If the you’ve made it this far, you’ve probably heard about Bitcoin mining.
In simple terms, miners (computers) compete to solve a complex calculation, and the successful machine “earns” the right to produce the next block in the blockchain - and is paid brand new bitcoin as a reward for its trouble. This is a fundamental feature of Bitcoin and many other blockchains, and implements the “Proof of Work” concept.
But another of Bitcoin’s primary features, a subfeature of mining, is that every four years the reward is cut in half. This translates to an ever-diminishing, deflationary total supply of new bitcoin that will eventually (in about 120 years) go to zero. (Of course, nothing can mathematically go to zero by being divided in half endlessly - but the current smallest unit of a bitcoin, a “satoshi,” 0.00000001 of a bitcoin, will not be divided in half but will conclude the 21 million coin supply.)
This reduction has occurred twice, and the third event is expected in mid-2020. This can be predicted because Bitcoin is designed to produce a new block every ten minutes.
The reasons for this halving, as it’s known, are ultimately philosophical, theoretical, even ideological. The thinking behind this feature belongs to a school of thought that holds scarcity as an inherent good when that characteristic is applied to a currency and/or assets.
This feature and its centrality to Bitcoin is no surprise: It is well known that Bitcoin was more than likely built in conscious opposition to (what is perceived as) the sort of monetary largesse that produced the 2007-8 global economic crisis.
It is worth mentioning that the diminishing emission which is behind Bitcoin’s halving function is by no means a universally recognized good - even in the Bitcoin community that has historically leaned toward the “Austrian” school of economics, which does not look kindly on monetary inflation.
Developers of the privacy coin project Grin, a popular new crypto referred to by some as “Bitcoin 2.0” (and worked on by some Bitcoin developers like Andrew Poelstra), have opted for a permanent fixed supply of one Grin per second - forever.
Anonymous lead developer Ignotus Peverell of Grin has said regarding this contentious subject that:
“There is no evidence that bitcoin’s supply curve is optimal. But there is a growing body of solid research showing that several aspects of it are problematic. To be honest, I have a pretty poor opinion of where the field of economics is generally at right now (not to say there aren’t any promising directions) as well.”
What does it mean for the bitcoin price?
Theories aside, halving events have historically occurred during, and not hindered, broad uptrends in Bitcoin’s price. We can clearly see this to be the case in both 2012 and 2016:
(First halving, from Tradingview.com)
The question of price after (and before) a halving must be located around two subjects: The Bitcoin asset’s increased scarcity and thus lower supply; and the effect of the halving on the difficulty of Bitcoin mining.
If a large portion of the Bitcoin mining power, or “hashrate,” on the network suddenly stopped mining - because, say, doing so was no longer profitable - the rate at which blocks are mined could slow to a crawl, and thus so would transaction speeds on the network.
This slowing, if it happened, could negatively affect Bitcoin’s price, as one of the network’s primary utilities - transfering value - would be hindered. Users might then sell their bitcoin in exchange for another, faster crypto, or forsake crypto completely.
One might think, then, that a halving would be dangerous in this regard, because it makes mining Bitcoin exactly half as profitable.
To guard against this sort of hazard, the network’s mining “difficulty” adjusts approximately every two weeks (every 2016 blocks to be precise), in an effort to maintain ten minute block times. This difficulty, an adjustable factor in Bitcoin’s hashing algorithm, determines how much arbitrary work mining computers must do in order to solve the math problem that allows a new block to be mined.
If hashrate begins to leave the Bitcoin network, block times will slow, and the difficulty setting will eventually adjust down to re-achieve ten minute block times (or vice versa).
During the last halving in early July 2016 (the 9th to be exact), in the midst of the block size controversy, fears abounded that the event could trigger a perfect storm of negative stimuli that would kill Bitcoin - a “death spiral.” At the time, the network had already periodically slowed to a crawl during peak trading seasons, causing transactions to take hours or even days to clear.
(Second halving, from Tradingview.com)
One strain of thinking said that miners needed the price to increase to continue justifying mining, especially in the period before the difficulty adjustment responds to changes in network hashrate; and for this, much trading would be needed in general. But this trading could not be accomplished if the network was too slow.
The fear was that this negative stimulus on price caused by network congestion, combined with the reduce mining rewards for miners, would drive so many miners off the network, so quickly, as to make the network useless - resulting in a doomsday chain reaction caused by the mutual exacerbation of panicking sellers and escaping miners.
Obviously, this did not happen. Miners continued to mine through the halving with essentially no reduction (see below) in capacity. As such, Bitcoin’s mining difficulty held steady during the event, dipping only briefly during the following month - before returning with even more hashrate.
(2016 halving, Hashrate above, Difficulty below)
Following the halving, the price of bitcoin did face about three weeks of downward pressure. But by September 2016, the broad uptrend had resumed and essentially did not terminate until February 2018.
What insights can we take away from the previous halving?
For one, the event was clearly “priced in” by the miners before it happened, given that there was no meaningful fall in hashrate. We can conclude that miners were generally prepared to mine at the 50% reduced rate in bitcoin terms, presumably expecting bitcoin’s price to rise against fiat currencies - which it did.
Is it safe to expect a repeat of 2016? Perhaps.
As stated above, both the previous two halvings have come during times of broad uptrends in bitcoin price. If in one year we find ourselves in the midst of a similarly broad price uptrend during the next halving, then we can probably expect only a slight dent - if any - to a positive trajectory.
After all, we can probably assume in 2020 that the halving will be “priced in” again, and miners still mining during the halving don’t want to bring down the price of their own asset; extracted at great cost and after great investment in the proprietary mining machines that have no other function than to mine cryptocurrency.
In conclusion, and based on Bitcoin’s price, hashrate, and difficulty histories, we should not expect anything more than a slight hiccup in the Bitcoin ecosystem when the next halving comes. The timings of the halvings can be estimated with a high degree of accuracy, literally years in advance, so no event could possibly be more priced in than a halving.
If the next halving occurs during a broad price uptrend, as the previous two have, it is pretty safe to assume a similar outcome of steady resumption in the price trend. If this were to not be the case, for whatever reason, we have very little in the way of examples to fall back on.
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