Bitcoin’s halvening

Marius Paun | London, UK | Senior dealer | Tuesday 12th May 2020

What just happened?

A block halving or halveing is a feature built into bitcoin’s code by the pseudonymous Satoshi Nakamoto. Part of the job for a bitcoin miner is to bundle up outstanding transactions, verify they are not a fraud (making sure that no bitcoin has been spent twice) and adding them to a block, on top of previous transactions thus forming the ‘blockchain’. Whenever a block is realised (which is roughly every 10 minutes) miners get a reward. That’s for the tasks above, solving a complex mathematical algorithm and also beating other miners to finishing line and it means receiving new bitcoins.

At the very beginning, miners would get 50 bitcoins per block as a reward. After every 210,000 blocks are mined, which happens every 4 years, the reward for blocks halves and will continue to do that until all 21 million bitcoins allowed by the initial protocol will be mined. That will occur in approximately the year 2140. Of course, should a miner increase efficiency (quantum computing is recurring speculation along those lines today) the next halving could happen a lot sooner. As of today, the block reward is 6.25 coins per block, down from 12.5 yesterday. We already had similar events in the past:

  • First halving – on 28th November 2012 at block 210,000
  • Second halving – on 9th July 2016 at block 420,000
  • Third halving – on 11th May 2020 at block 630,000

The issuance of bitcoins is controlled by the network itself, by consensus of all participants. The main rules still in place are 21 million bitcoins to be mined, the target of 10 minutes for blocks intervals, halving every 210,000 blocks and reward to start at 50 bitcoins. Any changes require all participants to agree by consensus. This is the reason why we now have the so-called forks: ‘Bitcoin Cash’, ‘Bitcoin SV’ where a part of the initial community has agreed to some changes, but not all of the participants.

Why was the halving built into the code?

It was probably meant as a function to give bitcoin an extra feature – scarcity- going forward thus to increase its appeal. It was designed as a deflationary currency. As it becomes scarcer over time, it could be used as an inflation hedge, something like gold currently does. Fiat money inflates as the supply of money increases (and it did massively in the recent past) which should lead eventually to a decline in purchasing power. Outside the digital currencies, no other asset has this feature of the regular halving of supply, pre-planned for the next hundred years.

What does history tell us about the effect of halving on bitcoin’s price?

The last one, in 2016 was considered a ‘buy the rumour, sell the news’ event. We saw a sharp rally in the run-up to halving but then a sell-off followed, pushing the price down. One thing is true, bitcoin price at third halving is higher than its price at second which is higher than the first. Undoubtedly the long-term trend is clearly up. Nonetheless, the jury is still out there on the effects halving will have on the future price of bitcoin.

During the mid-March steep selloff due to coronavirus, digital currencies also suffered big losses, at some point more than the stock markets. However, by the beginning of May, S&P was down more than 10% for the year, FTSE100 was down more than 20%, oil down 60%. The two winners? Gold was up 17% and cryptocurrencies more than 30%. Again, can we speculate that the quicker recovery in cryptos was due to the incoming halving for bitcoin? It remains to be seen.

On the downside, the first support is around $7890. If that is breached then bears will be targeting $7833 which offered good resistance on the way up in May-June 2018 but also during October 2018. Next in line supports at 6602 also a level likely to be closely watched as it held rather well recently.

On the upside, the bulls will be looking at 9270 as the next resistance followed by a breakthrough psychologically important 10,000 level. That will open the door for the range of $10,900 – $11,000 to be retested. We also notice the 6 and 21-day moving averages have changed direction and are now pointing upwards. The short-term MA (6) remains above the longer-term one (21) with the current market price currently above both indicators. All are bullish signals on the long-term chart.