Bitcoin Halving - Preparing for Lower Block Rewards

Today’s Bitcoin investors are moving their holdings from exchange platforms to their wallets at rates unseen since last June in anticipation of a halving of bitcoin mining rewards set to take effect in May. The seven-day moving average fell to 2,214,365 on April 14, a noteworthy low point that may indicate a change in investment strategy. Here’s what investors need to know.

What Is Bitcoin Halving?

Bitcoin halving involves reducing the reward given to miners for producing new bitcoin by 50%. The halving coming up in May is not the first one miners have experienced. Back in 2019, the original block reward was 50 bitcoins (BTC). This reward has already been cut in half twice, once in 2012, then again in 2016. As a result, today’s miners get only a 12.5 BTC reward. After the upcoming halving in May, the reward will drop again to 6.25 BTC per block mined.

These halvings were designed into the system when Bitcoin was initially conceived as a means of combating inflation and maintaining the total supply of coins, which cannot exceed 21 million. They happen every 210,000 blocks, or roughly every four years, and each halving reduces rewards by 50%.

In the early days of Bitcoin, millions of new coins were being added to the market. Since those who originally conceived the cryptocurrency capped mining at 21 million, it’s safe to say that the “easy” bitcoin has already been mined. More than 18.3 million BTC is already in circulation. Right now, around 1,800 BTC are mined each day, but that number should fall after the halving to around 900 per day.

While the halving process may sound disruptive to those who are new to Bitcoin investing, it’s a crucial part of maintaining algorithmic emission control over a cryptocurrency designed to operate absent any central authority. Now that investors are used to this protocol, it is less clear whether this and future halvings will create the same drive in prices as the last two events.

When Will It Happen?

Since the halvings occur every 210,000 blocks, there’s no way to give a hard-and-fast date for when the next one will occur. It will happen sometime in May, and most experts estimate that it should occur sometime between May 11 and May 18.

Miner Responses

Bitcoin miners have been preparing for the halving for months. Since last October, miners across the world have been upgrading equipment and optimizing their mining operations to conserve power and maximize profits. Some are purchasing state-of-the-art ASIC machines, while others are cutting electricity costs by purchasing surplus energy from power grids across the world.

Not all miners plan to stay in the race. Scott Freeman, the co-founder of JST Capital, expects the number of miners to drop. More specifically, he expects miners working with less efficient setups to find that it is no longer profitable enough to be worth the power usage. Many current miners and investors are looking to evidence from previous halvings that the price of bitcoin will increase, making up for the decreased BTC rewards, but there is no guarantee that this will be the case. For miners on the fence about whether to reconsider their career choices, it’s worth waiting until May to find out how the economy will respond.

Investor Responses

The fact that investors are moving their holdings out of exchanges and into private wallets at rates not seen for months may be seen as an expectation of what’s to come. Savvy investors almost always withdraw BTC for holding when they expect prices to rise.

There is reason for cautious optimism. After the first halving in 2012, the price of one bitcoin increased from less than $12 to over $650. After the second halving in 2016, the price rose to $20,000. There were, of course, other factors at play in addition to Bitcoin’s inherently deflationary nature. Increasing news coverage and subsequent public interest certainly played a role in driving these market trends.

Richard Rosenblum, GSR’s head of trading, believes that adding fewer coins will create a supply deficit and create more demand, causing the prices to rally and driving the market. However, while just about everyone who is paying attention to the bitcoin ecosystem believes that the halving will have a net-positive impact on the price of the cryptocurrency over time, not all investors are equally optimistic when it comes to short-term returns.

Jason Williams, the co-founder of Morgan Creek Digital, is skeptical of this bullish narrative. He, and others like him, believe that since the market is fully prepared for the decrease in BTC production, it has already made adjustments to compensate for the lower number of coins being added to the ecosystem.

External Factors

Although Bitcoin was designed to operate as an independent cryptocurrency free from central control, that doesn’t mean it isn’t impacted by other sectors of the economy. Recently, prices have been moving in tandem with other markets, namely the S&P and Dow. This belies the narrative that Bitcoin and other cryptocurrencies will perform as safe-haven assets, but it doesn’t negate the possibility of a rally in prices.

Bitcoin and the Coronavirus

Many investors still see Bitcoin as a relatively safe investment in today’s uncertain times. While the U.S. government has printed over $2 trillion in recent weeks to stave off the worst economic effects of the coronavirus pandemic, which creates a potential risk of hyperinflation, Bitcoin is fundamentally deflationary.

Analysts project that the last fractions of bitcoin will not be mined until 2140. Since there will be fewer BTC added to the ecosystem as this end-date approaches, the theory of supply and demand dictates that provided cryptocurrencies remain a viable investment, the value of each BTC should continue to grow.

Economic analysts attempting to anticipate the impacts of the current pandemic on fiat currencies have a different outlook. While the rise in unemployment and the contraction of the global economy that has resulted from the U.S. and other countries’ attempts to stop the spread of the pandemic is expected to create a contraction in the short term, increasing the possibility of deflation of fiat currencies, its effects in the long-term can’t yet be predicted with any accuracy.

In most cases, the influx of currency into an economy can be expected to create inflation. In some cases, it can even raise the risk of dangerous hyperinflation. This happens not as an immediate response, but over time.

During the 2008 financial crash, the U.S. Federal Reserve doubled the nation’s total assets over the course of several weeks, then doubled them again over the next few years. However, it took the economy more than 12 years to balance out thanks largely to the low demand for loans following the crisis. While there is much uncertainty surrounding fiat currency economic predictions, few expect the price of bitcoin to be impacted on the same level since it is genuinely a sovereign currency.

Bitcoin and Other Cryptocurrencies

As the dominant cryptocurrency, bitcoin directly influences global markets for altcoins. If the market demand increases in response to the upcoming halving, especially in combination with today’s general economic uncertainty, it could cause a natural price increase for other cryptocurrencies, as well.

Is Now a Good Time to Ramp Up Investment?

Whether they already have some bitcoin in the exchanges or squirreled away in a personal wallet, or they’re considering investing for the first time, now is a good time to buy bitcoin, especially as a long-term investment strategy. There’s no way to predict the future with 100% accuracy, so investing in bitcoin will still come with plenty of risks.

Analysts are divided on the subject of whether the upcoming halving will immediately drive demand in the short run, but most agree that it will have a positive impact in the long-term. Those who want to start investing in bitcoin for the first time can check out, a secure and well-respected peer-to-peer (P2P) platform that accepts both credit cards and PayPal transactions.

Unlike traditional exchanges, it allows verified users to access their bitcoin almost immediately. Since there’s no way to know exactly when the halving will occur, it’s best for newcomers to cryptocurrency to set up a wallet and an exchange account as soon as possible. Once they’ve verified their accounts, they can receive and send bitcoin, transfer BTC to their wallets, and start taking advantage of fully secured, automated transactions.

The Bottom Line

Bitcoin investors, analysts, and cryptocurrency enthusiasts across the world have a lot to watch right now. While miners have been preparing themselves for the upcoming halving for months, the almost unprecedented economic uncertainty surrounding the U.S. dollar and other fiat currencies adds an extra layer of excitement to the game.

Bitcoin’s March averages may not have been much to look at, but the cryptocurrency has already enjoyed a rally of over 50% from its mid-month low. If the bulls can sustain this pace in the short-term, it could carry the momentum behind the cryptocurrency past the halving. There is certainly no guarantee that this will be the case, but for those waiting with bated breath for the 210,000 BTC mark, it’s an enticing possibility.