The next “halving” takes place this Tuesday, May 12, 2020. A crucial moment for all investors who are interested in cryptocurrency. Interview with Andy Bryant, co-director of bitFlyer Europe to better understand whether or not to invest in this opportunity.
What is halving? Why does it take place every 4 years?
Andy Bryant : Bitcoin, by design, has a predetermined requirement to follow a predefined supply curve. This means that the creation of new bitcoins (which are integrated into the system and cannot be changed) is mathematically defined to follow a known schedule.
11 years ago, 50 bitcoins were mined every 10 minutes. About 4 years later, that number has halved, so as of 2012, only 25 bitcoins were mined every 10 minutes. Then, 4 years later, in 2016, that figure dropped by another half, so that only 12.5 bitcoins are mined every 10 minutes. When the emission rate of new bitcoins halves, we speaks of “halving” and it is a very important event for the sector. Nobody decides to do it. Nobody controls this event. It is written in the DNA of bitcoin itself. Anyone who wants to participate in bitcoin must agree that it is so and that it cannot be changed. It’s as if, for example, every four years half the world’s gold mines suddenly disappear. This does not change existing stocks, but simply affects the rate at which new resources are created.
Why was bitcoin designed this way? what does halving bitcoins for demand mean?
A.B : The goal is to make bitcoin more and more difficult to obtain over time. It’s about of a mathematically imposed digital rarity. This is the reason why people are so interested in it! It’s the opposite of what governments are doing with all this “quantitative easing” or printing money. The bitcoin supply curve started abruptly (50 btc / 10 minutes) and flattens with each halving. This is how 87% of all the coins that will ever exist were created in the first years, while the last new coin will not be created before 2100. It is asymptotic. This does not take into account all the bitcoins that are lost forever due to discarded or forgotten private keys. Some estimates put this figure at 4 million bitcoin (about 20% of the supply in circulation). Halving is therefore directly linked to the supply of bitcoin and indirectly affects demandbecause people are competing more and more to acquire something they know will become rarer after the fact. Bitcoin is the first financial asset in history for which we have a 100% predictable and predefined supply for decades to come.
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Why and how does halving affect the price of bitcoin?
A.B : If “halving” does not directly modify the demand for bitcoin, it halves the new supply. Rudimentary economic theory suggests that if supply is reduced while demand remains unchanged, the price must rise. In reality, many other factors come into play, psychology, media craze and expectations play a key role in the price. Some believe that the market will regulate itself automatically and suggest that, since the variation in supply is known well in advance, the current price should already be fixed taking into account the coming reduction and should not change after that -this. Others point out when the supply goes down, bitcoin miners have to keep more of the new coins created to pay for their operating costs, and as a result fewer coins are coming to market which drives up the price.
In return, other economic players who own bitcoins today could be tempted to sell them at a time when the general public’s interest is increasing, and therefore lower the price.
So many factors come into play, and no one can really predict what will happen. It could be a big non-event.
Previous results are no guarantee of future returns. Halving has already taken place twice in the history of bitcoin (today is the third). So there is of course a lot of speculation about what will happen. The last two times, this preceded a price increase of several thousand percent in the following months. But that does not guarantee that it will happen again. Even more so than compared to 2016, there are now more sophisticated ways to bet against the price (such as futures or other derivative instruments). In the last halvings, the only option was to buy or not to buy, so the downward pressure on prices was removed.
What impact may the covid-19 crisis have on the Bitcoin market?
A.B : The health crisis probably pushed people to rethink and question the value of money as we know it. Confidence and state of mind towards money changes. We are considering bitcoin as an alternative. A recent study by bitFlyer found that despite the global pandemic, confidence in cryptocurrencies is growing this year compared to last year. France is one of the European countries that have seen increased confidence in virtual currencies for 60% of people questioned who think that cryptocurrencies will still exist in 10 years (against 55% in March 2019). Virtual currencies are seen as an alternative to the traditional financial system and often as a wise investment.
When to invest, before or after halving?
A.B : You have to expect some volatility. The bitcoin investment community is much larger than it was four years ago, and many of them are facing “halving” for the first time. Google Trends Confirm That Bitcoin Halving Keyword Research Has Recorded In Recent Weeks. Many people will get carried away by the trend and invest considerable sums in the days to come, hoping for a rapid return. Cautious investors are unlikely to try to speculate on this event given the uncertainty. Long-term investors can choose to reduce the effect of volatility by “averaging dollar costs”, that is, by buying small amounts regularly over a long period of time, in order to smooth out price fluctuations and reach an average price. Other purely psychological factors, such as risk appetite and preference for quick gratification (time-preference) should also have an impact on price developments.
In the end, it is impossible to give advice that is guaranteed to be good advice. I would simply advise readers to manage their risks accordingly.