Bitcoin Halving and its Impact on the Price in 2016

01.01.2016

The year 2016 will see twofold reduction in mining rewards for a found block.

The overall supply of bitcoins is finite, and comprises 21 million coins. A coin first sees the light every time a miner solves a block. The bitcoin protocol dictates that the quantity of bitcoins used as a reward from a block shall half every 210,000 blocks. In average, there are around six blocks deciphered in an hour; therefore, generating 210,000 blocks takes roughly 4 years.

This means that miner reward will drop to 12.5 BTC as opposed to 25 BTC in the years 2012 to 2016. The final amount of 21 million bitcoins will have been mined by 2140.

The reason behind that is the necessity to control inflations. Bitcoin at its essence resembles commodities like gold rather than fiat currencies. If a centralized issuer prints too much money, it will devaluate, while the supply of gold is limited, and its mining becomes gradually different over time. Due to its limited supply, gold may retain its properties as an international means of exchange. Bitcoin designers hoped that the cryptocurrency would behave more or less the same.

As a single block takes roughly ten minutes to be mined, the reward halving is set to occur in July or August 2016. However, some bitcoin community members reasonably say that it takes roughly 9 minutes 20 seconds to mine a block, which is 7% less than the generally accepted value. Considering the fact, the halving may occur as early as on June 20, 2016.

The main question is how the halving may affect the bitcoin price. The answer is nobody knows for sure; however, the most popular scenarios state that it is either surge in price, or retention of current dynamics. Some say that the community has been ready for the halving in advance, and no one will be surprised. Therefore, they say, the price will not change, as it is expectations conflict or unpredictability that cause price fluctuations. Others say that due to reduction of bitcoin supply, the demand will grow, which will result in the surge of price. However, both parties agree that the halving will not result in the price’s dropping.

However, some say that abrupt reduction of the reward combined with price retention may cause de-incentivizing of mining, which may result in monopolization and volatility growth. Some miners may consider it unprofitable to keep their capabilities on, and may bowl off. Moreover, the drop of mining profitability and outflow of market participants may signify reduction of bitcoin’s investment prospects. Its further popularization and acceptance in that case may also be subject to fading.

Halving has already occurred on November 28, 2012. Back then, bitcoin was worth $13.42, and the halving had no effect on the price. However, bitcoin was not as popular as nowadays. Shortly after the price rocketed to $230. Nevertheless, experts associate it with then-crisis in Cyprus.

Daniel Masters, former oil trader at Shell and current co-founder of a multimillion bitcoin hedge fund Global Advisors, expects that bitcoin could overcome its historical all-time high of $1,100, or even peak at $4,400 by late 2017.

Masters reasons his predictions with increased acceptance of bitcoin payments by major corporate players and governments, further development of investment and interest in the underlying technology, the blockchain, and further growth of demand from China caused by its deceleration of economic growth and devaluation of Yuan.

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Tags: Bitcoin, bitcoin price, halving