“Sometimes people are irrational, wrong, shortsighted, or evil; sometimes they act for action’s sake; and sometimes they uphold noneconomic values like fairness, honor, or righteousness.”— George A. Akerlof and Robert J. Shiller
It’s Veterans Day, 2019. That means the Thanksgiving Holiday in America is just around the corner, and the New Year is just 51 days away. For Bitcoin watchers—you’re looking forward to the next halving event to take place in May of 2020—in just six months.
However, according to Coindesk—while the price of Bitcoin surged in the past halving events—this halving event may not pump the price like it did last time.
“Previous halvings have triggered bull runs,” says Noelle Acheson report, and “many are convinced that the next halving will have the same market effect, and it’s not just a belief that history repeats itself – models have emerged to support this theory.”
However, if the theories and models are correct—then why, asks Acheson, hasn’t an expected bull run happened already? Wouldn’t the price for an expected halving already be factored in?
It is because halving is more than an event: “it is also a narrative, and an uncertain one at that,” says Acheson.
What is Halving?
To help us understand the effect of halving on price, understanding what halving is will be helpful. Block halving is the process of “reducing the rate at which new cryptocurrency units are generated.” It is used to temper Bitcoin inflation. In particular, it is an event that occurs once every four years, and it is used to decrease the block rewards given to cryptocurrency miners.
According to Binance, halving is an essential part of the Bitcoin protocol. The code can be found on “Bitcoin Core Github”. Based on this code, the block “subsidy will be halved every 210,000 blocks.”
Significance of Halving
Today—central banks, like the Federal Reserve Bank in the U.S. —use interest rates to control the flow of money in circulation. It is used to put the brakes on inflation by increasing the interest rate, or it can lower the interest rate when a need to stimulate fiat currency in circulation is called for. In a similar way, halving is used to control inflationary pressures of Bitcoin.
“Halvings are at the core of the cryptocurrency economic models because they ensure coins will be issued at a steady pace, following a predictable decaying rate,” writes the authors for Binance. This mechanism to control inflation “is one of the main differences between cryptocurrencies and traditional fiat currencies.” Another distinction between Bitcoin and fiat is that Bitcoin has a limited or finite supply based on its code. Fiat currency is infinite.
— Jarau Moses (@JarauMoses) November 11, 2019
A Finite Supply
According to Jacob Donnelly, writing for Coindesk, Bitcoin code is programmed for a finite supply of Bitcoin not to exceed 21 million coins, and released over the lifecycle of Bitcoin.
“By limiting the total amount of bitcoins that could be created,” Donnelly says, “Satoshi Nakamoto was able to establish a defined amount of available data, a revolutionary accomplishment.” The goal of limiting the production of bitcoins was to provide a form of stability as a countermeasure to the “endless printing of paper currencies” inherent in fiat currencies.
Since 2009, there were only two Bitcoin halving events: November 28, 2012 and July 9, 2016. At the first halving event, Bitcoin was $12.31. At the second halving event, Bitcoin was $650.63.
According to Binance, only 64 halving events will occur for Bitcoin. After the last event—no more halvings will ever occur again. The amount of Bitcoin coins created as of that time will have reached its limit.
The following chart from Binance, shows a schedule of the first five Bitcoin halving events. Bitcoin’s halving lifecycle, therefore, is estimated to outlast every soul living today, and will reach its limit by 2265.
Statistically, two data points doesn’t establish a trend. With only two halving events on record, it is difficult to make inferences about the effect on price that the next halving event will have. Acheson noted that halving is more than an event, it is a narrative, and one that is uncertain.
Bitcoin will follow the economic principals of supply and demand. But, it will also be subject to what Adam Smith referred to as “animal spirits”. He observed that people are rational. They rationally pursue their own economic interests. But, they may also be guided by noneconomic motives, or narratives. These he called “animal spirits.” In writing for the McKinsey Quarterly, George A. Akerlof and Robert J. Shiller say: “Sometimes people are irrational, wrong, shortsighted, or evil; sometimes they act for action’s sake; and sometimes they uphold noneconomic values like fairness, honor, or righteousness.”
Will the next halving produce yet another bull run as hoped by the crypto community? That remains to be seen.