Brace yourselves, the next Bitcoin Halving is just around the corner, expected around 24th of April 2024.
What’s all the buzz about, and why does it spark excitement among Bitcoin enthusiasts? Let’s break down the details and the circulating ideas.
The Bitcoin Halving is a pivotal event surrounded by intrigue and speculation. At its core, Bitcoin operates on a limited supply principle – there will only ever be 21 million bitcoins, a characteristic that sets it apart as a deflationary store of value, akin to a digital version of gold.
Essentially the bitcoin halving event every 4 years cuts the bitcoin mining block rewarded in half. So the new supply of bitcoin being created every block, is cut in half, forever.
In stark contrast to traditional fiat currencies susceptible to inflation through central bank money printing, bitcoin’s scarcity is fundamental to its value proposition.
Satoshi Nakamoto, Bitcoin’s enigmatic creator, devised a method to fairly distribute new bitcoins by rewarding individuals for processing bitcoin transactions into a chain of blocks, hence the name ‘blockchain’.
Bitcoin miners, responsible for processing and securing bitcoin transactions into blocks are rewarded with new bitcoins for each block they create, known as the ‘block reward’. Approximately every 10 minutes, miners add a new block of bitcoin transactions to the blockchain and claim the block reward.
In Bitcoin’s infancy, Nakamoto’s reward for mining a block was 50 bitcoins, resulting in a daily creation of around 7200 new bitcoins. The Bitcoin Halving is a scheduled event designed to cut the production of new bitcoins in half approximately every 4 years or every 210,000 blocks.
The block reward is halved every 21000 blocks, approximately every 4 years.
Block rewards awarded to miners decrease with each halving event:
- In 2009 when bitcoin started, the initial block reward was 50 BTC resulting in 7200 new bitcoin created per day.
- After the first halving in November 2012, it reduced to 25 BTC resulting in 3600 new bitcoin created per day.
- After the second halving in July 2016, it reduced to 12.5 BTC resulting in 1800 new bitcoin created per day.
- After last halving in May 2020, it reduced to 6.25 BTC resulting in 900 new bitcoin created per day.
Simply put, the “halving” is a 50% reduction in the bitcoin rewarded to miners, for mining or processing a block of transactions. The upcoming Halving in April 2024 will see the reward drop in the block reward down to 3.125 BTC, resulting in 450 new bitcoin created per day, continuing this systematic reduction.
How the Bitcoin Halving Influences Price: Supply and Demand Dynamics
While the precise impact of the Bitcoin Halving on price remains uncertain, the general consensus is that it tends to drive the price upward. This belief is rooted in the principles of supply and demand.
As of today, with the price of Bitcoin hovering around $60 000, approximately 900 new bitcoins are created daily as a mining reward. To maintain price stability, the demand for Bitcoin needs to absorb these daily creations, roughly equating to $54 000 000 (900 x $60000).
If bitcoin demand remains constant, but the supply is cut in half during the halving, a common expectation is for the price to potentially double in response to that demand.
Learnings from Previous Halving Events
Examining the aftermath of the previous halving events reveals a surge in demand and price in the months following the halving event. While it is impossible to predict the price of bitcoin long term with any certainty, we can assume that its possible history will repeat once again and there will be a surge in price based on the reduction of new supply, as well as the continued increase in adoption world wide.
Stock to flow ratio and the price of bitcoin
This systematic reduction every 4 years decreases the inflation rate of Bitcoin, making it potentially scarcer than any currencies or commodities, while the demand increases.
The stock to Flow ratio is an indication of scarcity, and with bitcoin, this doubles after every halving. This ratio aligns Bitcoin more closely with precious metals like gold. The stock to flow ratio of gold is around 58, with bitcoin currently around 57. After the next bitcoin halving, the Stock to flow ratio of bitcoin will double to 120, making it twice as scarce as gold.
In the months following each bitcoin halving event, there has historically been a period where the price overshoots the stock to flow model price. After a major correction, the price slowly realigns itself and falls back in line with the model in time for the next bitcoin halving event.
The Stock to Flow model predicted a Bitcoin price around $50k per BTC after the last halving event, and the price hit an all time high of $69k. So the price overshot the model prediction, was corrected over the next couple of years, and now sits close to $60k today.
The predicted price of bitcoin after the next halving according to the same stock to flow model, is a price top of around $400k per bitcoin with an average price of $300k!
Current bitcoin price Stock to flow
In Conclusion
Drawing from historical data and trends, there’s an assumption that Bitcoin’s price will surge after the upcoming Halving in April 2024. If past patterns repeat and the concepts in this post hold, the future could witness a significantly higher Bitcoin price.
For more insights, you can revisit our previous articles on the Bitcoin Halving events here: The 2020 bitcoin halving, and The 2016 bitcoin halving
