Bitcoin’s next halving event is upon us. Many people anticipate this year’s halving with optimism. If you are wondering why it is because the previous halvings successfully pumped Bitcoin price for years, they are hoping history will repeat itself just like the last time (2016) when it successfully helped Bitcoin price to keep going up until December 2017.
So, what exactly is Bitcoin halving? And why is it considered so important for Bitcoin price action? This article will help you answer all these questions.
What Is Bitcoin Halving?
To keep it simple, Bitcoin halving basically means the event, which halves the creation rate of new Bitcoins. This event only happens once every 210,000 blocks (approximately four years).
To understand the concept of halving, first, you need to know that Bitcoin was designed differently from fiat currencies. Unlike centralized fiat currencies where the central banks can just print new supply, Bitcoin’s supply was designed to be finite. From the very beginning, Bitcoin was designed to have a maximum of 21 million coins.
The analogy is that Bitcoin works like digital gold because there cannot be more than a certain amount of supply for Bitcoin. Precious metals like physical gold also work that way. The supply of gold is limited, and there will come a day where all of them will have been mined. This is where the similarity comes from. Like gold, Bitcoin’s supply can only go as high as “21 million coins”. After that, there will be no new bitcoins to be mined.
However, there’s one crucial mechanism in the Bitcoin mining system. Bitcoin has a “slow down” mechanism where the mining rewards get halved every 210,000 blocks. That means new coins creation becomes more and more difficult as time goes by. In other words, Bitcoin miners receive 50% fewer coins each time Bitcoin halving happens.
Due to this halving mechanism, we are still not that close to the end of the Bitcoin mining business. Even though we already had 18,177,687 BTC at the time this post was written, the upcoming halving events will help us to buy much more time before the supply eventually reaches the maximum number, 21,000,000.
The History Of Bitcoin Halvings
When the genesis block was established on January 3rd, 2009, the mining reward was 50 BTC for every block. The first halving occurred on November 28th, 2012, where it reduced the reward to 25 BTC every block.
The second halving happened on July 9th, 2016, where the reward was halved once again from 25 BTC to 12.5 BTC.
What Will Change
After the last Bitcoin’s halving that happened on the 9th of July, 2016, the current mechanism is that miners receive 12.5 BTC for every new block. When the next halving happens, it will reduce this miner reward from 12.5 BTC to 6.25 BTC every new block. The next halving is expected to take place somewhere in May 2020.
What Previous Halvings Teach Us About Price
History has taught us that Bitcoin halvings played a huge role in creating a new trend for Bitcoin price action. Before the first halving, Bitcoin was trading at approximately $12.22. Only one year after the first halving, specifically in December 2013, the price shot up to above $1000 before it gradually crashed a year later (2014).
The second halving also had the same impact. Before the second halving on July 9th, 2016, Bitcoin was trading around $657. One year and five months later (December 2017), Bitcoin reached its peak price point above $19,000. And then, we had a price crash in 2018 before Bitcoin slowly “resurrected” in 2019.
Expectations And The Upcoming Halving (2020)
Well, if we want to learn something from history, it’s not impossible for history to repeat itself. If two of the previous halvings successfully pumped Bitcoin price for more than a year, it’s possible we will have this kind of price action after this year’s halving (2020).
Ironically, it’s the actions from traders that might actually pump Bitcoin price. If you have heard of the “self-fulfilling prophecy” concept in the trading world, you might know what I mean. When enough traders believe the same thing, it’s their actions that actually will create upward or downward pressure on a certain asset’s price.
So, if enough traders believe that Bitcoin price will go up due to this year’s halving, it might become a reality if they all buy a big amount of Bitcoins. And yes, Bitcoin’s rise might last for years, just like what we experienced from 2016 to December 2017.
Trade Cautiously – Because You Will Never Know
Of course, at the end of the day, you will never know what might actually happen. Although it’s very likely Bitcoin price will pump following this year’s halving event, but nobody can 100% predict the future. It’s also possible that Bitcoin price will fall because price action does not always repeat the same pattern.
Just like what the golden rule always says, never invest money you cannot afford to lose. Crypto trading world has always been very volatile and very speculative.