Will the third Bitcoin halving lead to a price explosion?

The Bitcoin blockchain code states that a halving happens every 210 000 blocks of transaction. After the Bitcoin was launched in 2008, the first two halvings took place in 2012 and 2016. The next one is just around the corner. Precise calculations show that 11 May will be the date. An enormous price increase ensued after the last two halvings. However, for experts it’s unclear whether there will be a price explosion this time or if the expected increase has already been factored into the current high price. Either way, the entire financial world is looking at the Bitcoin charts with great anticipation.

What’s a Bitcoin halving anyway?

When Satoshi Nakamoto created the Bitcoin blockchain twelve years ago, he capped the maximum number of Bitcoins available at 21 million. But these Bitcoins did not all enter the market at the same time. Users of the Bitcoin network need to actively mine for the cryptocurrency – unless they’re happy to simply buy the coins, that is. Mining requires a lot of computing. As a reward for the effort of mining a block of currency, miners receive a block reward. Basically, the reward is the Bitcoins they mined.

Even if it means a lot of work for them and their PCs, digging for new Bitcoins is a very profitable source of income for many miners. For this reason, finding new coins becomes increasingly difficult. Nakamoto purposely added this feature when creating the Bitcoins; otherwise, all Bitcoins would have been available and «used up» after a very short time. Bitcoin halving makes sure that the block reward is halved after 210,000 Bitcoin blocks have been mined. A the start, the reward was 50 BTC (BTC is the Bitcoin currency code). In 2016, it was 12.5 BTC. This year, the reward will be halved to 6.25.

But how can the halving date be predicted so precisely if it depends on the amount of Bitcoins mined? This is possible because the reward is halved after every 210,000 Bitcoins that have been found. With a block dug up every then minutes – that’s 144 blocks a day – this corresponds to a period of slightly less than four years. Naturally, this can vary somewhat, depending on how intensely Bitcoins are being mined for. However, the closer the 210,000 Bitcoin threshold gets, the more precise the predictions are. The next halving is expected between April and June 2024. The closer this timeframe approaches, the more exact the forecasts will become.

Why is Bitcoin halving necessary?

Without regular halvings, all 21 million Bitcoins would be used up within a very short time. But that’s not the only reason for halvings. One of Nakamoto’s ideas behind Bitcoins was to create a decentralised digital currency that is independent of governments and institutions. At the same time, he wanted something that was safer and more secure than traditional currencies. Today’s monetary system consists of currencies that have no intrinsic value – so-called fiat currencies. They are completely detached from physical assets. In classic money policy, the economy can either be influenced by controlling the amount of money or the demand. By increasing the supply of money, consumption, and thus the country’s economic output, is boosted. So what’s the catch? The money supply is extremely prone to inflation.

Things are quite the opposite when it comes to gold, for example. Like Bitcoins, gold is limited as gold mines are not an infinite source of this precious metal. For this reason, inflation in gold is relatively constant compared to fiat money. This is because the fiat currencies price level rises above average when the money supply increases. From a financial point of view, the digital currency Bitcoin has similarities with gold. The coin is a rare commodity with a limited supply. In addition, the currency needs to be actively mined – just like gold. As Bitcoin halving means that fewer coins are circulating, experience has shown that the inflation rate falls. This was already the case with the last two halvings. And that’s why Bitcoin halving is so important to keep Bitcoin a stable, secure and future-proof currency with a constant inflation rate.

What are the possible effects of Bitcoin halving?

Not only do miners receive the block award after successfully mining a block of the currency, they also benefit from an additional transaction fee for each Bitcoin block. That’s what makes mining so attractive. Professional mining farms and pools have been dominating for a few years now, driving many private miners to ruin in their wake. This is because the hash rate, which is a measure for the computing power in the Bitcoin network, adapts to the available computing power after every 2016 blocks. That’s the equivalent of about fourteen days. This makes mining increasingly expensive, particularly when it comes to power costs. In order for the virtual currency business to remain lucrative, the price adjustment must be enforced when the block reward is halved every four years.

Here’s an example. Let’s assume one Bitcoin costs 8,000 francs. And the costs to obtain a Bitcoin block are 80,000 francs. The current block reward of 12.5 BTC would bring the miner 100,000 francs. That’s a net profit of 20,000 francs. But if the reward is halved without a price adjustment, the miner would suddenly be lumped with a 30,000-franc loss. So to be able to work as profitably as before the Bitcoin halving, a price doubling to 16,000 francs would be necessary.

The past halvings have shown that prices will rise. But experts aren’t convinced. At least not all of them. Some of them claim that the danger lies in the fact that Bitcoins have become mainstream. They say this has changed the conditions. Others consider Bitcoin derivates, which influence the price, a negative factor. The current situation on the stock market due to coronavirus could also have a negative effect on this year’s halving. One of the biggest uncertainties is whether the effects of the impending halving are already reflected in the Bitcoin price. Anticipating the upcoming halving event, many investors have begun to buy the leading cryptocurrency. This may have already affected the price.

The CEO of Binance, Changpeng Zhao, believes that the halving’s potential has not yet been priced in. In an interview with «BlockTV», he expressed the opinion that demand is continuing to grow but supply is declining. According to Zhao, this will lead to a massive increase in price. Zhao’s statement is backed by Tom Lee, an analyst at Fundstrat Global Advisors. The latter also believes that Bitcoins still have enormous upside potential. Furthermore, he expects the price to rise by 200 percent or more after the halving.

What happens after 11 May 2020?

The fact is that Bitcoin is still the most important cryptocurrency. And this is unlikely to change – even under the current circumstances. The last two halvings went hand in hand with massive price increases. But even if everything does go well, a halving is anything but a minor event for the top dog of cryptocurrencies. In any case, a price increase will have a major impact on other cryptocurrencies and the entire financial market. After all, third time’s a charm. But who knows if the third halving will end on a positive note with a price increase? No matter how things pan out, Bitcoin will be the talk of the town over the next couple of weeks.

What we’re bound to see is a price increase. Otherwise, both private individuals and mining farms are likely to stop digging. The current dwindling trust in the central banks is also expected to have a positive influence on the price. Investors are on the lookout for alternative assets and Bitcoin is high on the list. Even if industry experts do not agree on what the outcome will be, there’s a positive vibe. If the majority of the financial world is to be believed, the Bitcoin price will break records in the next weeks and months. Anyone thinking about jumping on the Bitcoin bandwagon should do this as soon as possible. After all, it is quite possible that the whole mining game will become extremely expensive come May. The chances that everything will be different this time around are slim, but you never know.

Want to read more about cryptocurrencies and get Bitcoin news? Simply click on my «Follow author» button to stay up to date. If you want to invest in Bitcoins before the halving, I recommend getting the Ledger Nano as a hardware wallet. My collegue Raphael Rotondari tested the X version and was impressed. If you miss the deadline for the Bitcoin purchase, at least you can look forward to a half-price Ledger Nano S after the official halving and until 18 May 2020.

Crypto wallets

Ledger Nano S

2-factor authentication, Backup function

745

Crypto wallets

Ledger Nano S

2-factor authentication, Backup function

745