The volatile Bitcoin price is about to get hit with another disruptive event – the halving of the reward given to the Bitcoin miners.
The Bitcoin halving, which will cut the reward from 25 bitcoins to 12.5 bitcoins, is expected to occur tomorrow (Saturday), July 9.
It comes amid a wild run for the price of Bitcoin. After a period of relative stability, the Bitcoin price went from about $450 in late May to about $775 within a month. Since then, the price of Bitcoin has bobbed between $600 and $700.
Anticipation of the Bitcoin halving clearly has played a role here.
"The Bitcoin mining reward decreases by half at predetermined periods about every four years, so it will not come as news to anyone," said Gene Kavner, founder & CEO of iPayYou, a software Bitcoin wallet. "The price of this halving has, most likely, already been baked into the current price of Bitcoin. The big question is, whether the halving will have a negative effect on the Bitcoin miners."
The Bitcoin miners are at risk because of how the Bitcoin halving affects the most basic aspects of the cryptocurrency and how it is created.
To understand what's going on with the Bitcoin halving, you need to understand how Bitcoin is mined…
Why the Bitcoin Halving Is Key to the Bitcoin Price
Bitcoins are created when a miner "solves" a complex mathematical riddle, the creating of a new block that gets added to the Bitcoin blockchain. The blockchain is the public digital ledger of all the transactions that have ever taken place. The code periodically adjusts the difficulty of the riddle so that one block is created roughly every 10 minutes.
This function is vital to the network. Each block contains the transactions from the previous 10 minutes, which then get verified by all the other nodes on the network. The incentive for the miners to do this is the Bitcoin reward.
Originally the reward was 50 bitcoins. The first Bitcoin halving occurred Nov. 28, 2012, taking it down to 25 bitcoins. The next Bitcoin halving, to 6.25 bitcoins, is expected to occur in 2021.
The reason for the periodic Bitcoin halving is to control supply. Bitcoin is designed to be a deflationary currency – a response to the inflationary fiat currencies produced by governments. The U.S. dollar, for example, has lost 96% of its value over the past 100 years due to the U.S. government's incessant money printing.
Bitcoin, on the other hand, is not only designed with a decreasing supply – that supply is capped at 21 million. The last Bitcoin will be mined in 2140, but supply will drop to a trickle by the middle of this century.
So you have shrinking supply combined with steady demand – a combination that should result in higher Bitcoin prices.
But with Bitcoin, things are not that simple. The Bitcoin miners are the wild card. And what they do could have a major impact on the Bitcoin price…
What Will the Bitcoin Miners Do?
Remember, the Bitcoin halving will chop the revenue the miners get in half. Bitcoin mining carries a lot of overhead, from the dedicated mining machines that cost thousands of dollars, to the electricity needed to power them, to the cooling apparatus needed to keep them from overheating.
Some in the Bitcoin community believe the drop in the reward will force miners to turn off some of their machines, thus delaying the confirmation of transactions. Such an issue would cause concern about the reliability of Bitcoin and put downward pressure on the Bitcoin price.
But Bitcoin miners say that's not likely.
"We believe any drop in hash rate will be relatively small, like 10% to 25%," Marco Krohn, CFO and co-founder of Genesis Mining, told Bitcoin Magazine. "This is because electricity contracts are generally fixed for a longer period; if a contract doesn't run out before the end of the month, you won't stop mining before the end of the month."
Krohn says miners have been investing in more efficient hardware in anticipation of the halving. They've had a long time to plan for this, and they're ready.
At worst, some transactions will be delayed as a result of a slight drop in the mining power, but that will fix itself in a few weeks when the system lowers the difficulty. The Bitcoin price is unlikely to be much more volatile than usual over the next week or two.
But of greater interest is the long-term effect of the halving on the Bitcoin price. And this is much easier to determine…
Where the Price of Bitcoin Is Going in the Months Ahead
Interest in Bitcoin continues to rise among financial institutions as well as venture capitalists. The Bitcoin economy, while not yet exploding, continues to grow. All that spells increasing demand just as the supply of new Bitcoin is falling in half. And that's bullish for the Bitcoin price.
A look at the last halving suggests what we might expect.
In mid-2012, the Bitcoin price had recovered from a slump in 2011 that had pushed it below $3. By the spring it was at $5, and by the fall, the price of Bitcoin was hovering in the $12 to $13 range.
Then as now, it's likely that the halving drove the Bitcoin price higher in the months leading up to the event.
In the immediate aftermath of the 2012 Bitcoin halving, the price of Bitcoin didn't react much. It rose to about $13.50 and stayed there for nearly two months.
But then the Bitcoin price spiked, all the way to $250 in early April – an increase of 1,900% over November 2012 levels. Of course it was too much too soon, and the price of Bitcoin soon settled back to the $100 range. But even that was a 700% gain over the Bitcoin price in November.
That doesn't mean the price of Bitcoin necessarily will soar 700% over the next six months. But those big gains following the last Bitcoin halving strongly suggest another bull run – just not right away.
The Bottom Line: The Bitcoin halving that takes place Saturday will cause some minor disruptions in the short term that could cause a slight drop in the Bitcoin price. But in the long term, the reduction in supply combined with increased demand as a result of growing adoption will push the price of Bitcoin much higher.
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- Bitcoin Magazine: Bitcoin Miners Share Optimism as Second Bitcoin Halving Approaches