We just went through one of the most important events in the history of Bitcoin - and possibly global finance - the third halving.
On 11th May 2020, the block reward was reduced from 12.5 BTC to 6.25 BTC. During a time when the Federal Reserve is seemingly injecting trillions of dollars made out of thin air into the economy, Bitcoin remains true to its deflationary nature.
After every 210,000 blocks of 4 years, Bitcoin goes through the halving process. Halving was hardcoded into the protocol by Satoshi Nakamoto himself to keep the supply of Bitcoin under control. Unlike fiat currency, Bitcoin has a fixed upper limit of 21 million. The halving mechanism, along with the network difficulty, controls the entry of coins into the market and prolongs the availability of the supply.
On October 31, 2008, an unknown programmer named Satoshi Nakamoto published the Bitcoin whitepaper titled - “Bitcoin: A Peer-to-Peer Electronic Cash System.”
January 2009 was a month of a lot of firsts:
The value of the first-ever Bitcoin transaction was pre-determined by the individuals on the Bitcoin.org forum. This was also the phase during which the infamous “10,000 BTC for two pizzas” transaction happened.
Bitcoin was still a pretty unknown entity. However, this didn’t stop the community from innovating. On December 7, 2010, a user going by the handle “double” created a Bitcoin app for the Nokia N900. Another user “ribuck” sent 0.42 BTC in the first-ever P2P transaction with the help of a mobile device.
Now we reach the second halving phase when the mainstream adoption of bitcoins has taken to a whole new level. Let’s look at some of the main highlights during this time period.
2017 was a landmark year for Bitcoin in many aspects. Along with invading the mainstream consciousness, the price also crossed several key psychological levels. At the beginning of 2017, BTC/USD was around $1,000. By the end of the year, it was worth almost $20,000. That’s a staggering 1900% rise in price! However, the highs of 2017 were followed by the lows of the 2018 crypto bear market. However, despite wild price actions, the fact remains that 2017 started with Bitcoin priced at around $1,000 and the halving occurred when Bitcoin was priced at around $9,000, an 800% increase.
A lot happened during this time period. Let’s take a closer look at some of the highlights.
Historically speaking, the halving has been a pretty bullish event for Bitcoin.
After the 2012 halving, the price of BTC/USD spiked by 9,336.36% to go from $12 to $1,038 within a year. The 2016 halving saw the price go from $650.63 to $2,526, within a year. In case you are wondering, that’s a 288.60% rise in price.
Will the 2020 halving have the same effect? It is far too early to tell. However, it is worth noting that there is a huge discrepancy between the price rise in the 2012 halving and the 2016 halving. There are good reasons to believe that the 2020 halving will have a far lesser impact on the price change.
The miners will experience the immediate effect of the halving. With the reduced block reward, they are going to struggle to keep their business profitable. The profitability chart below shows that mining profitability has decreased dramatically since January 2019. The dip towards the end signifies the drop in profitability due to the halving.
Miners are an essential part of the ecosystem. We can’t have them packing up their ASICs and exiting the market en masse. There are a few steps that they can take to ensure long-term profitability:
Now, looking at the long-term effects of the market, it will depend solely on real-world use cases. Currently, we have a lot of countries experimenting with Central Bank Digital Currencies (CBDC). Will this lead to broader adoption of cryptocurrencies and Bitcoin? As of now, we can merely speculate. However, the fact remains that the long-term potential of the market, despite all the downs, remains a positive one.
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