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Bitcoin halving explained – what can we expect?

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Bitcoin halving took place in the early hours of Tuesday, 12 May 2020 and there is tremendous international interest in what the halving will mean given that two previous halvings lead to dramatic price increases.

Bitcoin will return to its all-time highs within the next 12 to 18 months,” said Luno‘s chief executive, Marcus Swanepoel. “I believe we’re currently at the beginning of a long upward trend, one that, considering the broader economic environment, is set to experience increased volatility, especially in the next few weeks. Nevertheless, with the halving just around the corner, and with some patience, we will see that same sharp increase common with previous halvings, even if it will take a bit longer than usual to get there.”

In a recent poll of Luno users, most users (75%) expect the bitcoin price to be “higher” or “much higher” by the end of 2020. Less than 5% of Luno users said they plan to sell their bitcoin over the next six months, with more than 90% expecting to buy more, increase trading or hold on to their crypto over the same period of time.

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Marius Reitz, GM for Africa at Luno, unpacks the main areas of interest about the halving.

How will the price be affected?

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Since there have only been two previous halvings, this means there are only two data points, which is not significant enough to devise a trend. When the first halving took place in 2012, there were only 43 000 wallets (accounts). By the second halving in 2016, there were around seven million and today there are more than 48 million wallets, but this is still a relatively small number. 

In theory, if supply slows down and demand stays constant, prices will rise.  In the past, the halving has correlated with an increase in the price. The first halving took place on 28 November 2012, when one BTC was worth around $11. In the course of just a year after the event, Bitcoin’s price swelled to $1,100. The second halving took place in July 2016. Bitcoin maintained a price of around $600–$700 before flying to $20,000.

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Bearish Bitcoin price arguments

Miners may sell their Bitcoin to pay for new equipment, though miners have known about the impending halving far in advance so this is likely priced in already. Another argument is that consumers are not thinking about buying Bitcoin in the Covid-19 economic fallout and some cryptocurrency holders may liquidate their holdings to cover real costs which they face due to job or other financial losses.

Bullish Bitcoin price arguments

If you drop supply of anything by 50%, usually it drives demand and therefore prices increase. Many have upped their holdings in anticipation of a bull run. Countries with unstable currencies like South Africa have seen Bitcoin as a safe haven and good store of value and with governments printing money all over the world, inflation is likely to be higher than in the past. The Covid-19 situation may reduce the purchasing power of fiat currency, prompting more people to consider Bitcoin.

What effect will the halving have?

What we know for sure is that only 900 Bitcoin will be produced per day (currently 1800) and it will be twice as hard for miners to produce Bitcoin. The inflation rate drops to 1.73%  which is substantially lower than Bitcoin’s current inflation rate of 3.93%. For the first time, Bitcoin’s annual inflation rate will be lower than that of gold. Global inflation is about 3.56% according to statista.com and is expected to rise. The fact that Bitcoin’s inflation will be below all of this and may have a significant impact. 

The mining hash rate (processing power of the network ) is currently at an all time high and this is expected to drop.  

Covid-19 and a changed financial landscape

Covid-19 has probably permanently changed the financial landscape. While there was panic selling on equity markets in March, it is now apparent that the world economy is going to be greatly affected. Interest rates have generally dropped and countries around the world are facing news like the UK announced yesterday, its GDP is expected to contract at a dramatic 14% per annum. 

Bitcoin enthusiasts point out that there is certainty of Bitcoin supply which cannot be affected by any government or person. In times like this, people tend to turn to safe havens like gold, and the gold price has increased. Bitcoin can be bought by anybody with a smartphone and internet connection, gold is more difficult to access. There is also attraction to an alternative financial system. 

What is a halving?

The Bitcoin halving is a planned reduction in rewards miners receive. Halvings happen once every four years or so and this will be the third since Bitcoin was launched in 2009. 

A halving is a 50% reduction in the value of rewards to Bitcoin miners. Bitcoin is generated by miners. They have computers performing complex calculations which validate the transactions on a public digital ledger, called the blockchain. The miners compete with each other to earn newly-issued tokens known as a block reward. 

Why do Bitcoin halvings happen?

It is built into the Bitcoin protocol and fundamental to Bitcoin’s principles. There is a finite number of Bitcoin that will ever be in circulation (21 million) and there is no way of producing more. As such, halvings are a unique protocol which controls the supply.

Money issued by governments (fiat money) can be created by simply printing more notes, which means it loses value to inflation if too much is printed. 

Will the halving affect the Bitcoin processing speed and transaction fees?

The protocol design means it is unlikely to change. Transaction fees are not currently a large percentage of the income for miners, whose primary goal is achieving the block reward. This is why it is a race to see who decodes the block first. Miners joined forces and formed large mining pools, increasing the chances of getting a block which is then shared equally, along with the transaction fees. 

Does Bitcoin have any advantages over gold?

Gold is established, regulated and attracts institutional buyers. While there is some volatility, it is much more stable than Bitcoin, which is still classified as an experiment and extremely volatile. Gold has the first mover advantage over Bitcoin by a significant margin.

Bitcoin has an advantage in terms of ease of use and accessibility. Another key issue is Bitcoin’s certainty advantage. Although gold is disinflationary, we don’t know what that finite amount is and how much is left. 

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