What Is Bitcoin Halving?

Halving’s main mission is to control the issuance of cryptocurrency and curb its inflation.

Shortly before the first halving took place in 2012 Vitalik Buterin (creator of Ethereum) explained its significance by comparing Bitcoin to gold: “There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.”

To ensure the network’s stability Satoshi Nakamoto provided that with a decrease in mining activity its mining difficulty also decreases. If a halving results in some miners finding the minting of coins no longer profitable and abandoning it, the network’s hashrate will decrease and the mining difficulty will likewise go down. This means that the intervals at which new blocks are added to the blockchain will remain the same and transaction speed will not suffer from the departure of any number of miners.

In addition, profitability of Bitcoin mining is affected by the cost and volume of transactions in the network. If these indicators are sufficiently high the negative impact of diminished miner rewards will be less pronounced.

The first two halvings in the Bitcoin network were accompanied by increased volatility over the next 1-1.5 years. The asset’s price would rise from $11 to $1,100 or from $230 to $20,000 only to then plummet dramatically. Expert opinions are still divided regarding the influence of the third halving on the Bitcoin market. Some expect growth while others expect no significant changes.

Digital Asset Research experts believe that in May 2020 Bitcoin could rise as high as $60,595. This assumption is based on the analysis of the market’s behavior in cycles between previous halvings. It turned out that at the end of the cycle Bitcoin’s price is growing due to increased demand and reaches peak values ​​in the first third of the cycle, each time rising to a new historical maximum. Researchers believe that if their model  is correct, Bitcoin’s new peak price will be reached in September 2021. Following this model, with the next halving in 2024 Bitcoin’s price could reach $732,256.

A German bank Bayerische Landesbank came to a conclusion that the upcoming halving will allow Bitcoin to approach gold in when it comes to stock-to-flow (S2F) ratio. S2F for gold is 58 and by May 2020 it is not expected to dramatically change, while for Bitcoin it is expected to increase from 28.5 to 53. This could allow for Bitcoin’s price to soar to $90,000. If the model proposed by the bank’s experts is correct, the 2024 halving will increase the strength of Bitcoin to unprecedented levels of 100+.

That being said, analysts at the American company Strix Leviathan note that on the eve of the halving media are actively recommending users to hold Bitcoins and so the price surge in this period can be explained by the illusory increase in asset’s value amid growing speculation.

Mining difficulty is recalculated once every 2016 blocks (approximately every two weeks). For that reason some experts are worried about situations where a temporal gap is formed between the hashrate drop and the next recalculation of the mining difficulty. Within this period Bitcoin network may enter the so-called “death spiral”.

How it works: mining difficulty remains high, the profitability of mining decreases – miners turn off their computing power, the hash rate drops, transactions in the network slow down.

However, blockchain expert Andreas Antonopoulos believes that the death spiral is not threatened by the bitcoin network, since miners initially enter the crypto sphere with a long-term strategy and will continue to work in anticipation of a new recalculation of mining complexity and restoration of the usual network operation.