Bitcoin Halving Explained

Matt Gibson| Oct 5, 2019

General

At Vimba we like to keep our savers in-the-loop and educated with all things Bitcoin. If you're just getting into Bitcoin you might be wondering what in the world is the Bitcoin Halving?! Don't worry, we've got you covered!

 

In this guide, you will find a break down of what the Bitcoin halving is and how it could affect the price of bitcoin.


Bitcoin Mining Basics 

Similar to gold bitcoin has to be mined. Instead of a chemical process used to extract gold, however, bitcoin mining is conducted by computers solving complex problems to find new blocks on the Bitcoin network. To incentivise participants to mine bitcoin, there is something called the “block reward,” which exists to reward miners for putting their computing power to use to verify transactions and to secure the network.

 

When the Bitcoin network first started, the block reward was 50 BTC. That means that every time a new block was found, miners would receive 50 freshly mined bitcoin. While that may sound like a lot today, where the price of bitcoin is around $10,000, in the early days of Bitcoin, each coin was barely worth a few cents, so the seemingly high block reward was not that high in dollar terms. 

 

Moreover, the mining difficulty was extremely low in the first few years of Bitcoin, which meant that you could mine the digital currency on a laptop or home computer and still generate a mining profit. Something that no longer works today.  

 

So, why are we talking about the basics of bitcoin mining in our guide on the upcoming Bitcoin halving? The reason is simple: 

 

The Bitcoin block reward is halved every four years, while the total supply of Bitcoin is finite and limited to 21 million.

 

The Bitcoin network, therefore, experiences a slowdown in new supply. Fortunately, for bitcoin investors, this slowdown in supply has historically been met with an increase in demand for bitcoin. As a result, bitcoin has experienced substantial price rallies following block reward halving in the past. 

 

The block reward halving is an ingenious control mechanism that is built into the Bitcoin protocol to ensure that inflation cannot get out of hand for bitcoin in the way it can (and does) for fiat currencies.

 

Unlike Bitcoin, fiat currencies are managed by central banks. They are in control of the money supply. If a government needs (or wants) more money, they can print more money. However, printing more money means that the value of the currency in circulation loses value because the laws of supply and demand kick in. 

 

In the Bitcoin network, that is not possible because of the money supply control mechanism that is hard-coded into the protocol. And that is where the block reward halving plays such an important role.

 

Now, let’s look at the halving in more detail! 

 

The Bitcoin Halving in Numbers

Since the launch of Bitcoin in 2009, there have been two halvings, with the third one coming in May of this year. 

Below is a breakdown of the Bitcoin block reward halving from 2009 to 2020.

 

To remember why this is important we have to consider two facts about Bitcoin:

- There is a finite and limited supply of 21 million

- Every four years the reward for miners decreases by 50%

Below is a breakdown from 2009 - 2020. 

Bitcoin halving breakdown

You can checkout the block halving eta here at Bitcoinclock.com

Now, let’s look at the historical price action following a halving event. 

 

2012: The first halving lead to the first big rally

In 2012, when the block reward was halved for the first time, the Bitcoin community and investor base looked very different than it does today. Back then, Bitcoin was still largely an “underground” phenomenon, and trading in and out of the digital currency was only possible on a small number of exchanges. Additionally, the price of bitcoin traded in a range between $5 and $13. Something that may be hard to imagine for someone who started investing in bitcoin (BTC) in the last few years. 

 

Despite the very different Bitcoin ecosystem at the time, the price of bitcoin did exactly what many expected when its new supply was reduced. The price rallied. 

 

The first halving took place on November 28, 2012, when the price of bitcoin was trading around the $10 mark and closed the year above $13. In the twelve months to follow, the price of bitcoin rallied to over $1,000, at which point the world first took notice of Bitcoin. 

 

First Bitcoin halving

 

2016: The start to a massive rally

Many Bitcoin experts agree that the Bitcoin block reward halving that took place in July 2016 was one of the key drivers between the incredible bitcoin rally we experienced in 2017. 

 

While the immediate impact of the halving was not profound, the bitcoin price slowly climbed from around $650 in July 2016 to over $900 in December 2016. In the following year, however, the price of bitcoin rallied from $1,000 to over $20,000 within twelve months. 

Bitcoin second halving

Chart by CoinMarketCap

2017 marked the year that bitcoin went mainstream, and the digital asset markets became a widely accepted alternative asset class. 

 

2020: The next big bitcoin bull market?

Today, the upcoming Bitcoin halving event is one of the most discussed topics in the digital asset investment community. Some believe the halving is already priced into the market, while others believe we may see another 2017-like rally following the third block reward halving. 

 

Anonymous Bitcoin analyst and proponent of the Stock-to-Flow (S2F) model, Plan B, firmly believes that the halving will lead to a bitcoin rally that will push the digital currency to new all-time highs. His main argument for this belief is that Bitcoin has (digital) scarcity.

 

Bitcoin Stock to Flow

Using his Bitcoin Stock-to-Flow Model, Plan B predicts that the price of bitcoin will rally towards the $100,000 mark following the 2020 halving. This will not happen overnight, however. He believes that we will see a steep rise in the price of bitcoin in 2021. 

 

He is not alone in this thinking. Many bitcoin investors are “stacking sats” ahead of the halving to benefit from the potential upcoming price rally.

 

What Will Happen to the Value of Bitcoin After the Next Halving?

The truth is no one knows! 

 

Historical price action suggests that we should experience another rally - potentially similar to the one we saw in 2017 - in the next 18 months. However, there is no certainty in the world of investing. 

 

At Vimba, we believe in the future of Bitcoin and its potential as not only a store of value but also as a truly borderless currency. We always encourage our users to invest what they can and to remember that as with any investment, prices can fluctuate. 

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