Bitcoin halving is a much-hyped event that has gotten a lot of attention & fanfare for the past few weeks in tech and regular news media both internationally and locally in South Africa – as Bitcoin enthusiasts, exchanges and investors worldwide were looking forward to it and anticipating its effect on Bitcoin price.
Bitcoin halving happened on 11th May 2020 at 3:21 p.m. EST when 630,000th block was mined. This is the 3rd halving event in the history of Bitcoin. The first one happened on 28 November 2012 and the second happened on 9 July 2016.
Many of us non-tech or non-BTC people are wondering what exactly the fuss is all about and what exactly is halving?
What is Bitcoin Halving?
Bitcoin Halving (halvening) is 50% reduction of reward that is paid to BTC miners i.e.: people or companies that work to do calculations to verify the transactions happening in the Bitcoin network. Bitcoin, a popular digital currency, is made of blockchain where a set of transactions are divided into each Block.
Every day around 144 blocks are solved or mined, and miners are rewarded based on that.
The miners are rewarded BTCs in return for doing complex calculations per block of the blockchain, these calculations are very complex and take specialized computers built specifically for this purpose.
Whenever anyone sends BTC payment to another user, that transaction needs to be verified to render it complete. Transactions with very low confirmations can be reversed hence are not reliable. Normally transaction for amount up to $1000 USD are accepted with 2-3 verifications/confirmations and for larger amounts to be accepted for payments, there have to be at least 6 confirmations. Most exchanges only accept payments with at least 6 confirmations.
It is said that every 9-10-minutes, 1 block of calculation is completed in the Bitcoin’s blockchain network. And in March this year, it was reported that each block contained 2,700 such transactions.
The number of transactions per block and time for 1 block calculation to complete varies and depends on various factors.
Over the years the reward for mining Bitcoins has been halved every 4 years from 50 BTC in 2009 to 25 BTC in 2012 to 12.5 BTC in 2016 and now it is 6.25 BTC per block.
Bitcoin’s system was built to reward miners to verify and complete transactions but as more demand increases and more new bitcoins are created – the reward is reduced systematically. The system also changes the calculation complexity of each transaction as the BTC circulation increases.
Miners have been mining the Bitcoins very fast, competing among each other in the past week leading up to this halving event as this was their last chance to earn more BTC for calculations – this also led to more complex calculations last week in the form of BTC hash rate.
But now, the BTC hash rate is expected to decrease over time as reward & supply is adjusted.
Hype around decreased supply & possible price increase
Miners are said to be creators of the new BTC as they add to the new supply of blockchain – since this event will reduce the reward paid to them, most of them are expected to no longer sustain their operations thereby this will reduce BTC supply.
Before this event, miners were generating 1800 BTC per day (12.5 BTC X 144 blocks), after this, they will only be able to generate 900 BTC (6.25 BTC X 144 blocks). Hence, thereby decreasing overall supply and putting pressure on existing BTC limited supply. This will also make miners no longer the largest sellers of BTC as major exchanges are reported to sell around 1200 BTC per day.
There is an increasing sense of positivity among investors with this – as this event is expected to increase the price of BTC to an all-time high as previous halving’s had done the same in 2013 and 2017 (i.e.: following months after halving) with BTC price when the price of BTC jumped to $1100 and $20,000 respectively.
Experts and enthusiasts say this will likely increase the price of BTC by the end of this year or start of 2021 as the demand will exceed the supply, hence there is much hype around this.
The halving event is predictable regular occurrence every 4 years but this year the event was very much hyped amid economic crisis with Covid-19 as investors are looking for different avenues for their investment to safeguard against inflation and for risk aversion. BTC has seen a lot of increased interest due to this.
There is a reason behind halving that – Bitcoin creator Satoshi had put a limit on supply of maximum BTC in circulation to 21 Million to cap the inflation & supply of new bitcoins in the system.
There are currently 18,377,787.5 BTC in supply and there are 2,622,212.5 bitcoins left to be mined and new supply will end sometime in 2140 with no new BTC mined.
This is unlike in the case of a real economy where a country can print new money which in turn can increase inflation. Moreover, due to capping BTC’s supply is limited – like with Gold which has 2% annual increase in supply, BTC supply is expected to go down to less than 2% per year starting this month.
