While market participants are digesting the consequences of an unprecedented cessation of global trade, it is easy to overlook the event that will change the landscape of cryptocurrencies for the next five years no less. Next week, the third bitcoin halving will take place.
When Bitcoin was first created, the “block reward” was set at 50 bitcoins for each block, but this reward is halved every 210,000 blocks or about every four years. After the previous two-fold cuts in 2012 and 2016, the block reward should now drop from 12.5 to 6.25 bitcoins per block on May 11 or 12, depending on how quickly blocks are mined over the next week.
To date, about 18.3 million of the 21 million bitcoins that will ever be created have been issued. It is easy to imagine that an instant reduction in compensation of 50% for miners protecting the Bitcoin network will have a serious impact on the entire crypto asset industry. How did the Bitcoin course behave on the eve of previous halvings? (Here I recall that past results do not necessarily indicate future profits!).
The previous two bitcoin halvings led to a powerful rally of 10,000% and 2,500%, respectively. In terms of supply and demand, such a bullish reaction to supply reduction makes sense: at current prices, the amount of newly created bitcoin every day (which is usually sold to the market by miners) will drop from $ 16 million to $ 8 million. As experienced traders have found, market movements are never so clear and predictable as they seem to be retroactively. From the point of view of an effective market, any fundamental reaction to halving should be “incorporated in the price” at this stage; after all, it’s hard to imagine a more predictable event than the constant reduction in supply that is planned for more than a decade in a liquid, traded asset with a market capitalization of more than $ 150 billion.
Please note that the market capitalization of bitcoins is more than 15 times higher. than it was the last two times, and a significant part of this market capitalization is due to rapid growth by more “sophisticated” institutional investors.
Nevertheless, the retail contingent of bitcoin traders still makes a significant contribution to price changes, and they can still have a bullish effect on the price in the coming weeks. Regardless of short-term movements, bitcoin can continue to benefit from a wider macroeconomic background. I look at bitcoin as a source of diversification in the portfolio, as well as gold, precisely because of its truly decentralized nature. It is this feature, combined with a fixed offer, that makes it a hedge against the fiat money of the central bank, which can be manipulated. Time will tell if Bitcoin can ultimately become the “stock of value” and the “medium of exchange” that Nakamoto introduced more than ten years ago, but there is no doubt that halving next week will draw a lot of attention to the crypto assets market, providing opportunities for traders.