Bitcoin was created in 2008 pseudonymously by Satoshi Nakamoto and became the first decentralized crypto-currency to come into life. Since then, it has gained a great popularity among a considerable group of investors aspiring to deal freely without the restrictions imposed by central banks and financial institutions around the globe. Despite the issuance of more than five thousand crypto-currency, Bitcoin still attracts the largest number of investors and accounts for more than 67% of the market value of crypto-currencies. In February 2011, Bitcoin’s value equaled one dollar and in December 2017, it recorded its peak reaching around twenty thousand dollars, today its value is around nine thousand dollars. However, as the halving date approaches, what awaits investors in the coming period?
Bitcoin: outperforming major companies
Looking at Bitcoin’s performance in 2020, amid the Covid-19 crisis in which stock markets crashed and indexes recorded historical losses, we realize that Bitcoin’s price outperformed the stocks’ performance of major companies. In fact, during the first quarter of 2020, Bitcoin recorded only 11% losses while Google and Apple recorded 15% and Facebook recorded 20% losses. However, Amazon was able to record a 3% gain surpassing Bitcoin. Now looking at the performance of these companies in the first 4 months of 2020, after the stock market started to wipe out its losses, we realize that Bitcoin once again was able to outperform major companies recording a 20% gain while Google, Apple, and Facebook all recorded 2% losses.
|Date||Jan-20||Mar-20||% change Q1||Apr-20||% change 4M|
Bitcoin: the gold of crypto-currencies
Since its inception, Bircoin’s fixed supply was set at 21 million Bitcoin. Due to its nature, crypto-currencies are created through a mining process. In details, miners are expected to solve complicated algorithms and validate the transactions in order to add new blocks to the chain (blockchain technology). Every time a miner successfully adds a block to the chain, he receives a reward in the form of bitcoins and that is how Bitcoins are mined. Since the supply of Bitcoins is predetermined, the reward will drop following a specific pattern. Actually, the reward is halved approximately once every four years.
Like gold, Bitcoins are created through a mining process, and like gold as well, Bitcoins’ supply is limited. The latter also follows a deflationary supply model, which is supposed to induce a raise in the value of the currency.
12 May 2020: date of the third halving
When Bitcoin was founded, miners’ reward was 50 Bitcoin per block. The difficulty of algorithms is adjusted automatically according to how quickly they were being resolved to make sure that only one block is added to the chain every 10 minutes.
The reward is divided into half every time 210 thousand blocks were added, which happens almost every four years. Following this strategy, the supply of Bitcoins will reach its limit in 2140 and the reward by then will be equal to zero Bitcoin.
The reward was halved the first time in 2012 from 50 to 25 Bitcoin and then in 2016 from 25 to 12.5 Bitcoin. On the 12th of May, the reward is going to decrease to 6.25 Bitcoin, which is expected to be accompanied by a rise in the value of the crypto-currency as it was the case during the previous two scenarios. This appreciation in value is best justified by the decrease in additional supply.
1st Reward Halving
|Bottom||November 2011 21||2.29$|
|Halving date||November 2012 28||12.56$|
|Peak||December 2013 4||1151$|
Source: Karken Intelligence
In the previous two scenarios, Bitcoin’s price started to appreciate (bull) about 12 to 18 months before the reward halving date. The bull trend lasted around 12 to 18 months after completion and reached a peak before the price entered a bearish mode.
The importance of halving and its implications
Halving the reward means decreasing the additional supply of Bitcoin since around 18.4 million were already mined and less 3 million are left to be mined . The halving is one of the main requirements for the Bitcoin to meet the definition of sound money and to make sure that its purchasing power is not going to be subject to sudden or unexpected fluctuations on the long run, and by that to fight inflation, which was one of Satoshi’s main targets.
Once the halving is completed on May 12, the annual supply growth of Bitcoin will decrease from 3.7% to 1.8%, which is below the 2% inflation rate used by central banks for their fiat currencies.
Throughout history, gold has proven to be a good preservative of value thanks to its scarcity, outperforming inflationary assets. But, does the Bitcoin offer the same advantage? To find out, we are going to calculate the stock-to-flow rate, which is the supply of the asset in circulation divided by the annual production.
|Asset||Before 12 May||After 12 May||Before 12 May||After 12 May|
Source: Karken Intelligence
After completing the fourth halving in 2024, the SF ratio of Bitcoin is going to surpass that of gold, which is expected to help raise the value of Bitcoin and encourage miners to keep on validating transactions and solving algorithms.
In fact, the implications of halving mainly affect miners. They will undergo a 50% decrease in their profits after May 12 while they still have to incur the same cost. The only way to offset this loss is by raising the transaction fees and/or increasing the hash rate, which represents the speed at which miners solve the algorithms, which could be done by using equipment that are more advanced.
Moreover, once the halving is complete, it is expected that miners are no longer going to be the biggest sellers of Bitcoin, but instead crypto-exchanges will emerge as leading sellers.
The future of Bitcoin network depends mainly on miners, which is the reason why their reward is going to be a hot topic in the coming year. Should miners not be satisfied by the reward, they could impose a real threat forming a 51% attack for example, controlling the majority of the network and preventing other miners from adding blocks to the chain. Therefore, satisfying miners should be the main target following the halving to make sure Bitcoin is going to survive!