Halving Bitcoin – Myths and Reality of the biggest event of 2020 – Bitcoin – Cryptocurrency 2020

Halving is the go-to event in the Bitcoin ecosystem. How can we ignore this phenomenon, which only happens once every four years? And whose promise is to send us straight to the moon? Or go to hell? Between myths and realities, halving is mainly a source of all-round interpretations and misunderstandings. In addition, the desires of each other amplify a crowd phenomenon, leading to FOMO and FUD.

We will, through this article, try to answer any questions you may have. Make yourself comfortable, immersed in the heart of the Bitcoin protocol!

What is halving?

Halving is a Bitcoin-specific event that occurs every 210,000 blocks. Other protocols, such as Litecoin, have borrowed this halving principle. The explanations that follow in this article apply to any cryptocurrency that has implemented this system.

Today – in March 2020 – minors are distributed 12.5 reward bitcoins every time a block is mined. Or 12.5 bitcoins every 10 minutes approximately.

In May 2020, Bitcoin will experience the 3rd halving in its history and the rewards will then be halved. This means that minors will no longer share 12.5 bitcoins per block, but 6.25 bitcoins.

And the phenomenon will not get better since 210,000 blocks later, the rewards will go from 6.25 bitcoins to 3.125 bitcoins per block. And so on.

graph showing the number of bitcoins and the rewards per block according to the number of blocks mined
Number of bitcoins in circulation and bitcoins mined per block according to the total number of blocks

As you can see from the graph above, a major effect of this halving is the reduction in money creation.

So, after each halving, bitcoins are created a little slower (twice as slow to be exact). This is what gives this logarithmic curve to the numbers of bitcoins in circulation over time.

Little anecdote: without this halving phenomenon, the 21 million bitcoins would have been mined entirely in 2026, that is to say in 8 years. Instead, the halving pushes this date back to 2140! Quite a difference, right?

The end of the miners?

Description of the situation

Now that this halving phenomenon and its implications are a little clearer, one of the first questions that comes up often is: “But, the miners, they will suddenly go bankrupt?” And if the miners go bankrupt, the blockchain will stop? Is it the end of it all if the price doesn’t go up quickly? “

Indeed, how to be profitable when the rewards allocated are halved? And if all the miners stop, how is the Bitcoin blockchain going to keep moving? In terms of premiums, the only solution that seems to exist is an increase in the price, to compensate for the division of rewards.

However, even if the question is natural, the answer is a little less. This requires understanding how the Bitcoin mining difficulty adjustment works.

Animated image (GIF) of a Bitcoin miner
How does a Bitcoin miner look like this?

Indeed, what will happen when the rewards are cut in half? Depending on whether the price is:

  1. Multiplied by two: no change for minors
  2. More than doubled: minors are winners
  3. Stable or even declining: miners see their income cut in half and are losers.

It is this third case that interests us. In this context, yes, some minors would probably find themselves at a loss. They will then stop their machines.

The protections put in place within the protocol

What will be the consequence? A drop in hashrate of Bitcoin. The Bitcoin protocol knows how to react to a drop in hashrate: it decreases its difficulty!

What does this imply ? The less profitable the mining, the fewer the miners. But with the decline in the number of miners, the difficulty will also decreasethus making mining profitable again. Which will bring new miners to come. Which will increase the hashrate. And so on … Mining on Bitcoin is an endless cycle between profitability or not miners.

But in any case, we cannot arrive at a situation where 0 miners would be profitable and the Bitcoin blockchain would be stopped. And yes, that too was envisaged in the protocol!

So no need to panic, halving will never mean blocking the blockchain following a reduction in rewards! This belief is wrong and demonstrates a misunderstanding of the mechanisms underlying Bitcoin.

Impact on price

Phew! Our Bitcoin is saved, it will not die from a blockchain shutdown following a desertion by miners! What if we were to focus on what interests you most: the price? Yes yes, do not hide, we know that it is an important element!

Speculative impact?

Is halving priced or not?

In other words, have the buyers and sellers who make the market already integrated the consequences of the future halving into their behavior, in advance? This is a famous question that many try to answer, without necessarily advancing good arguments or having the right elements in hand.

