The Bitcoin Halving: What It Means and Why It Matters

After months of anticipation and way too much hype, the Bitcoin halving event took place yesterday (Monday, May 11).

Simply put, that means the reward earned by the Bitcoin miners for solving one block in the blockchain has shrunk from 12.5 bitcoins to 6.25 bitcoins.

It was the third halving event in Bitcoin's 11-year history. When Bitcoin launched in 2009, the mining reward was 50 bitcoins. The first halving in November 2012 cut that to 25, and the second in July of 2016 reduced the reward to 12.5.

The immediate impact of the latest Bitcoin halving was muted. A headline on crypto news site CoinDesk referred to it as "dull."

Actually, the reaction was predictable. The Bitcoin price fell about 2%, to around $8,600. And the discovery of new blocks slowed as Bitcoin miners took equipment offline. That makes sense because with the halving of the reward, it's no longer profitable to run less efficient mining hardware.

But the lack of immediate drama doesn't mean the Bitcoin halving is no big deal. As with most things Bitcoin, the implications of this event are far more complex and nuanced.

Why the Bitcoin Halving Happened

The halving was not a random event. The reward reductions are built into the Bitcoin code and are not triggered by a date, but by the length of the blockchain. A halving occurs every 210,000 blocks. Monday's halving occurred at block height 630,000.

The idea behind it is to control the supply of new bitcoins entering the system. To seed the network rapidly and to generate interest, the early reward was a comparatively large 50 bitcoins.

But Bitcoin's creator, the mysterious Satoshi Nakamoto, designed a currency system that would not keep generating a steady stream of new coins - a flaw that would dilute the value of all existing coins. The halving events are programmed to continue until the Bitcoin supply reaches its cap of 21 million in the year 2140.

Contrast this with what most of today's central banks do with fiat currencies. As governments print more money to pay for wars, social programs, and bailouts from economic setbacks such the coronavirus recession, inflation eats away at the currency's buying power.

In other words, you can be earning the same amount of money, but it buys less and less.

The mining pool that won the block just prior to the halving embedded a message in it to hammer the point home. It said: "NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue."

That was not just a reference to the rampant money-printing of the U.S. Federal Reserve this year. It recalled the message Nakamoto embedded in the very first Bitcoin block, a headline in a UK newspaper: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."

Central bank manipulation of money at the expense of ordinary citizens was one of Nakamoto's primary motives for creating Bitcoin. And it explains why halving events are built into the code.

The Bitcoin halving has implications for the price as well - despite the ho-hum reaction from Bitcoin traders this week.

What the Halving Means for the Bitcoin Price

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Last year, folks were talking about how the halving was "priced in," and so would have no impact when it occurred.

Actually, we saw a run-up in the price a few weeks ago as anticipation for the halving was building. Bitcoin shot up from about $6,800 April 20 to a little over $10,000 May 7.

But as we reached the actual event, Bitcoin sold off. It was a variation on a theme we see in the stock market all the time: Buy the rumor, sell the news.

The anticlimactic reaction to the halving in the Bitcoin markets should have surprised no one, though. In the previous two halvings, the price of Bitcoin behaved in much the same way - it hardly moved.

But halvings do seem to have an impact on the Bitcoin price over the long term. The media attention around these events tends to draw in new investors, for one thing. That beefs up demand over time as these newbies dip their toes in.

Instinct says the cut in the supply of new coins should boost the price as well. But daily trading volume in Bitcoin is about 270,000 per day. The halving cut the supply of new coins from 1,800 per day to 900 - the proverbial drop in the bucket.

But over time, that reduction in supply adds up. In 100 days, the Bitcoin markets will have 90,000 fewer coins to trade than they would have without the halving. In 300 days, the gap grows to 270,000 bitcoins - equal to one day's trading volume.

Huge Bitcoin rallies did follow the previous two halving events, but many months later.

At the first halving in 2012, Bitcoin traded for just $11. A little over a year later, Bitcoin went as high as $1,157. At the second halving in 2016, the Bitcoin price was about $655. At the end of 2017, it peaked at just under $20,000.

Over the next year, the reduction in new Bitcoin supply will combine with rising demand from new Bitcoin investors big and small to push prices higher.

We continue to see rising interest from institutional investors. Billionaire hedge fund manager Paul Tudor Jones is the latest heavy hitter to put substantial sums into Bitcoin. Just this week, he told CNBC that he has almost 2% of his assets in Bitcoin.

This is why many in the crypto community - including myself - expect the Bitcoin price to go as high as $100,000 by the end of 2021.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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