BTC is reported to have 1.73 % inflation after halving from 3.93% which is lower compared to 3.56% global inflation rate.
Alternate Investment Instrument: Comparisons to Gold & Investor outlook
All the above factors have made BTC a popular alternate investment instrument and make some economists & experts to often compare BTC to Gold.
Gold, which is considered a safe haven in uncertain conditions, is mostly bought physically on the spot or through derivatives market and not everyone can buy it & many times as it is difficult to access – while BTC, on the other hand, can be traded or bought through online platforms like mobile or PC – this has led to its greater popularity among masses and retail investors.
Recently during Coronavirus, there has been even more attention to the alternate financial system as people hope it won’t be as much affected by inflation.
Local financial website Forex Brokers South Africa explained – Anticipation of gains from Halving event & risk aversion and hedging from inflation & Coronavirus havocked markets had caused the demand for BTC to grow in the past few months.
Although BTC too was hit by Coronavirus in March, it has since recovered like other financial markets equities from its low $5000 to almost $10000.
Investors were seen speculating & investing more leading to this event. And brokers & exchanges are eyeing this demand, with many reporting surges in numbers.
BTC Exchanges like Luno & Binance recorded their highest numbers during this time. Luno reported the highest number of active users on an MoM basis on March 20 and crossed 4 million total users. They also reported the highest trading volume since August 2019 and the second highest website traffic increase. Binance also reported their highest number of new signups during pre-halving time.
Experts believe BTC will remain Bullish in long run continuing till the end of 2020 & start of 2021 as it had in previous bull runs after 2016 & 2012 halvings.
Paul Tudor Jones, a billionaire investor, said he has hedged his investments against inflation with BTC as he is concerned by the effects of massive fiscal spending and bond-buying by central banks to combat the pandemic. Tudor is reported to have made money from BTC’s previous bull run in 2017.
Canadian investment fund 3iQ recently listed a $48 million offering of its Bitcoin Exchange Traded Fund (QBTC.U) on Toronto Stock Exchange.
With big names now showing interest in BTC, this has given some credibility to Bitcoin, which it was long looking for.
In the short term in coming days & months, BTC market will likely be volatile and six may experience pullback as investors rush to get the returns they made during a bull run in pre-halving times. Plus, miners are likely to sell their BTC to pay for their equipment. BTC Market prices are also expected to get hurt if the second wave of Coronavirus hits.
But overall sentiment seems bullish by industry leaders & enthusiasts like exchanges, traders & institutional investors.
But one couldn’t predict this bull run, when it will happen or how it will go as the market is mostly totally driven by demand and sentiment of investors & BTC is inherently been very volatile. There is a possibility, COVID 19 could dampen demand and hence affect BTC prices.
How investors are investing in Bitcoin during Halving
BTC is now reported to be seeing demand from all kinds of investors – speculators, retail traders & institutional investors which have resulted in its demand & price to go up in the past few months.
Some of the investors are directly buying BTC through exchanges and holding it in their wallets, some are speculating through CFD brokers using margin, some are investing indirectly through equities in companies dealing in BTC, while others are trading through hedge funds & ETFs.
This demand has not gone unnoticed by Brokers, exchanges & hedge funds.
As exchanges, brokers & funds are looking to attract these investors. They have started to offer different options to invest in BTC as interest in spiking. Some have even started offering futures and options for BTC.
But buying BTC through exchange & trading through Bitcoin CFD brokers remains the most popular method among retail investors.
Criticism & Call for Regulations
Not everything is positive in this story as it is presented by industry backers & enthusiasts.
PWC in 2020 reported that bitcoin industry was not able to attract enough investment with 76% M&A value drop for major players.
Then, there are many opposers from likes of Warren Buffet, Nouriel Roubini & lots of criticism for Bitcoin as it is not backed by Governments or considered fiat currency in most countries citing reasons for its unreliability, uncertainty & volatility. Due to this, it is often plagued by scams & bad players.
There are now growing calls for regulating the sector from industry leaders and some progress on this aspect has been made in different countries.