What is the Halving?
Bitcoin, the internet's very own public payment network and store of value, is known for being decentralized and having no governance. This means that everything is pre-programmed into the protocol, and it uses these "rules" as its monetary policy. In any and all monetary policies, one of the most important factors to consider is money creation.
Who gets to print the money? Who gets to decide how much is printed, and how often? This is one of the most important aspects in any monetary policy because there is tremendous power in the hands of those responsible for such rules.
With Bitcoin, it is pre-determined. Satoshi set in stone the monetary policy of Bitcoin when he decided that in order to distribute the coins fairly to network participants, it should be done automatically and at a fixed and predetermined rate, with new coins being introduced into the system with every new block added to the chain, as a reward to the miners who are using hardware and electricity to do so.
When Bitcoin was finally "turned on" by Satoshi in 2009, 50 new coins were added as a reward in every new block., every ten minutes. The halving occurs every 210,000 blocks, or around 4 years. The Bitcoin protocol dictates that after this time, the new coins being given as a reward will be cut exactly in half, therefore, it was called the Bitcoin Halving.
The first halving happened in late 2012, the second one was in mid 2016, and third Bitcoin halving is set to occur this coming May 2020. There will be halvings every 4 years until the last satoshi is mined in 2140, but 98% of bitcoins will be mined by 2028.
Yes, you read that right. 120 years of halvings to go!
What Happens During and After The Halving?
Looking at the history of Bitcoin, we see two halving events with very similar themes surrounding them. In the year before the halving, we see a big downward price movement, while in the year during the halving, we see a decent recovery and accumulation period, and finally, in the year after the halving, we see a parabolic run-up to new all-time highs for the price of Bitcoin.
In 2011, Bitcoin went from mere cents to $32, then suddenly crashing over 90% down to $2. From 2011 to 2012, the price slowly but sure crawled back up to $12 right before the first halving in November 2012. In 2013, Bitcoin went from $15 to an astonishing $1200 by December. Then it crashed for two years down to $200, and stayed there for a while.
By January 2015, Bitcoin had fallen to its lowest point of $190, but ended that year at around $350. By 2016, Bitcoin had started to climb again, finishing strong that year at $800, a 100+% increase. And then, the 2017 bull run blew people's minds and we saw Bitcoin run up from $800 to $20,000 in the same year, breaking all records.
As you can see, the pattern is quite obvious.
In 2018, like clockwork, Bitcoin crashed again, and it hit its lowest point in December 2018 at $3200, and 85% drop. Still following the script, it then recovered in 2019, from $3200 up to $14000 then correcting itself to $10,000~ today, February 2020. The Halving is set to happen this year, between April and May 2020, and if history tells us what's possible, we should see a strong bullish market develop this year, leading up to a new all-time high by 2021.
Stock to Flow Ratio and Halvings
A great chart to visualize the halving's effect on the market and the price of Bitcoin can be seen in the in-depth analysis of data analyst @100TrillionUSD in his widely acclaimed article , "Modeling Bitcoin's Value with Scarcity", which is about the Stock-to-Flow ratio of Bitcoin as digital gold, compared with other commodities. The halvings reduce the flow of Bitcoin and causes a supply shock, but with demand ever increasing, the only direction left for the price is to go up.
The absolute scarcity and provably fixed supply of Bitcoin is a first of its kind in the financial and commodity markets. The world are just starting to understand the implications of having a digital commodity with nearly perfect monetary properties that is only available in a fixed quantity.
According to the Stock-to-Flow chart, Bitcoin has a range of $55,000 to over $100,000 between 2021-2024, with historical prices overshooting the peak by a factor of 3. And if we extrapolate further? Theoretically, Bitcoin can reach beyond that range just by capturing a big percentage of the gold market or other store of value asset classes.
What do you think? Will history repeat itself? Let us know in the comments!