The two previous halvings demonstrated a 2-year uptrend in bitcoin price beginning 12-18 months prior to halving, followed by a roughly -80% peak-to-trough downtrend. The most recent halving’s bull run lasted nearly two-and-a-half years and ended in December 2017 as price topped out at $19,499. Price gradually retraced -83% and ostensibly bottomed out at $3,225 in lateDecember 2018, one year later. Bitcoin has since partially recovered to $9,300 as of January 31st, 2020, representing an increase of +188% YoY.
The halving is critical to helping bitcoin meet the definition of sound money. Because the minting process undergoes -50% reductions, bitcoin supply follows a disinflationary curve. Other assets that follow a disinflationary curve, such as gold, have proven to be a better store of value than inflationary assets (e.g., fiat currency). The third halving - expected to occur on May 12, 2020 - will reduce annual supply growth from a rate of 3.7% to 1.8%, marking the first time in history that Bitcoin’s supply growth rate will fall below the 2% inflation target used by most central banks. Bitcoin’s code prescribes a down-trending supply growth rate until total supply approaches 21 million bitcoins in the year 2140; however, 99% of bitcoin’s supply will be minted by 2032.
Assets with higher stock-to-flow ratios, such as gold, exhibit lower annual inflation rates. While gold currently has the highest SF of popular metal commodities, bitcoin’s SF is expected to take the lead at the time of the fourth halving in May 2024. Bitcoin isn’t a metal commodity, but we found this to be a meaningful comparison since the digital asset is commonly seen as “digital gold” due to its similar properties.
At the time of halving, mining profitability may come under significant pressure depending on bitcoin price performance as miners will experience an estimated 45% - 50% decrease in nominal bitcoin rewards while operating costs, including facilities and electricity, remain largely fixed.
Bitcoin does not currently have the required transaction volumes or fees to compensate for the reduction in block subsidies, although that may change in the distant future. Transaction fees will likely become a trending topic for debate as network participants begin to digest a subdued block subsidy environment. In the short run, the only metric that has the power to fully compensate miners for the reduction in revenue is a proportionate increase in the value of bitcoin.
In conclusion, though bitcoin is still young in terms of halving cycles, the halving itself remains a pivotal feature of bitcoin’s monetary policy and a core contributor to its reputation as an attractive store of value in the marketplace.
We at ycobitcoin.com are monitoring our volume and transactions closely to see how our clients and market behaves. Stay tuned...