Finite Supply
Unlike fiat money that can be printed until it is nearly worthless, bitcoin has a finite supply of 21 million “coins”. This makes it almost impossible to inflate like paper money due to the fact that when the last block is filled there will be no more bitcoins created.
Rewards Cut In Half
Miners are rewarded a certain amount of bitcoin for performing difficult cryptographic problem-solving to fill blocks of information. The reward is currently 12.5 new BTC – this is how new bitcoins are created. A halving is when the amount of bitcoin rewarded to the miners for each block filled is cut in half. Bitcoin is designed to do this each time 210,000 blocks are filled and will do so until all 21 million bitcoins are created – expected to occur around the year 2140. Bitcoin has already seen two halvings. The first one happened November 28, 2012 when the reward for each block went from 50btc to 25btc. The second one happened July 9, 2016 when the price was cut in half again down to 12.5btc per block. The next one is expected to happen on or around May 12, 2020 when it will be cut to 6.25btc per block.
What This Means For Buyers
What does this mean for buyers? It means less bitcoin will be created for each block mined, thus making it more scarce. We don’t know how the next halving will affect bitcoin’s price but if we look at the last two times this has happened we can see a pattern emerge. Many believe this next Bitcoin halving will trigger a large upswing in price and start another bull run in the market. Within a year of the first halving Bitcoin value went from $11 to $1,100 before a pullback in price brought it back down to around $600. The second halving took that $600 price and pushed it all the way to $20,000 within 18 months, after which another pullback was experienced.
Miners Preparing
In the past, it seems that miners tend to sell some of their bitcoin to ensure they hold enough funds to finance their operations for months after the halving. Once the market hits it’s break-even point, the price of bitcoin will be high enough to be profitable to mine again. Many believe this is why we have seen pullbacks in price before the past halvings. It is estimated that the break-even price of bitcoin for miners after this halving will be between $12,000-$15,000 per bitcoin.
There are skeptics that believe the next halving can’t be compared to the previous ones due to higher anticipation and the maturity of the market. The futures market will play a role this time. The smaller mining operations that have not taken steps to prepare for this halving will probably have to stop mining to cut losses. Skeptics believe this could slow or even halt a bull run after May. Nonetheless, this time there is a more efficient market infrastructure in place with more institutional investors and traders. Only time will tell if the price will go up or down before, during, and after the halving.