Bitcoin Halving is a word you probably hear frequently, but might not fully understand.. Lets explore what exactly it is, and the role it will have when looking at long term price action trends. This might blow your mind, so ensure you're prepared before continuing..
The people who "contribute", that is mine, or host nodes for the Bitcoin network get rewards for their hardwork (and massive electricity bill). This payment is done every "block", and this can be defined as a large amount of transactions recorded onto the public ledger. After a certain amount of time, a block will be submitted, and considered immutable on the public ledger. This is what makes blockchain permanent. Once processed, the changes are permanent because it is distributed among all of the peers connected to the network.
Anyways.. Back to the miners, and the rewards they receive:
After a certain amount of blocks, the reward given to the network contributors will "half". This is where the halving terminology originates from. The amount of blocks between halvings is known, but it is much easier to track the change in with approximate dates rather than the number of blocks away. Here is a snapshot of the prospected rewards for the Bitcoin network.Here is a snap shot of the BTC block rewards that will be given out over time as the network begins to mature. Every time the halving comes around, the reward is cut in half. This is what makes Bitcoin (and other cryptos) so special: these assets are deflationary. Complex word for a simple idea: this asset becomes more scarce overtime because less is produced. The opposite of this is an asset which is inflationary - an asset which becomes less scarce overtime, and well therefore lose value overtime (ex: fiat/common currencies). Now, there is a correlation between the scarcity of an asset, and how it is valued.This is a basic economic principle called supply-demand. Before we dive into that..
Lets observe the macro correlation between halvings, and the price of Bitcoin:
The important to thing to note first, is when the halvings occur themselves. This can be seen in purple, and occurred in late 2012, and early 2016 - approximately every 4 years. However, the price did not get "factored" in until almost two years later. The peaks can be seen in orange and occurred in late 2013, and late 2017 - approximately every 4 years. This paints a cycle of supply - demand coinciding with the typical market bull/bear cycle.
When the halving happens, the supply begins to expand at a reduced rate. This decrease takes time to come into affect, and commonly, takes two years for the price to peak. This change in supply distribution takes time to affect the market, hence the delay between halving and all time highs. We mentioned this earlier, but this is because of one age old principle: supply and demand.
S&D, a principle as old as economics itself..
It is pretty simple to understand, but lets dive into four examples to ensure you understand the theory:
- High supply + low demand = low price
- High supply + high demand = medium price
- Low supply + low demand = medium price
- Low supply + high demand = high price
How many other people want the same thing, and the availability of it determines the price you pay.
Example: Fidget Spinners in 2018.. High supply, high demand.
Example: Expensive "Hype Beast" Items.. Low supply, high demand,
Example: Bitcoin.. Shrinking supply, rising demand.