The big day is finally here. Today marks the third bitcoin “halving” event. Halvings happen roughly every four years and reduce the amount of new bitcoin created by half.
As many of you know, bitcoin is slowly “mined” over time by specialized computers that solve complex math equations. A new “block” is mined every ten minutes. And a reward is given to the miner who correctly solves the problem. Today, that reward drops from 12.5 BTC per block to 6.25 BTC per block.
So for the next four years, bitcoin’s inflation rate will be 1.8%. For the last four years, that rate was 3.65%.
This is a huge change. Every day there will now be half as many new coins coming onto market as there were before. And because many miners sell the majority of the coins they mine, this will have a huge impact on the supply and demand picture.
In the past, halvings have been extremely bullish catalysts. Investopedia recently summed up the effects that the 2012 and 2016 halvings had on price.
In the past, these Bitcoin halvings have correlated with massive surges in Bitcoin’s price. The first halving, which occurred in November of 2012, saw an increase from about $11 to nearly $1,150. The second Bitcoin halving occurred in July of 2016. The price at that halving was about $650 and by December 16th, 2017, Bitcoin’s price had soared to nearly $20,000. The price then fell over the course of a year from this peak down to around $3,200, a price nearly 400% higher than its pre-halving price.
Of course, it wasn’t always a straight line up directly after the halving. Traders and investors know that halvings have a big impact on price. And they tend to trade ahead of it.
So it’s hard to say what will happen in the short-term. We can’t assume it will go straight up from here. We don’t know how long the COVID-19 crisis will last. We don’t know if there will be another crash in stocks before this is all over. If there is another big drawdown in stock prices, the panic could leak over into crypto and hurt prices temporarily.
However, in the long run, the halving is undoubtedly a bullish catalyst. There’s no other way to interpret cutting the new supply of bitcoin in half.
This situation also reflects my overall outlook for bitcoin. The current monetary and financial trends should be extremely bullish for bitcoin in the long run. Around the world, fiat currencies are being digitally “printed” by central banks at unprecedented rates. Here in the U.S., the Federal Reserve is now essentially funding the federal deficit with newly printed digital money. Massive bailout programs have already begun. And they’re likely to continue throughout this crisis.
This is why bitcoin was created — to act as a sound alternative to fiat currencies.
So while I am very bullish over the mid-to-long terms, I think it makes sense to be cautious in the short-term. If you’re a trader, don’t assume the halving is going to make prices rapidly double in the near-term.
I continue to recommend a buy and hold strategy for the long-term. Try to sit back and relax. Don’t watch the price too closely. If you believe in the long-term case for bitcoin, don’t try to time the market. Even professional investors are getting crushed right now. Holding for the long-term is more likely to make you money, and it’s a lot less stressful as well.