defend the integrity & immutability of the blockchain.

Miners compete against each other to be the first one to verify a block successfully. The network rewards winners with some new, freshly minted Bitcoin.

Typically as the rewards increase, the competition between miners increases as well. As total computation power in the network grows, mining difficulty will also increase.

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The goal of raising the mining difficulty is to make it exceptionally difficult to corrupt blockchain data, relative to the total computational power available in the network.

To corrupt the network, a bad actor needs to dedicate at least 51% of the total computation power to double spend.

There will only be 21 million Bitcoin minted, ever. Currently, there are 18.3 million in circulation, leaving about 2.7 million unmined.

A More Technical Explanation on Bitcoin Mining & Rewards

Bitcoin miners compete against one another to guess the correct nonce for a block.

A nonce is an arbitrary number that starts from 0 and is increased incrementally by one on every guess.

When a miner hashes the data together with the nonce, the output hash renders an entirely different result every single time.

The network difficulty specifies how many zeros the hash must start with

To successfully “mine” a block, a miner has to end up with a hash in which the first 18 alphanumeric characters must be zero.

There is no way to arrive at any final hash pattern on purpose. The best way to get the final hash pattern is by guessing.

The best and only way to get the desired hash pattern is by incrementing the nonce and re-hashing, again and again.

Price Speculation — How Will The Halving Impact Bitcoin’s Price

Now to address the most pertinent topic on peoples’ minds,

just how much is Bitcoin’s price going to be impacted by the Halving?

There are two schools of thought:

  • The Halving is going to increase the price.
  • The market has already priced in the Halving.

Reasons Why The Price Will Increase

The Halving will reduce the supply of Bitcoin available to purchase

Per day, the net supply of new Bitcoin minted is:

144 blocks/day x 6.25 BTC/block = 900 BTC/day

At the current price, that is supply reduction of:

900 BTC x $ 9,200/BTC = $8.28 million USD per day.

The above estimate assumes that miners are instantly selling their Bitcoin rewards, instead of holding onto them in the anticipation that they will increase.

At this given moment, there is roughly $500 million supply of Bitcoin available on all exchanges to buy within 10% of the market price. An $8.28 million reduction represents only a 1.6% decrease in the total supply. On a short-term basis, a supply reduction does very little to increase the price of Bitcoin.

However, if we take a longer approach. Over a year, that is

900 BTC x $ 9,200/BTC x 365 days= $3.02 billion USD

Now we’re talking about a sizable decrease in supply.

The Bitcoin halving does not introduce a supply shock immediately into the market. But over time, reducing the minting of new coins will cause the overall supply to shrink.

The Halving is generating additional attention to Bitcoin, causing the demand to increase.

Bitcoin’s Halving is garnering an enormous amount of attention from journalists, traders, and the like.

Many are clamouring that another bull run is impending because a price hike always accompanied previous halvings.

Are price increases from halving a self-fulfilling prophecy?

An increasing number of searches on Google for the term “Bitcoin halving” is evidence of this phenomenon. Everyone in cryptocurrency is talking about it.

Supply elasticity is a measure of how sensitive supply is to changes in price.

Bitcoin is supply inelastic and extremely price-sensitive to demand changes

Unlike other assets like currencies and even commodities, there will never be more than 21 million Bitcoin, making supply highly inelastic. No matter how much prices increases, there is a finite amount of Bitcoin.

Inelastic supplies are more sensitive to changes in demand, as prices will more easily soar or plummet. Due to this, we may see higher volatility after the Halving.

Reasons Why The Price Will Increase

We’ve already experienced a mini-bull run since January. The price of Bitcoin has shot up roughly 50% since January.

If you examine the relative mentions of halving in crypto publications overlaid with price, you’ll see a stark correlation since the beginning of 2020.

Demand leaving up to the Halving has already been priced in as marked by the recent bull run.

While correlation does not imply causation, this data persuasively indicates that the market has already priced in the hype.

Bitcoins in circulation make up 87% of total future supply. Halving the trickling of the remaining 13% may not altogether have such a tremendous impact.

Perhaps, the number of willing sellers of existing Bitcoin on the market is significantly more critical than miners who are selling new coins.

The network has already minted most of the Bitcoin supply. Halvings far out into the future does little to depress the supply of Bitcoins in the market.

While the long-run supply of Bitcoin is inelastic, the short-term supply may be elastic. A large number of whales & hoarders may be waiting on the sidelines until the price is right.

10M Bitcoins haven’t moved in a year, the highest since 2020.

If most of these Bitcoins are inactive because more and more people are HODLing, then a price increase may encourage many to offload some of their coins.

Bitcoin hoarders and whales will sell off their Bitcoin if prices are favourable, keeping prices from soaring too high.

The Most Affected Group — Miners

While the Bitcoin halving is essential to traders and investors, it is significantly more critical to miners.

Due to the low barrier of entry, mining is a barely profitable activity, as a perfectly competitive market does not allow for large margins.

Mining rewards are close to the cost of operating a mining operation. The two may sometimes lag each other but eventually reach an equilibrium in the long-run.

If rewards become significantly more valuable, then more new entrants will join the market in search of large profits. New entrants increase the overall mining difficulty, thereby reducing profitability.

When profits are too low, miners will leave the market because they are operating at a loss. Entrants leaving the market will cause the overall network to decrease in difficulty, increasing profitability.

Since the Halving is reducing 50% of the mining rewards, we will either see:

In scenario 1, it’s business as usual.

In scenarios 2 and 3, we will see the equilibrium shift out of wack, and the mining market plays out as we have described.

In the short-run, large capital expenditures and shortages in the supply of mining hardware may slow the rate in which entrants enter the market. But both of these factors are resolved in the long-run.

  1. The price of Bitcoin increase such that rewards are just as valuable from a dollar perspective
  2. The price of Bitcoin increases such that rewards are more valuable from a dollar perspective
  3. The value of rewards decreases, so mining becomes less profitable.

In the short run, mining operations may operate at a loss to recoup sunk costs invested in hardware. However, this is not sustainable in the long-run.

Long-Run Inflation & Monetary Policy

The next Halving will decrease Bitcoin’s inflation rate to 1.6%, lower than the US currency inflation rate.

Traditionally currencies require some amount of inflation to be good for spending. Inflation incentivizes people to spend instead of hoard.

This next Halving reinforces Bitcoin’s usefulness as a store of value, and not so much as a currency.

Managing Your Cryptocurrency Portfolio

If you want to get involved in the cryptocurrency market, the smartest way to do is by using HodlBot.

We automatically diversify and rebalance your cryptocurrency portfolio across market indices. We also enable our users to create and rebalance their portfolios automatically.

Originally published at https://www.hodlbot.io on February 29, 2020.

Everything You Need to Know About the Bitcoin Halving in 2020 was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

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