How the halving events can drive the bitcoin price up to 1 million dollar
Bitcoin halving is referring to the event when the block reward for the bitcoin miners are halved after a certain period of time.
At the moment a bitcoin miner received 12.5 as a block reward for mining a news block they add to the bitcoin blockchain. This reward is halved in every four years and the next event is expected to happen in May 2020, less than a year from now.
During the past 10 years of history for bitcoin halving events had a long term positive bump in the price of bitcoin. According to some analyst, eventually halving can drive the bitcoin price up to 1 million dollars.
But what is this event actually? How it works and why does it have an effect on the price of bitcoin?
Let’s see the details behind this special feature of the bitcoin blockchain.
How does bitcoin mining work?
The total number of bitcoins is set to 21 million, but not all of the coins are not yet available on the market. Bitcoins are placed gradually through the mining activity. In order to understand this, we have to see how does bitcoin mining work.
Bitcoins are released at a predictable rate through block rewards. These block rewards go to the miners who very the transactions processed through the blockchain. Miners solve very complex mathematical problems which are presented at them in a block. Whoever solves this problem the first, gets the block rewards, which are the bitcoins. This process is a fairly computer-intensive, running bitcoin miners cost a lot of energy, and eventually money, so the block reward compensates the miners for all the effort they take to keep the network open.
When bitcoin was introduced in 2009 the first miners received 50 bitcoins for each mined block. This was reduced to 25 bitcoins in 2012 and to 12.5 bitcoins in 2017.
So right now, miners receive 12.5 bitcoins after each block mined. This block reward is halving during the halving event, next time in 2020 May to 6.25 bitcoins per block.
The program of bitcoin protocol has been designed at a way that not all of the bitcoins are placed on the market when the system started. Rather, the number of bitcoins in circulation gradually placed on the market, through halving at a decreasing rate. The halving event happens after every 210 000 blocks.
Predicting the exact date can be calculated from the time needed to mine a block. It is known that approximately every 10 minutes a new block is mined. Calculating the time needed between halving events, it takes about 4 years to miner this 210 000 blocks.
Bitcoin halving effect on its price
The predictable rate of how new bitcoins are created and released to miners can be calculated precisely as it is already written down in the protocol of bitcoin. It is not like fiat money, where central banks can decide to print an unlimited amount of money which causes inflations. Rather, the fixed amount of bitcoin, which represents a fixed supply makes the prices continually increase until the equilibrium price is reached.
If you look at the prior halving events you can see that the prices peaked significantly after the prior two halvings.
The theory behind this is the fixed amount of supply drives up the prices due to the increasing demand. According to general economics, the supply and demand meet at an equilibrium price. The supply of coins is gradually decreasing making one single bitcoin more and more valuable if demand is constant or increasing.
Since miners spend a lot of money on covering operational expenses, so most of the coins mined are converted into fiat currencies right away after creation. Now they make around 1800 bitcoin each day which is reduced to 900 after the halving. That is a sharp decrease in supply, which needs to be compensated by the price increase in order to meet the current demand rate. In addition to this, if the demand keeps increasing because of continually improving adoption, the equilibrium price of bitcoin can even go higher than what the supply would indicate. The ever increasing price leads to more interest from the general public, especially during bull price runs, the search for the term ‘bitcoin’ is skyrocketing, which is leading to a price increase spiral increase the price of bitcoin higher and higher.
Due to increased scarcity caused by the halving on the bitcoin market, the stock-flow model suggests that prior bitcoin halving event had a positive price impact on bitcoins, so the future halving events will do the same: skyrocket the price of bitcoin
According to crypto analysts, who are modeling the price of bitcoin based on the circulating amount of coins, the price of bitcoins will reach 100 000 dollars in 2020 and will be above 1 million dollars after 2024.
Counter-arguments against the bitcoin halving effect
The above theory seems all nice and shining however on the financial markets only one thing is for sure: past performance is never a guarantee for the future.
Having said this there are a couple of counter-arguments against the stock-flow model and overall some analysts questions the existence of bitcoin halving effect on the market.
Strix Leviathan researchers have concluded in their analysis that the limited amount of historical data available for the crypto markets leads to a lack of supporting evidence which would provide enough statistical data to prove the halving effect theory.
One of the theories busted by statistical analysis is that bitcoin markets have a reduced sell pressure from miners after the halving as they prefer to ‘hodl’, while the demand is increasing.
According to the analysis of 32 halving events across 24 different altcoins, the researches concluded that 6 months before and 6 months after the prices have moved not significantly different. Thus, researchers showed that assets experiencing a halving even perform no better than the rest of the market.
The researchers acknowledged however that the bitcoin market indeed experiences price peaks after the prior halving events. The reason for that is simply explained by the fact, that
if enough people believe the bitcoin price will increase and buy according to this, it becomes a self-fulfilling prophecy.
Whether bitcoin halving has a direct impact on the bitcoin price or not it is true that during the past events bitcoin prices sharply increased after the block rewards have been halved. Although it is not 100% guaranteed that this will happen again, due to the self-fulfilling prophecy effect which often happens in the financial markets, it is definitely worth paying attention to the date of the next halving, which will be in May 2020.