Feature Piece - Bitcoin Halving
Bitcoin's next halving event is expected to occur in May 2020. We expect that enthusiasts will start to hear more and more about it in the lead up. Below we delve into why this is a milestone event for Bitcoin.
Some would argue that Bitcoin's most powerful feature is its algorithmic monetary policy. In designing Bitcoin, Satoshi Nakamoto algorithmically programmed Bitcoin to reduce its inflation rate every 210,000 Bitcoin blocks. Simply, approximately every 4 years the amount of Bitcoin generated for block reward is halved.
Now we are not implying that inflation or government driven monetary policy is bad, but because certainty, computationally predictable and deflationary monetary policy can provide investors with a predictably scarce commodity that can act as a reserve asset.
During the first 210,000 blocks the reward was 50 Bitcoin per block, this reduced to 25 in 2012, 12.5 in 2016 and soon to be 6.25 from May 2020.
OK, so what?
The algorithmic monetary policy creates Bitcoin's scarcity and is why there will only ever be 21 million Bitcoin ever in existence. Scarcity, along with an established history and durability are some of the primary features that have made gold the US$7 trillion reserve asset of the world.
Bitcoin arguably is an improvement on some of gold’s features including portability, verifiability and divisibility and once its inflation rate reduces to 1.8% annually (lower than gold’s inflation of ~2-3%) in
2020 it could capture the interest of financial institutes as another reserve asset worth considering.
Bistcoin's short history has shown that approximately one year out from each of the previous Bitcoin halvings in 2012 and 2016 Bitcoin has rallied in price. In 2011, approximately one year before the 2012 halving, Bitcoin started a rally that ended the day of the halving after a 300% price increase. Shortly after a correction was Bitcoin’s first parabolic rise from US$12 to US$1,100. In 2015, again approximately 1 year before the 2016 halving, Bitcoin started a rally that ended the day of the halving after a 145% price increase. Again after a small correction in price, Bitcoin began another parabolic rise from US$550 to US$20,000.
Why does this happen?
Currently there are 1,800 Bitcoin created daily. Most of this is sold on market to pay for mining hardware, electricity and maintenance costs. On the day of the halving, the amount of Bitcoin that miners will have to sell on market will immediately half, creating a supply shock to the system. As this drastic decrease in supply is met with constant (or increasing) demand, prices rise to find a new equilibrium.
Magnet Capital's take
The Bitcoin narrative around ‘4 year cycles’ defined by halving events has played out almost identically over the last two market cycles. With the recent drawdown after the last parabolic move it seems that in the absence of any real adoption, Bitcoin traders have not been pricing in technology developments, regulation and institutional speculation, but rather trading to the same market cycle that has played out before. The 85% retracement in Bitcoin price from its high in December 2017 seems to be a near exact set-up to the previous two events. We expect that the halving narrative will start to become more prominent in early 2019.
Disclaimer: Magnet Capital does not accept any liability for any financial decisions made on the basis of the information provided. The above opinion does not constitute financial advice and should not be taken as such. Magnet Capital urges you to obtain professional advice before considering any investment decisions.