Some within the crypto community insist that the crypto winter that began in 2018 is not over yet. You would never know it to look at Bitcoin. Since the start of 2019, Bitcoin is up more than 200%. That makes the bitcoins you use to play games online even more valuable. As an added bonus, Bitcoin is pulling other coins up with it
Questions about the cause of Bitcoin's recent phenomenal growth abound. Everyone wants to know what is behind it and whether or not the rally will continue. Others want to know if now is the time to get in. Could the next round of Bitcoin millionaires be people who are just buying today?
Anything is possible. However, of greater curiosity to us is something that doesn't get discussed a lot. It is a phenomenon known as halvening. We find it fascinating for the simple fact that it could be the largest single factor driving Bitcoin's current price increase.
An explanation of halvening
Halvening occurs within a cryptocurrency when the value of mining is decreased. Under the current formula, coin miners on the Bitcoin network are rewarded at a rate of 12.5 bitcoins per block. By this time next year, the reward will have been reduced to 6.25 bitcoins. The lower reward will have a natural effect of boosting the value of single coins by reducing the number of new coins put into circulation as a result of mining efforts.
Now, we want to talk about whether or not halvening is responsible for current price hikes. Before we get to that, it is important to discuss why the phenomenon occurs to begin with. This is fundamental to understanding the true value of Bitcoin in the marketplace.
A limited number of coins
Bitcoin's original developer, a coder who operates under the pseudonym Satoshi Nakamoto, planned for his cryptocurrency to be decentralized from the start. Achieving decentralization required building certain parameters into his code, including providing for only a limited number of coins. His code only allows for a total of 21 million coins.
This doesn't seem like a big deal on the surface. However, it is problematic in that once all of the coins are in circulation, demand becomes static. And if supply and demand truly define price - and they do - static demand would normally cause the value of a single bitcoin to plummet once all 21 million coins are released.
Through halvening, Satoshi created a system that organically increases coin value as more coins are put into circulation. It also lengthens the amount of time it takes to get all of those coins mined. The longer it takes, the higher the overall value can grow.
The only thing this system doesn't account for is the eventual end of supply. Even halvening will not prevent this event from occurring. However, it is believed that by implementing a system capable of recovering lost and abandoned coins, rewarding miners will be feasible even after end of supply has been reached. Such a system would theoretically prevent the price of Bitcoin from crashing.
Halvening's effect on price
Now, let us get back to the main topic of whether or not halvening is driving the current price trend. There are arguments on both sides. There are those who insist halvening is having only a minimum impact, if any at all. They base that opinion on the fact that the next round of halvening isn't set to occur until May 2020.
Let's assume this position is correct. Halvening being so far in the future would not necessarily encourage investors to buy today. After all, any value attributed to halvening will not kick in for another 11 months. There is no point in dumping a lot of money into Bitcoin right now when we all know how volatile it can be.
If you are looking to halvening to make money, it would seem more reasonable to wait until autumn before you start buying. But then again, investors might want to get in now while Bitcoin's price is still recovering from crypto winter.
The other camp is occupied by people convinced that halvening is the biggest price driver right now. Their reasoning is encapsulated by a previously made point. Bitcoin still represents pretty good value when you consider that it peaked at nearly $20,000 back in 2017. Investors anticipating a windfall from halvening might want to get in on it now before prices get much higher.
As the thinking goes, halvening is going to double or triple Bitcoin's value simply by cutting the reward to miners in half. Though a doubling of the price is not likely, let us assume it actually happens. Let's assume that halvening leads to Bitcoin being worth twice as much in May of 2020 as it is today. The price would eclipse 2017's peak by at least a few thousand dollars.
That seems pretty strong incentive for institutional investors to start pumping money in before the price gets too much higher. After all, investors know that the best way to profits is to buy low and sell high.
A few other influences
You can decide for yourself how much impact halvening is having on Bitcoin's price surge. While you think it over, there are a couple of other things that might also be in play. They include Facebook's plans to launch its own cryptocurrency, a reduction in outdated mining software, and investor groupthink. Let us look at each one individually.
Facebook's crypto plans
The cryptocurrency community has known for a while that Facebook wants to get into the crypto space. However, few were prepared for the plans Facebook actually introduced in early June 2019. It turns out that the social media giant is not looking to merely issue a coin that will make it easier to do business with them and their subsidiaries.
Facebook has every intention of developing its Libra project to the point of being a global currency capable of competing aggressively with both Bitcoin and fiat. We know that they have a decided advantage in their existing network infrastructure. They could prove tough to beat.
It is clear that Facebook will be a driving force in the future development of crypto regardless of how well Libra does. Their entrance into the market could be just what crypto needs to achieve worldwide adoption as an alternative monetary system. Because Bitcoin still dominates the market, any such move toward universal adoption would be good for investors, thus pushing prices up.
Outdated mining hardware
The biggest and best Bitcoin miners sat on old mining equipment throughout the duration of crypto winter. There was no point in investing in new equipment as long as coin price remained stagnant. Things got so bad for some that they were not even running their older machines. But with crypto winter seemingly over, miners are starting to ditch that old equipment in favor of running brand-new servers.
The benefit here is one of speed. Bigger, more robust machines process transactions more quickly. They allow miners to be more competitive in searching out that next block. And as you know, competition is always good for business. The more aggressively miners compete, the more value they add to the network.
If there is a downside here, it is the fact that equipment requirements continue to grow with every Bitcoin transaction. This is forcing some of the smaller players out of the market. They are miners who cannot afford to upgrade to newer, more powerful machines. They are being left behind because they cannot keep up.
You cannot dismiss the way investors think when you are talking about an asset traded on open markets. Investor groupthink affects everything from stocks to precious metals and commodities. It affects cryptocurrency as well.
What is investor groupthink? It is a phenomenon that causes large numbers of investors to take the same position on a given asset without thinking things through. They read what others are saying about that investment and choose to agree or disagree based on little more than their own fleeting thoughts.
Investor groupthink can be good or bad depending on what it leads to. Perhaps the worst example of it is the groupthink that led to the stock market crash of 1929. How many millions were lost overnight as a result of widespread panic among investors?
In terms of Bitcoin, it could be that there are large numbers of investors who all think that now is the time to get into Bitcoin - before halvening takes place. The mere fact that they all agree is causing them to pump lots of money into the network. This drives the price up even if halvening turns out to be a non-factor. Why? Because investor groupthink is increasing demand. Higher demand always drives prices up.
Halvening is a very real phenomenon that is built into most cryptocurrencies. But is it driving the price of Bitcoin up right now? A lot of people think so, yet there is no way to prove it one way or the other. All we know is that Bitcoin is enjoying its strongest price run in a long time.