The Bitcoin halving event!
Roughly every ten minutes, a block is produced by a miner through Proof of Work and added to the Bitcoin Blockchain. As a reward, the miner gets a certain amount of Bitcoin for every block it produced. This reward is about to be cut in half in 2020. Exactly what type of effect this will have on the Bitcoin price is an actively debated topic within the cryptocurrency community.
History of mining rewards
The Bitcoin mining reward was originally 50 Bitcoin per block at Bitcoin’s inception. Every 210,000 blocks the reward gets cut in half, which has happened twice thus far, resulting in a mining reward of 12.5 Bitcoin. In May 2020, the reward will be cut in half once more, leaving the reward at just 6.25 Bitcoin. In order to estimate what the effect of this event will have on the Bitcoin price, we will look at the other two times this event occurred to see how Bitcoin reacted
Past effect on Bitcoin price
The following chart clearly shows how the Bitcoin price acted both in anticipation of the event as well as afterward. On both occasions, the solid line in the middle is the halving event with the green boxes showing the Bitcoin price movement.
You can clearly see that Bitcoin has surged in price on both occasions leading up to the event with an event bigger price surge following the event. Note that the second event saw a quick dip of about 35% before starting its rally. Just how much the total returns were can be seen in the table below:
So the returns on investment after the halving events have been tremendously higher than the period leading up to the event. All price rallies had a duration between 12-16 months.
The annual inflation rate drastically decreases with every halving event. And will be even lower than the target inflation rate for the US dollar by the Federal Reserve and the Euro by the European Central Bank.
The reason for the bullishness surrounding the event is basically this decreasing inflation rate. Miners who are awarded Bitcoin, only really have one purpose for the coin and that is to sell it to rack in a profit. By halving the reward, 6.25 Bitcoins less will be sold on the market. This has a favorable impact on the pricing, although its extent is questionable.
At Icoinic, we believe that the price movement of Bitcoin will be bullish surrounding the upcoming halving event in May 2020. Although the inflation rate merely has a limited direct impact when looking at the comparison to the current daily trading volume of around 2.8 mln Bitcoin, the lower mining reward is still good for the long term price stability of Bitcoin.
The short-term bullish effect of the event will be more psychological than anything else, but bullish nonetheless. Past performance indicates that more upside is to be expected after the event has happened than beforehand. But of course, this is far from a guarantee.