A significant event is planned for May 2020 for the Bitcoin network - halving. This will be the third such event in the history of the currency. Although the event is still six months away, predictions for the consequences of yet another reduction in miner rewards are already regularly appearing in crypto media outlets.
Let’s work this out together: can halving lead to another Bitcoin rally, or is this just another clickbait headline and an exciting newsbreak?
What is halving?
Halving is the process of reducing the speed at which new units of the cryptocurrency are created. As a result of halving, the reward issued to miners for each extracted block is reduced.
Right after the Bitcoin network was launched, miners were rewarded with 50 BTC for each extracted block. In the fall of 2012, the reward was halved, going down to 25 BTC per block, and then in the summer of 2016, it was halved again to 12.5 BTC. This second halving in 2016 was followed by the most famous rally in the history of Bitcoin - the maximum price of $20 000.
Will halving lead to a price increase?
In anticipation of the halving, analysts have built a model to estimate changes in price. Based on this model, Bitcoin will reach a price of $60 000. For comparison, from July 2016 during the previous halving until July 2017, the price of Bitcoin has seen an almost ten-fold increase - from 268 to 2525 dollars.
However, there is no obvious correlation between the price of Bitcoin and the previous halving, as there are a number of factors that may have impacted the price - from the launch of Bitcoin futures to announcements from government officials. That’s why we shouldn’t expect another rally after the next halving. What’s more, practice shows that the cryptocurrency market tends to react to events opposite to market expectations. This was the case with the hype around the launch of Bakkt, a platform for institutional investors - experts believed that another ‘to the moon’ was in the cards for Bitcoin, based on its intense growth in December 2017 after the launch of Bitcoin futures. However, the reality was quite different - after the launch of the first completely regulated Bitcoin futures trade platform Bakkt, this ‘digital gold’ went down by almost $1000 in price.
What was the impact of halving on other cryptocurrencies?
Bitcoin is not the only cryptocurrency network to regularly conduct halving. Litecoin, Bitcoin Cash and Zcash have also halved rewards at different interviews. Let’s take a look at the impact of this event on the price of Litecoin.
Prior to halving, Litecoin creator Charlie Lee announced on Twitter that the main goal for halving was to maintain the price of their cryptocurrency. Halving occurred on August 5, 2019, and on this day LTC saw a price increase of $10, reaching $103. However, this increase was not permanent - on August 23, the price fell to $75. The network performance fell by 25% following halving.
At present, we do not have access to enough historical events in the market to identify correlations and make accurate predictions. The reduction in the reward for miners might lead to a reduction in the volume of cryptocurrency sales made by miners, which will lead to an unbalanced supply and demand. This might lead to a dramatic price increase, but as we can see in the case of Litecoin, these increases are temporary, and they might be influenced by other events.