The ‘halvening’ is almost upon us.
While this may sound ominous - we’re picturing a masked madman cutting his unsuspecting victims in two (or a really bad Mark Wahlberg film) - it’s actually a nickname for an exciting event in Bitcoin history - the latest halving.
Every 4 years, the supply of Bitcoin is cut in half - and today it will happen again. This means that the number of bitcoins coming into circulation every 10 minutes will fall from 12.5 to 6.25.
This event will affect how the currency is created moving forward, as well as having a significant impact on the whole crypto market.
So what’s actually going on here and what does all this mean for you? Here are 5 major takeaways we've been thinking about at Donut - consider it a 'dummies' guide to the Bitcoin halving:
1) All Part of Bitcoin's Design
To know what’s really going on, we need to travel back in time to the origins of Bitcoin for a quick history lesson.
In 2008, Bitcoin founder Satoshi Nakamoto created the cryptocurrency in response to the flaws in the financial system exposed by the Financial Crisis.
In his famous white paper, Satoshi stated that the problem with traditional currencies is that people have to trust the central banks who control their supply to maintain their value. He argued that throughout history, they’d violated this trust, debasing their currencies for their own gain.
To prevent the same problems with Bitcoin, he decided to fix the supply at 21 million. Rather than letting humans decide when to change the supply, he automated the rate of creating of new coins on a predictable schedule - halving the supply every 4 years.
This way people could trust the system and plan ahead without having to worry about sudden changes in the market - because unlike dollars, pounds or other fiat, Bitcoin could never be dramatically devalued by money printing and inflation.
2) Mining Will Get Harder
The halving will most directly impact Bitcoin mining, the means through which Bitcoins are produced.
18 million bitcoins are currently in circulation and they have all been produced through mining - a process where people or ‘miners’ program networks of powerful computers to solve mathematical puzzles.
The computational work of mining (creating blocks) builds and supports the Bitcoin blockchain, and new Bitcoin is the incentive for doing this work.
2020's halving will once again reduce the number of Bitcoins awarded in a given time period, but for miners it is still worth playing the game because of their anticipated value in the market.
3) Past Performance Does Not Predict The Future
Many people expect big price increases because of what happened around previous halvings. Following the first halving 2012, the price of BTC rose 80x while the 2016 halving preceded a 300% increase in value during the bubble of 2017 and 2018.
These previous price increases can be explained in part by basic economic theory, which predicts that a fall in supply with no change in demand will lead to a price increase. Since the same thing is happening this time around, people expect history to repeat itself and this is one of the reasons the 2020 halving is getting so much attention online and in the media.
4) It's Potentially Priced In
2020's halving is different for a number of reasons. For one, there’s a lot more money and resources in crypto now. Global investment banks even have crypto trading desks, meaning they also have teams of analysts researching where the price is going next.
Increased scrutiny and flow of information around the asset class has led many to believe that the market, which has been aware of the schedule for some time, has already ‘priced in’ the halving.
This means that people may have already factored in that the halving is happening and bought Bitcoin, pushing up the price before the event itself.
5) Back In The Spotlight
While we know that Bitcoin’s halving event traditionally means an increase in transaction volumes and flow, the current economic climate means: 1) a lot of people are holding onto cash and 2) the investors that see Bitcoin as a speculative asset are less likely to buy it.
The truth is nobody knows what will happen to the price.
But perhaps the most important thing about the halving is that it casts a spotlight on the industry. With the space receiving more attention in the media, more people are likely to become aware of Bitcoin and its benefits. More people will think about investing in the asset and support exciting new projects in the field of decentralized finance.
As the 'halvening' approaches, more people become aware of how we can change our relationship to money, and that can only be a good thing.
Real talk 🚨.
Any investment strategy puts your capital at risk, including crypto assets such as Bitcoin. The above information is intended for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.