The paper’s ingenuity is undeniable. It saw to the creation of the first digital decentralized currency, and consequently spurred on the emergence of a multi-billion dollar industry.
But perhaps what’s most remarkable is the foresight evinced in the paper, particularly around the mechanisms embedded in the Bitcoin protocol that safeguard the integrity of the ledger and potentially impact the coin’s value.
The so-called ‘Halvening’ is one such mechanism and its periodic occurrence is an important milestone. According to the Bitcoin protocol, the next Halvening is estimated to happen again in May, 2020. And as this event is historically associated with turbulent, potentially profitable price movements, it is something investors should take note of.
The Halvening’s Significance
So what is the halvening? When Bitcoin was created, it was determined that the coin should be issued as a reward for miners who maintain the blockchain and verify transactions.
The pace of block mining is such that a batch of newly minted Bitcoin is issued every 10 minutes and awarded to miners for the work they do in verifying transactions, keeping the underlying blockchain immutable and creating new blocks.
Bitcoin was predetermined to only have 21 million coins in circulation, and this was to be released gradually to miners as an incentive.
In 2009, for every block added a miner was rewarded with 50 Bitcoin. In 2012, this amount was halved to 25, in 2016 to 12.5, and in May, 2020, this amount will further be reduced to 6.25 Bitcoin per block. With 18 million Bitcoin already in circulation, 3 million are yet to be released.
The reason why the amount released is halved every 210.000 blocks (roughly 4 years) is to counter inflation. As Satoshi explained in an email:
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.”
Satoshi clearly anticipated increasing adoption and demand and understood Bitcoin’s value to rise enough to keep miners incentivized, despite reward reductions, so much so that once all Bitcoin has been mined, the fees associated with each block should still suffice to keep miners motivated.
The Halvening’s Impact
The purpose of halving the block rewards is to drive Bitcoin’s value upwards in the long term, and so far this has had the desired effect.
The first Halvening happened on 28 November, 2012. Although the price movement of +1.7% on the day itself was negligible, the preceding and following months showed continued growth and led to the rally in early 2013 when the price rose from $13 to $260 in 4 months.
During the last Halvening, in 2016, the price didn’t move so much. Although, some have interpreted the 50 percent price rise (from $430 to $650) in the three months prior to the reward reduction as a pre-emptive bull run. Placed in a wider timeframe, Bitcoin’s performance – which includes the coin reaching its all-time-high of almost $20k – is notable.
If historical data is any indicator of what may come, significant gains could be on the cards – but like anything that is well known, one must realistically assume that some of the positive risk is already reflected in the current price. What is notable is that previous Halvenings have seen a strong price reaction, but that does not mean this will happen again this time.
With only 7 months to go until the next Halvening, apart from taking a view on which way the market may go, there is now a range of crypto derivatives available that allow you to go either long or short and take full advantage of potential price swings. Now is a good time to explore the benefits of the different types of financial products that allow investors to turn a profit in both a bull and a bear market.
AAX specializes in crypto derivatives in the form of perpetual futures contracts and also facilitates spot trading for major cryptocurrencies. In preparing for the upcoming Halvening, we encourage investors to thoroughly research Bitcoin’s historical price movements, but also how other altcoins performed alongside it, and to make full use of leveraged perpetual contracts for Bitcoin to maximize exposure and hedge against risk.