A Bitcoin halving is a “Leap Year” event where the incentive for mining new blocks is halved every 4 years, resulting in miners receiving halved bitcoin rewards for validating transactions.
It is a well-known fact that Fiat currency is extremely inflationary in nature, as evidently shown in global events like recessions and the recent coronavirus outbreaks. For instance more US dollars were printed in the hope of stimulating the economy. The Federal Reserve ( commonly known as ‘Fed’) controls and regulates the supply of the US dollars by withholding or increasing the supply of US Dollars to the market. However, even until today, most viewed this move as a highly unethical practice. This is one reason Bitcoin is growing in dominance in the financial market.
The creator(s) of Bitcoin - Satoshi Nakamoto, hard-coded an upper threshold (maximum supply) of Bitcoin to ensure that nobody holds the power to randomly inflate Bitcoin’s supply. As they were not certain of the eventual popularity of Bitcoin back in 2009, prospective acquirers of Bitcoin were incentivized by portions of the total supply of Bitcoin (BTC) before it ran out in a century’s time. Also, they have devised a method in distributing the currency through a process called Mining, where miners use their computational power to contribute to its blockchain, thereby gaining Bitcoin as a result. Should all the coins be mined, transaction fees will replace mining to secure Bitcoin’s token economy. But prior to that, halving events will still be over for the foreseeable future.
Understanding The Halving
Since Bitcoin halving events occur due to the design of the blockchain network, it has been speculated that the distribution of the coins will be made in a staggered manner. This means that coins would be distributed quicker at the beginning to incentivise people to join the network and mine new blocks. With this distribution structure, block rewards will be halven at regular intervals as it is expected that the value of the rewarded coins will increase as the network grows. Bitcoin halvings are scheduled to happen in roughly every “leap year” (four years), once 210,000 blocks were mined for every instance, until the maximum supply (of 21 million BTC) was exhausted by the network.
Bitcoin is set to proceed with its third halving sometime in May 2020. When that occurs, each reward per mined block will be reduced to 6.25 BTC, down from 12.5 BTC prior to the third halving event. As per previous halving events, the limited Bitcoin supply has also been predicted to put upward pressure on the BTC price, similar to natural commodities such as gold and silver.
The Lightning Network, a second layer technology for bitcoin that uses micropayment channels to scale its blockchain's capability to conduct transactions, has yet to gain significant traction and therefore is an unfinished product that will require more attention after the third halving event. This second layer scaling solution is a critical link in Bitcoin’s future, and its development will have a significant impact on future usability.
Therefore, it is worth noting that Bitcoin exists within a much larger blockchain ecosystem. Although Bitcoin continues to be a sound investment moving forward and its market dominance remains uncontested, it must continue to advance in terms of its technical aspect to ensure survivability in the future. Apart from its own product, there are three other aspects that we will be looking into after the third halving event has happened.
Stability in Bitcoin Mining
The first aspect to take note of while judging the halving impact is the mining stability of the network in which miners play a very important role in the Bitcoin ecosystem. While miners are responsible for mining new blocks and facilitating transactions, they are also involved in the upkeep, known as ‘hashrate’, for the overall network.
Hashrate is the technical term used to describe the computational ability of a network. The higher the hashrate, the faster and more secure is the network. This also translates to the importance of miners’ continued contribution to the network for Bitcoin’s viability. Should miners decide to leave the network due to lack of incentives, the Bitcoin network will be heavily congested due to an excessive number of pending transactions, which will only be processed if there are sufficient miners doing block mining in the network. A frightening outcome if this worst case scenario were to happen would be a 51% attack, in which the dominant mining group(s) will find it easier to utilise its superior hashrate for a network takeover. Hence, it is important to monitor the miners’ activity after the halving activity to determine the stability of the network, moving forward.
The Price of Bitcoin
Next, there is a highly anticipated question that most of the Bitcoin users will be looking forward to knowing. That is the price of Bitcoin after the halving event. While there is no way to predict the exact value right after the halving, past historical records could give users a possible insight on the price movement after May 2020 for instance. During the 2012 halving event, the price of BTC/USD rose catapulted to $1,038 from a pre-halving price of $11 in just one year. Subsequently in the next halving that occurred in July 2016, Bitcoin went through another price surge from S$576 to S$2,526 in a year, which is almost a five-fold increase from the pre-halved price. Thus, it is predicted that the May 2020 halving event may see a repeated occurrence of a price jump after the event. According to experts, this trend happened because everyone in the cryptocurrency market was highly anticipating the halving in previous events, thereby compelling the price to follow a predictable price action. Another similar analysis put forward by PlanB’s tweet has further reinforced arguments from other analysts that have predicted a big price surge to the upcoming May’s halving event.
Historically, the focus has always been on the imminent bull run that followed every past halving event, but preceding it was a price dip that is of vital importance too. Bitcoin is almost acting like a safe haven from the traditional stock markets during global uncertainties such as the ongoing global COVID-19’s pandemic (also a precursor to an economic turmoil), and in most cases the price of BTC will seemingly catch up thereafter. In most instances, the pre-halving dip usually offers opportunities for investors to accumulate Bitcoin. Since the halving bull run is inevitable, it would be much better to accumulate at its low as compared to risking one’s position by buying at the top. Regardless of the outcome, the Bitcoin community must continue to focus on building solutions that could hold its value and consequently achieve mass adoption, in order to fend off competitions from more cryptocurrencies (or altcoins) that are building solutions that aim to supersede Bitcoin.
Security of Bitcoin
The next three halving events will further reduce miners’ block rewards down to 3.13 BTC, 1.56 BTC and 0.78 BTC. According to Emin Gün Sirer, CEO of AVA Lab, such reductions will be sufficient to seriously weaken the security of Bitcoin in a recent interview with CryptoNews. He has further added that a massive double-spend attack targeting cryptocurrency exchanges may also occur as a result of a drop in the security. This would, in turn, trigger exchanges to extend their Bitcoin’s confirmation times to prevent the attack. Unfortunately, no reasonable number of confirmations may be sufficient to security assurance should the attackers have access to an excessive amount of hashpower.
While Sirer’s perspective may be plausible given that the block rewards are undoubtedly getting lower for every halving and that rewards will be nulled after thirty halvings, some experts in the industry argued that transaction fees will be more than enough to incentivize Bitcoin mining, moving beyond the block reward phase. Dan Held, Kraken’s director of business development, believes that the block reward, which includes newly minted Bitcoins and transaction fees, is set to grow to exponentially higher levels when Bitcoin’s subsidy decreases through halvings. Indeed, based on data provided by Coin Metrics, the daily paid amount (in USD) for transactions has been growing over the long term.
Bitcoin halving at the very core of the protocol
Halving ensures that Bitcoin deflationary quality is retained. This is in stark contrast to centrally-controlled fiat currencies which are inflationary by nature. Satoshi Nakamoto’s creation had worked out the entire lifetime of Bitcoin, such that even after the supply is maxed out, the internal tokenomics will continue to sustain the network. In terms of its pricing, it remains to be seen if the historical pricing trend after every halving event will repeat itself, or that unknown and new factors will hold it down. Bitcoin security will strengthen in tandem with an increasing adoption of Bitcoin after every halving event. Otherwise, the network may be in trouble. As Dan Held explains, fees are "directionally proportional to both the value of the network and usage. In other words, the block reward (newly minted BTC and fees) equilibrates towards adoption. There isn't a situation in which there is a disconnect as participants in this game are only financially incentivized."