Published: December 9th, 2019
The upcoming reduction in Bitcoin’s mining reward has everyone in the cryptocurrency space talking. And, the conversation is a lot likely to intensify in the approaching months as the event draws closer.
At the moment, the price of the cryptocurrency seems to be the central topic in this discourse. It probably will remain so even in the months to come. The reason being, all the previous Bitcoin halving events have come with remarkable bull runs.
Pundits are convinced that the next event expected sometime in May 2020 will have the same effect on the price of Bitcoin. Luckily, this is not just from the belief that history likes to repeat itself. Rather, the school of thought is backed by economic models formed from the transaction trends around the time of the previous events.
However, if indeed a bull run is in the making, how come its genesis has not manifested yet. Better still, why does it seem like the market has not already priced in the halving?
To answer these pertinent questions, it is probably best to start by explaining what Bitcoin halving is.
Bitcoin was programmed with an inflationary control mechanism. At its peak circulation, there will be a maximum of 21 million coins. To get to this cap, an incentive is given to network processors or miners for solving Bitcoin transactions. The said motivation is referred to as the block reward.
This mining process is gradual and controlled. And, the value of the compensation (block reward) is halved every four years. This aspect was included apparently to ape the increased difficulty that comes with mining gold.
The initial reward was 50 BTC for every block processed successfully. This was later halved to 12.5 BTC in July 2016. The next reduction will happen in May 2020 or thereabouts.
Essentially, Bitcoin Halving reduces the amount of Bitcoin that the network generates. This artificial limit in the supply of new coins creates a demand, which may lead to price hikes, say, in case the demand remains strong enough.
In all the previous Bitcoin Halving events, price hikes have been recorded months before and after the fact. And, the price appreciations have been very rapid. However, it is important to note that the situations around each event are different. The first halving was the first of its kind, and Bitcoin holders did not exactly know what to do with it.
The second halving came at a time when industry players had more knowledge and knew how to relate the event to the economic laws. However, it also coincided with the rise of Ethereum. In addition, the ICO space was experiencing a monumental rise. So the price hike could have been a result of any or all the factors.
And, the demand for Bitcoin is known to often fluctuate wildly!
Despite being only six months before the event, the Bitcoin price has slid down some in the previous weeks. And, even though the market is witnessing a rally with Bitcoin exchanging at $7,533.97 on Sunday, December 8, 2019, at 17.44 GMT, this is only after it came from a low of $6.908.64 a week earlier on November 24, 2019.
The good news, however, is that both Bitcoin and Bitcoin Cash chains have displayed a relatively steady hold despite the slip in price. In addition, available data shows that miners are holding on to the freshly minted coins, an act referred to in the industry as HODLing.
These facts, notwithstanding, other experts in the field are of a differing opinion. According to Tuur Demeester, a Bitcoin analyst and investor, and a Coindesk contributor, the Bitcoin network needs a fresh injection of US$2.9 billion in investment funds for it to stem the effects of deflation of the new coins coming into the system. A position that supports a price boost.
And, this is because the laws of demand and supply still hold strong. Even with a constant rate of investment into the network, the pressure caused by fewer coins in the market as a result of the halving will cause a price hike.
The price hike witnessed earlier this year that took the price of Bitcoin from $3,300 to the neighbourhoods of $12,000 is not explained. Some experts conveniently relate it to the halving, arguing that the increase is the network’s way of accommodating the coming event.
If the above argument is true, then it is possible a good number of Bitcoin holders have already positioned themselves by factoring the supply adjustments into whatever models they are using.
Also, it is possible that some of these traders are using hind wisdom. You see, models are great and can give accurate predictions. However, they are only reliable up to some point. Anyone who has analyzed the Bitcoin trends for some time will tell you that the cryptocurrency’s ecosystem as currently constituted is very different from what it was four or eight years ago.
Back then, the entire cryptocurrency environment was an infant. And, there was considerably less involvement from the institutions. In addition, the valuation frameworks that exist now were almost non-existed back then.
It, therefore, is reasonable, almost prudent for players to hold the opinion that this year’s halving may be different.
As markets mature, price becomes a factor of several aspects and not only supply. The Bitcoin market is getting to that stage. Meaning, anything can happen now.
It is logical that a bull run is possible building to and following the halving event. This may be especially true if new investors attracted by the historical correlation and supply models highlighted above invest in the network for whatever reason. However, it is foolhardy to disregard the unique economics of the Bitcoin ecosystem. If these sets of factors lure more investors to the network, then a remarkable price increase is inevitable. It is also possible things might take a different turn. Shrewd investors, as such, will factor in all assumptions but still approach the Bitcoin ecosystem with a robust dose of skepticism.