This should in no way be considered financial advice.
Even in 2016, “bitcoin halving” is a strange term for a strange concept. Unsurprisingly, many people – even those active in the bitcoin community – still do not fully understand it. Nevertheless it is a very important concept, which will particularly impact those who mine bitcoin, but also those who use it to trade, invest & borrow. Everybody with an interest in bitcoin, both borrowers and lenders, benefit from understanding bitcoin halving and its likely consequences.
Below, we till look at the process underlying the phenomenon, as well as tackling the likely implications of the “bitcoin halving” for our community. But first, let’s look at a definition (mine):
“Bitcoin halving” describes the process by which the reward for the mining of a block in the blockchain, is reduced by half. In the case of the bitcoin halving in 2016, the drop will be from 25 BTC to 12.5 BTC.
A Brief History of Bitcoin Halving
As with all strange concepts, “bitcoin halving” sounds like it’s from the future, despite actually being as old as Satoshi’s Whitepaper itself. In his seminal work, Satoshi outlined his vision for a currency with finite supply, understanding scarcity to be synonymous with value. Thus, he implemented a series of steps which act as a mechanism, to reduce the reward received by bitcoin miners by 50% every 4 years, or more accurately, every 210,000 blocks. This reduction will result in the number of bitcoins never exceeding 21 million.
The first halving came in November 2012, when the reward for mining a block was reduced from 50 BTC to 25 BTC. It has remained at this level since! Encouragingly for the bitcoin community, the 2012 halving had no visible impact on the value of bitcoin, perhaps setting an important precedent.
Bitcoin halving 2016 – What are the implications
The next bitcoin halving will most likely occur between July 11-12, 2016. We know this because the 210,000 mined blocks needed to half the reward, will most likely be reached by then, if current mining rates continue.
So, what does this mean for bitcoin? Here are the three (in my opinion) likely scenarios:
- The price of bitcoin will rise. This perspective is informed by simple supply and demand thinking. If fewer bitcoins are created through mining, fewer bitcoins will be available for everybody. With this decrease in supply, the price people are willing to pay will increase – similarly to gold.
- If the price of bitcoin fails to rise significantly, bitcoin miners might lose interest and stop operations. If this is the case, the price of bitcoin may fall.
- The price of bitcoin stays the same. Just like in 2012, the bitcoin halving 2016 may have no measurable and distinctive impact on the price of bitcoin. The reasoning behind this rests on the fact, that the upcoming halving is well-known to everyone concerned and should therefore already be reflected in the price.
As you can see, the three scenarios I describe, follow bitcoin’s value down contrary paths, but make a good fist of reflecting the complexity of the issue. As Andreas Antonopolous says:
What does this mean for the Bitbond community
It’s tough to say exactly what the implications of the “bitcoin halving” will be. Nevertheless, it is important that you know and understand the concept, and let it inform your decisions on our platform. Borrowers intent on taking out a BTC denominated loan in order to repay with the proceeds from bitcoin mining, might be well advised to wait a little while, until the circumstances are more clear. FX traders, who plan to borrow bitcoin and then repay with their profits, might want to heed similar advice.
On the flip-side, investors might want to practice caution when assessing potential additions to their lending portfolio.
Whatever your decision is, make sure to be informed!
Further reading:
Bitcoin Magazine – Will the upcoming mining reward halving impact bitcoin’s price?
Quora – What do you think will happen to bitcoin’s price after the halving in mid 2016?
Wiki Bitcoin – Controlled supply
Chris Grundy
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