Once again, there is a “Bitcoin Halving” in the next few months. What exactly does this mean, and why does it make many bitcoin users excited? Let us explain some information and ideas that are going around.
What is the bitcoin halving?
TLDR: The inflation rate of bitcoin goes down.
Bitcoin transactions are grouped into blocks, and when a miner creates one of these blocks, they are rewarded for this with some bitcoin. A block of bitcoin transactions is added to the bitcoin blockchain by miners every 10 minutes on average.
When bitcoin first started, the reward given to a miner for creating a block was 50BTC for each and every block added to the blockchain.
Every 210 000 blocks that are mined on the bitcoin blockchain (roughly every 4 years), something really interesting happens. The amount of bitcoin that is given as a reward to miners who mine each block, is cut in half, in an event now known as “The Halving”.
The first bitcoin block was mined on 3 January 2009, and the reward was first halved after 210 000 blocks on the 28th of November 2012, from 50BTC down to 25BTC. After the next 210 000 blocks, the reward was halved again on July 9th, 2016, down to 12.5BTC, and as you can probably guess, the next halving event will reduce the block reward to 6.25BTC per block.
The inflation rate for bitcoin therefore goes down every 4 years, and within a few years, will be lower than any other currency.
Why is the mining reward halved every 210 000 blocks?
There is a limited supply of bitcoin, only 21 million will ever exist. When Satoshi Nakamoto created bitcoin, he needed a fair way to distribute bitcoins, so he decided to give them away for free, as a reward to miners for creating the blocks.
Satoshi Nakamoto designed the growth supply of bitcoin to start high, and gradually reduce over time. This means that over time, the inflation rate of bitcoin reduces. This meant that at the beginning, it was easy to distribute large amounts of bitcoin quickly while they were cheap, but as bitcoin grows older, and becomes more valuable as the supply of new bitcoin being reduced means it becomes more scarce.
The decreasing rate of growth means that the first 20 million bitcoins will be mined by around 2025, leaving 1 million coins to be mined over the next century.
How does the halving event affect the bitcoin price?
TLDR: Number Go Up!
Supply and demand
The price of bitcoin is partly based on supply and demand. Quite frankly, if there was no demand for bitcoin, the price would be zero, and you would probably not be able to even give it away free.
The demand for bitcoin is there because it is scarce and useful to people. As the amount of people who desire bitcoin grows, so does the demand. With increased demand, comes the increased price, and with the new supply of bitcoin being created getting cut in half, you effectively double the demand.
Almost everyone has experienced how things go up in price when there is a shortage. Unless the demand goes down with the shortage, then the price always goes up. When there is more bitcoin for sale than there are people buying, the price goes down, and vice versa.
There are now record numbers of people registering on exchanges daily, and wallet downloads are increasing exponentially. The amount of News stories that are across major news channels is more than ever before.
Miners will only have half the amount of bitcoin to sell
The bitcoin miners need to cover their costs of mining, and so a large portion of bitcoin that is received as rewards by miners each day, is sold to cover costs. Every day there is around new 1800 bitcoin given to miners (12.5 bitcoin reward per block * 144 blocks a day = 1800) and of that there is a large portion that is sold.
If miners sell 50% every day, that means at the current price of R115000 per bitcoin, there is bitcoin to the value of R103 500 000 being sold each day. That downward pressure in price created by miners needs to be absorbed in order to maintain the current price and keep it moving sideways each day.
With the bitcoin halving event cutting the miners reward in half forever, miners will only have half as much to sell going forward. There will therefore be a bigger demand for bitcoin, and the price should go up exactly like before with the previous two halving events.
Bitcoin Stock to Flow ratio gets doubled
Bitcoin is valuable because it is useful, and it is scarce, and is the first digitally scarce object the world has ever seen. Bitcoin has been called ‘digital gold’ because of its similarities to gold.
Gold and bitcoin are both referred to as ‘Hard money’ as they are hard to create, this is opposed to ‘Easy money’ such as government money, which is easy for a government to create / inflate / debase.
It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history. – Saifedean Ammous
The Stock to Flow ratio (SF) of bitcoin shows how the scarcity of bitcoin increases over time. Metals like gold and silver have a higher SF, than things like copper or zinc. Bitcoin has an inelastic supply, and no amount of mining will enable you to produce it faster than every block of 10 minutes on average.
The of bitcoin can be quantified by the SF (existing supply growth rate) in the following way: SF = Stock / Flow
- Stock is the amount of bitcoin that has already been mined. In something like gold, this is the existing stockpiles that exist above ground.
- Flow is the annual production of bitcoin or gold for example.
In the chart, you can see that Gold has the highest SF of 62, meaning it will take 62 years of gold production to get to the current gold stock levels. Gold stock divided by the production rate, equals the SF ratio: 185.000 / 3.000 = ~62
The current stock of bitcoin that exists is 18,140,300, and the current production rate or flow is 657000BTC per year (12.5BTC per block @ 144 blocks per day * 365 days per year). This means the SF of bitcoin is 27.61, meaning it will take 27 years at the current production, to re-generate the current stock piles of existing bitcoin (if it were possible to create that much).
When we have the 2020 bitcoin halving, the mining reward will be cut in half, from 12.5BTC per block, to 6.25BTC per block. This means the SF of bitcoin is doubled after the halving, and be closer to Gold in terms of SF ratio.
At the time of the halving in 2020, there will be approximately 18 375 000 BTC in circulation, and the annual production (Flow) will drop to 328500BTC per year (6.25BTC per block @ 144 blocks per day * 365 days per year).
This will put the SF of bitcoin after the 2020 halving at 55, much closer to that of gold!
What does the high Stock to Flow mean for the bitcoin price if true?
If you want to try to predict the price of bitcoin based on its scarcity and the Stock to Flow model, then you will be surprised to see the historical value of bitcoin in a log chart, overlay-ed with the stock to flow ratio values:
If you look at the light blue line of the Stock to FLow 365 day, you can notice that the bitcoin price has historically stayed very close to that value. It is fascinating to see that after each halving event, there has been a time when the price overshoots the model price.
The Stock to Flow model puts the bitcoin price around the $50k per BTC range after the next halving.
Based on the past information and events with bitcoin, we can make the assumption that the price will go up in the future.
If history repeats itself, and the ideas in this post hold, then the price will be significantly higher in the future. You can read our previous article on the bitcoin halving that we published before the last halving here.