As the Bitcoin halving event looms, hodlers, and analysts are looking to the coin’s historical behavior in the hope that history might repeat itself.
Indeed, the Bitcoin halving is a major event that occurs around once every four years. Simply put, miners are rewarded every time they successfully mine a Bitcoin block. This process, known as mining, is done via ASIC computers which work on updating Bitcoin’s ledger by solving complex cryptography that scales depending on the network’s hash power. Once 210,000 blocks are mined (taking around 4 years), the block reward gets halved, and with it comes an interesting change in price-action relative to fiat currency. Satoshi Nakamoto hard-coded the process in order to keep inflation under control right up until 2140, when all Bitcoins will have been mined. Once this big event kicks in, over 85% of the total Bitcoin supply will be out in circulation, leaving just 3.15 Bitcoins of the 21 million total supply cap.
Focusing on Bitcoin’s immediate future that’s more relevant to the living, the next big day is set to be sometime in May 2020, where rewards will half from 1,800 to 900 Bitcoins per day. Notably, the asset’s monetary inflation rate, which currently stands at 3.8% per annum, will also half to 1.8% — rivalling the 2% targets of most central banks as well as precious metals. In fact, Bitcoin will have a similar, if not superior inflation rate to Gold – acting as a safe haven and a hedge against possible fiat currency uncertainty.
While Bitcoin is still relatively young, it’s historical halving events have been met with favourable market trends for your average investor. For instance, on November 28th, 2012, also known as ‘halving day 2012’, Bitcoin’s block reward got sliced from 50 BTC to 25 BTC per day, grounding Bitcoin’s whitepaper claim on scarcity in the process. As per the below chart, the process happens every 210,000 blocks.
Separately, upon deeper price-action inspection, one can see that the top digital currency went through two bubbles between 2010 and alte 2011, which was subsequently followed by a major crash. To the relief of many hodlers no-doubt, the coin then went through a slow and steady recovery about a year before the first halving. Fast forward several months and Bitcoin bounced from $10 to a whopping $200 – that’s a 200% return on investment within a single year.
Naturally, what goes up must come down. In fact, Bitcoin then went through a period of consolidation before rallying to fresh all-time highs, peaking at $1,200.
As with prior cycles, Bitcoin’s price went on to retrace to its next inflection point at about $120, about a year before the next halving on July 9th 2016. At this point, most analysts even with rudimentary faculties of deduction noticed a repeating pattern. Lo and behold Bitcoin’s price continued to climb right up to the next big event where block rewards were cut to today’s 12.5 BTC per day. As with prior halvings, this further instantiated Bitcoin’s claim on scarcity, pushing the coin into a parabolic spiral that saw the digital asset reach a monumental $20,000 in December 2017.
At the time of publishing, we are less than a month away from the historical yearly inflection point that has historically been accompanied by incremental moves to the upside.
Will History Repeat Itself?
In Bitcoin’s whitepaper, Satoshi Nakamoto delineates the mechanism with which nodes are continuously incentivized to support the network. Comparing it to gold mining, Nakamoto writes:
The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
In some sense, this puts to rest reservations that about miners dropping out of the market due to squeezed profit margins. And given that Bitcoin’s hashrate has either remained consistent or burst to the upside, it’s not at all unreasonable to expect miners to continue to adapt to the shifting market conditions.
The currency’s history actually points more towards a continued, sustained effort to maintain the public ledger and payment system. In addition, Bitcoin’s limited supply, intrinsic financial freedom and increasing scarcity make for a plethora of confluent reasons for the project to not only survive, but thrive.