The Evolution of Bitcoin - 12 Years in the Making
The Evolution of Bitcoin - 12 Years in the Making
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 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.
Why does Bitcoin go through halving?
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.
Timeline of Bitcoin halving
- 2009: Bitcoin mining rewards start at 50 BTC per block
- 1st halving on November 28 2012: Mining reward drops to 25 BTC
- 2nd halving on July 9 2016: Mining reward down to 12.5 BTC
- 3rd halving on May 11 2020: Reward falls to 6.25 BTC.
The first halving phase (2008-2012)
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 release of the first open-source Bitcoin client
• Issuance of the first bitcoin
• The first-ever block was produced with the following text - “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks..”
• Hal Finney was the receiver of the first-ever Bitcoin transaction from Satoshi Nakamoto. He received 10 BTC
• Following Nakamoto’s departure, Gavin Andresen became bitcoin’s lead developer at the Bitcoin Foundation
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 “doublec” 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.
2011 and 2012 were when things really started picking up:
• Organizations like Wikileaks and Wordpress started accepting bitcoin donations.
• In September 2012, Gavin Andresen, Jon Matonis, Patrick Murck, Charlie Shrem, and Peter Vessenes launched the Bitcoin Foundation to "accelerate the global growth of bitcoin through standardization, protection, and promotion of the open-source protocol."
• BitPay, a bitcoin payment service provider, reached the critical milestone of having 1000 merchants.
• In June 2012, the Coinbase exchange was launched by Brian Armstrong and Fred Ehrsam.
The second halving phase (2012-2016)
Now we reach the second halving phase when the mainstream adoption of bitcoins got taken to a whole new level. Let’s look at some of the main highlights during this time period.
• December 6, 2012: The France-based Bitcoin-Central becomes the first exchange to operate within the framework of European regulations.
• March 28, 2013: Bitcoin capitalization surpassed 1 billion USD.
• August 6, 2013: Federal Judge Amos Mazzant ruled that bitcoins are "a currency or a form of money."
• August 2013: Germany's Finance Ministry claims that bitcoin is a "unit of account."
• October 2013: Silk Road goes down with the arrest of owner Ross William Ulbricht. FBI seized roughly 26,000 BTC from the website.
• February 2014: The infamous Mt Gox hack occurred during which a staggering 744,000 bitcoins were stolen. The price of Bitcoin plummeted by 30% following disclosure of the attack.
• December 2014: Microsoft starts accepting Bitcoin for Xbox games and Windows software.
• January 2015: Coinbase raised 75 million USD as part of a Series C funding round.
• June 2015: New York State Department of Financial Services laid down the law to regulate Bitcoin and digital currency businesses in New York state
• March 2016: The Cabinet of Japan acknowledges virtual currencies like Bitcoin as payment means on an equal basis with real money.
• April 2016: Video game distributors Steam start accepting bitcoin as payment.
• July 2016: Researchers proved that bitcoin commerce was no longer driven by “sin” activities by November 2013 but instead by legitimate businesses.
• July 2016: Uber started accepting bitcoin payments in Argentina after the government blocked credit card companies from dealing with Uber.
The third halving phase (2016-2020)
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 around $1,000 and the halving occurred when Bitcoin was priced around $9,000, an 800% increase.
A lot happened during this time period. Let’s take a closer look at some of the highlights.
• January 2017: Bitcoin breaks above $1000 for the first time in three years.
• March 2017: GitHub project related to Bitcoin exceeds 10,000.
• April 2017: Japan accepts Bitcoin as a legal method of payment.
• August 2017: Bitcoin block size limit splits the chain up into Bitcoin and Bitcoin Cash.
• September 1, 2017: Bitcoin crosses the $5,000 mark.
• October 2017: China bans cryptocurrencies and ICOs.
• November 29, 2017: Bitcoin crosses the $10,000 mark.
• December 2017: Cboe starts offering bitcoin futures. Futures trading rise by 26% from the opening price at their debut session.
• December 18, 2017: Bitcoin reaches an all-time high of $19,891.
• December 28, 2017: South Korean, the world’s third-largest cryptocurrency market, introduces stricter regulations.
• February 2018: Bitcoin drops by 50% in 16 days and falls below $7,000.
• March 2018: Google, Twitter and Facebook ban online advertising of cryptocurrencies.
• November 2018: Bitcoin falls below $4,000.
• April 2019: Bitcoin reaches back above the $5,000 level.
• July 2019: Bitcoin fluctuated wildly between $12,500 to $9,300.
• May 2020: Bitcoin settles around the $9,000 price level
Halving’s effect on the price
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.
• Firstly, since mining will become even less profitable, the miners may immediately sell-off their reward to facilitate their operations.
• The amount of Bitcoins remaining to be mined is far lesser than the daily trading volume. This means that the price may be impacted more by daily trades rather than by the halving.
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:
• Use energy-efficient ASICs.
• Move their operations to colder climates.
• Use cheaper and alternative sources of electricity to power their systems.
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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