Will the Bitcoin halving benefit long term investors? 🚨 This article is 5 years old...
Will the Bitcoin halving benefit long term investors?
5 min read
Updated: Apr. 25, 2020 at 9:27 am UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
Bitcoin is 255 days away from its block rewards halving, which will decrease the BTC miners receive per block. Based on historical data, the coin experienced high levels of price volatility before and after the event, making it a good time for traders. But how will long term investors fare?
The Bitcoin halving
The halving is a regularly scheduled process which reduces the rewards miners get from finding a new block, subsequently decreasing the coin’s overall rate of issuance.
As first determined by Satoshi Nakamoto in the first iteration of the Bitcoin protocol, the block reward is cut in half every 210,000 blocks.
The procedure happens roughly every 4 years based on how quickly blocks are mined, with blocks found roughly every 10 minutes, totaling 144 blocks per day.
This procedure is scheduled to happen roughly every 4 years based on how the protocol is set up, with blocks found approximately every 10 minutes, totaling 144 blocks per day. With the current block reward of 12.5 BTC, this equates to 1,800 BTC in daily rewards excluding transaction fees, or about $19 million per day at current prices.
Around May 17, 2020, after block 630,000, miners who are currently awarded 12.5 new BTC per block will only receive 6.25 BTC per block. The decrease in supply is expected to substantially reduce the total hashrate of the coin as old mining equipment becomes less profitable while increasing long-term prices as a function of lower current-circulating supply.
This event will continue to happen until all 21 million BTC are mined. While it is unknown when the last few coins will be mined, it is expected to be around 2140 based on the current rewards schedule.
Past halving events
Bitcoin has had two halving events since it inception on Jan. 3, 2009.
The first block rewards reduction took place on Nov. 28, 2012, at a block height of 210,000. At the time, the mining reward dropped from 50 BTC per block to 25 BTC. Common knowledge is that the event had a significant impact on the market price of the coin, observable before and after the event according to historical market data.
Following its peak of $31.90 on June 8, 2011, Bitcoin went through a 6 months bear market. Its price plummeted 93.70 percent to reach a low of $2.01 on Nov. 18 of the same year, marking the bottom of the downtrend. From that point on, BTC began an exponential upswing, nearly one year before the halving, where it saw two major corrections averaging 47.80 percent.
By the time the block rewards reduction occurred on Nov. 28, 2012, Bitcoin was up 514.50 percent from the low of $2.01 a year earlier, trading around $12.35. After the event, BTC continued its uptrend and topped $268.67 on Apr. 10, 2013, representing a 20.80-times increase.
The second halving happened on July 9, 2016, at a block height of 420,000. During that time, the rewards miners received per block was reduced from 25 BTC to 12.5 BTC. This event had a similar effect on Bitcoin’s price as the first halving.
The 2013 bull market ended when Bitcoin reached a high of $1,177.19 on Nov. 30 of that year. The rally exhausted around the price high, and BTC retraced 86 percent to hit a bottom of $163.88 on Jan. 14, 2015.
Then began a new bull market lasting nearly 3 years, which was characterized by 11 corrections averaging 34.60 percent retracements, each.
During the 2015-2017 bull trend, Bitcoin went through its second block rewards reduction on July 9, 2016. At the time, BTC was trading at $665.16, which represented a 306 percent increase from the low of Jan. 14, 2015. After the event, BTC suffered a 27.40 percent drop, but its bull rally continued to top at $19,764.51 on Dec. 17, 2017. From the second halving to the peak, Bitcoin’s market value increased over 28-fold.
The 2020 Halving Event
Although it is too early to tell what would happen before and after the third halving occurs, analysts have come to different conclusions based on historical data:
- Bitcoin price action is characterized by steep retracements before the beginning of a new bull market. In fact, the bear market of 2011 bottomed at a 93.70 decline and the one in 2013 concluded with an 86 percent correction. Meanwhile, the most recent macro bear trend ended after an 84 percent pullback from the peak.
- During its bull markets, Bitcoin tends to retrace multiple times, which helps maintain a healthy uptrend. From the low of $2.01 on Nov. 18, 2011 to the high of $268.67 on Apr. 10, 2013, BTC had two significant retracements that averaged 47.80 percent. During the 2015-2017 bull trend, this cryptocurrency had 11 corrections averaging 34.60 percent. So far, from the low of $3,148.33 on Dec. 15, 2018 to now, Bitcoin has had 4 significant retracements that averaged 23.90 percent.
- Bitcoin has not made a new all-time high before a halving event. As a matter of fact, during the past two block rewards reductions its price appears more correlated with a stock to flow model. This value is calculated by dividing the total number of Bitcoin in circulation by the number of Bitcoin generated in a month divided by 12 (for months in a year). The stock to flow model currently predicts that Bitcoin will trade at $9,400 when the third halving takes place.
- After the halving occurs, BTC’s market valuation rises exponentially. Following the first halving, the coin went up 20.80x. The second event was succeeded by a 28.70x increase.
Despite the similarities seen across Bitcoin’s previous halvings, a study found that its price is unimpacted by block rewards reduction events. The research conducted by Nico Cordeiro and Ava Masucci from Strix Leviathan, a Seattle-based startup that specializes in engineering and operating trading algorithms for crypto, analyzed 32 halvings across 24 cryptocurrencies and compared these to an overall market benchmark.
In summation, the researchers concluded:
“We found no evidence that cryptocurrency assets experiencing a halving event outperform the broader market in the months leading up to and following a reduction in miner rewards… While the narrative is certainly feasible as a logical theory, it is equally possible that we are dealing with an illusion of validity and previous bull runs were the result of nothing more than increasing levels of speculation within the asset class.”
Nonetheless, there is limited historical data from the original cryptocurrency given the small number of observable halvings. As a result, how the halving will impact BTC is still highly uncertain.
Yet, from a macro-economic perspective, it is undeniable that reducing the number of new Bitcoins introduced into circulation increases its price over time (so long as adoption continues increasing).
As speculation mounts around new inflows of institutional money from Bakkt’s Bitcoin futures and VanEck/SolidX Bitcoin ETF, BTC continues to provide signs that its price will continue growing over the long term.
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Strix Leviathan
Strix Leviathan is a Seattle-based technology company building an enterprise-grade cryptocurrency investment management platform, targeted towards institutional clients including banks, hedge funds and cryptocurrency companies..