Maybe yes, maybe not. In general, you have to stop wanting pay too much attention to news pricing.

Make no mistake, writers write in response to the price, not the other way around.

So, yes, you will always find me an exception, but I will answer you that it is only there to confirm the rule! 😉

graphic illustrating the bitcoin halving in 2016
Bitcoin price graph during July 2016 halving

Do you see the graphic above? It resumed the price of Bitcoin in July 2016, during the halving (vertical blue line). As you can see, the halving does not seem to have had such an immediate or radical impact on the price.

We can see that the weeks that followed were bear, but the correction seemed to have started before. And the trend is upward thereafter but, similarly, follows an upward trend triggered several months earlier.

Finally, is halving already priced? Well … maybe the real question is: does halving have a price?

Besides, it should not be forgotten that if halving was previously unknown, now this event is expected by all. It is therefore complicated to want to “bet on it” hoping to be one of the few “elected” to have thought of it.

Because, even if its impact on the price of Bitcoin in the long term is undeniable, there is no evidence that it acts in the short term.

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Fundamental impact?

Unfortunately, we have seen that the short-term and speculative impact on the price of Bitcoin is not necessarily visible.

However, this halving phenomenon is not without bringing a very interesting property to Bitcoin: a modification of his S2F ratio.

Oh the pretty barbaric name I just introduced … S2F ratio, kezako?

The S2F ratio, or Stock-to-Flow ratio, is a figure that represents the scarcity of an asset. For example, today, one of the assets with the highest S2F ratio is none other than gold.

And, as you know, it is the scarcity of gold that makes its price and appearance “safe investment“. Well, the cause and effect relationship between scarcity and the price of an asset is obviously a dangerous shortcut, but that’s the idea behind this S2F ratio.

So, how is Bitcoin affected by the S2F ratio? And what is the link with halving?

The calculation of the S2F ratio directly depends on the amount of bitcoins that are produced. It’s the flow or flow in French. The smaller this flow, the greater the value of the S2F ratio.

However, with halving, the division of rewards by block corresponds exactly to a reduction in the flow. This increases the S2F ratio of Bitcoin with each iteration.

And, once the S2F ratio has been modeled, it is possible to estimate a theoretical price for Bitcoin.

Bitcoin s2f ratio graph highlighting the theoretical price of the latter

The graph above is a model of the S2F ratio. You can observe jumps in the theoretical price at the time of the different halvings.

If this model continues to be tested in the coming years, then Bitcoin could reach $ 100,000 between 2022 and 2024.

This is how halving can have an impact on the fundamentals of Bitcoin. Almost believe that Satoshi Nakamoto set up this system on purpose, to create a growing interest in his famous creation …

Year 2140. Where are we now?

Context

Are we looking a few years into the future and meet again in 2140!

This year is special for Bitcoin. The last bitcoin fragments have just been mined.

From now on, the reward for a mined block is 0. How can we continue to pay miners in such a context? Will the model still be viable?

Our saviors: transaction costs

Already present today, minors are not paid only by bitcoins created during the validation of a block.

In fact, they are also remunerated through transaction fees which are applied every time you send bitcoins.

These costs now represent a very small part of the minor’s remuneration.

However, Satoshi Nakamoto’s bet is that with growing interest in Bitcoin, the number of transactions on its network would also increase. And the more bitcoin exchanges there are, the higher the fees will be.

Thus, in the long term, minors will be rewarded only with transaction fees, and the network will have to be active enough at this time to be viable.

But, after only 10 years of existence, Bitcoin has shown us that it was under the hood, right?

Conclusion

The Bitcoin halving represents an important event and is followed by the community with great attention.

However, this deadline is the source of all the interpretations that could lend themselves to the creation of many myths.

How many times have I seen in a conversation “Do you think Bitcoin will pump or dump on halving day?”. Very reckless will be the one who puts forward any answer to this.

If I can take one piece of advice: don’t dwell too much on the short-term impacts of this event. On the other hand, take an interest in it, for the long term.

Try to understand how halving gives Bitcoin unprecedented property, and how it can affect its future.

Fewer myths, more realities. I hope this article has helped.

Halving Bitcoin – Myths and Reality of the biggest event of 2020 – Bitcoin – Cryptocurrency 2020
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