Today is a significant day in the history of cryptocurrency: the bitcoin halving. But as the coronavirus and upcoming recession cause growing uncertainty, the implications go far beyond a technical change.
An event built into the cryptocurrency from the outset, the Bitcoin halving will not, as many often incorrectly assume, see the price of Bitcoin halve. Instead, it will see the amount of bitcoin miners receive for the work they do cut by half: at present, mining a single block results in 12.5 bitcoin, but after the halving, this will be cut to 6.25.
This event, which will occur at around 20:30 GMT today, is the third halving to be applied to the cryptocurrency, and is designed to counteract the fact that Bitcoin is finite: there can only ever be 21 million Bitcoin mined. While in the early days reaching the limit may have seemed long in the future, as the cryptocurrency has become more popular the amount mined each day has significantly increased.
The halvings, which occur at every 210,000 blocks – around four years apart – counteract this issue, ensuring mining can continue in the future.
Will the bitcoin halving cause a price rise?
For many experts, the bitcoin halving is set to generate a rise in the price of Bitcoin, as acquiring it through mining becomes more expensive. This occurred in the previous two halving events in 2012 and 2016.
“As the third halving event to occur, there are expectations for what might come after, with history telling us that the Bitcoin price will typically begin to rise significantly within the 12 months following a halving – something that can be simply put down to supply and demand,” says Danny Scott, CEO and co-founder of CoinCorner.
“The Bitcoin halving has created attention each time it has occurred and resulted in many new people discovering bitcoin,” added Gareth Stephens, founder of Bitcoin Lessons.
“The 2020 halving takes the newly minted supply of bitcoin from 3.6% down to 1.8%, this now makes bitcoin have a lower inflation rate than fiat and gold. This will likely attract attention as people around the world look to store their value in an asset that can hold its value over a long period of time.”
However, not everyone agrees that the halving will spark a notable price rise.
“We don’t believe there will be much change to Bitcoin use in the aftermath of the halving event,” says Joel Kruger, currency strategist at LMAX Group.
“Most Bitcoin is already in circulation, and as a consequence, the notion that there will be a surge in demand because there are less new bitcoin coming into circulation, is an exaggerated one.”
“We expect the halving to be a disappointment,” adds Ed Hindi, CIO of Tyr Capital.
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“We may see the market drop by 25%-35% from the peak, but we expect it to be followed by a period of rangebound trading over a number of months and then a gradual move back up. The longer term horizon for bitcoin is extremely bullish – we may well witness a peak of $100/125k in the next couple of years – but in the short to medium term we think we’ll see a lot of disappointed players out there.”
Hindi argues that this is due to a range of other factors impacting the cryptocurrency, including his belief that many individual buyers will sell their bitcoin as the recession begins to bite.
Bitcoin halving amid the coronavirus and recession
Whether a risk to growth or a boon, the coronavirus outbreak has undoubtedly been an unexpected factor in future adoption rates. And for many, it is only going to help the cryptocurrency grow.
“While almost every other asset has suffered, bitcoin has stood alone in resisting the devastating economic impact of the coronavirus; we’ve seen the currency already return to its pre-March, pre-coronavirus value,” says Marcus Swanepoel, CEO of cryptocurrency platform Luno.
“Even with the coronavirus as a backdrop, previous halvings have led to some of the most dramatic rallies for bitcoin. Given bitcoin’s stern defence against the economic effects of the pandemic, the precedent suggests that we may well see another rally similar to that in 2017.”
Others see the economic reactions to the pandemic playing a key role in bitcoin performance following the halving.
“The coronavirus pandemic has resulted in another massive barrage of global stimulus from governments and central banks, carrying worrying medium to longer term risk of currency debasement,” says LMAX Group’s Kruger.
“This is something that only serves to further highlight bitcoin’s value proposition as a currency born out of a rejection of centralised governance and monetary policy that would allow for currency debasement.”
Bitcoin Lessons’s Stephens generally agrees, although is more sceptical as to how much this will play a role.
“There is a further reluctance to use physical paper money due to the risk of passing on infection, but there are already digital forms of money so I don’t see this changing too much,” he says.
“The economic impact of the lockdown and decimation of businesses that has resulted in the printing of trillions of dollars could well expedite the exit from fiat currencies into bitcoin as people realise how worthless their government money truly is.”
Inextricably linked with the coronavirus is, of course, the now expected global recession, and here Stephens sees cryptocurrency stepping to the fore.
“The impending recession could really highlight on a global scale the problems with governments owning money, and whilst a depression would likely suppress the price of all assets for a number of years,” he says.
“The truly decentralised, outside of the system asset away from government control is bitcoin so that is where the smart money will flee in times of a global economic crisis.”
Bitcoin’s role in the new normal
Amid the talk of recession is a growing narrative about the creation of a new normal, and when it comes to financial institutions, many see the combination of the halving, financial uncertainty and disruption as being a key driver of adoption.
“May’s event could herald bitcoin’s coming of age. The digitalisation of our lives is accelerating at a faster pace than ever before. We’re in an exciting new era driven by technology,” says Nigel Green, CEO of independent financial advisor deVere Group.
“This new world needs new ways of doing things to fit the new normal. Clearly, one of those things which is needed now more than ever, as the world becomes ever-more digitalised and globalised, is digital and global currency, such as bitcoin.”
For Luno’s Swanepoel, there is evidence of growing support at a governmental level.
“Preceding the halving, we’ve seen a significant shift in attitude from major governments that will have put bitcoin on many people’s radar,” he says.
“The United States government has recently flirted with the idea of a ‘digital dollar’, and China has gone one step further as it pushes toward the digital yuan. With the world’s biggest economies moving toward digital currencies, greater knowledge and increased adoption of bitcoin will soon follow.”
However, others do not see such growing government interest in bitcoin as being impacted by the halving.
“Most industries and government bodies have either adopted blockchain technology to some extent or are exploring how to for the significant benefits which the technology offers including greater transparency of transaction histories, enhanced security, improved traceability, increased efficiencies and speed and, with this, lower costs. The bitcoin halving is unlikely to impact on this,” says Sushil Kuner, principal associate, Gowling WLG.
Support from financial institutions
Perhaps more significant, however, is the increase in support from the financial institutions.
“Mainstream financial institutions have long been fearful of cryptocurrencies, with many still seeing the likes of bitcoin as competition, not opportunity. But, financial giants in the way of Barclays in the UK, and Goldman Sachs, have pushed forward with their respective cryptocurrency projects,” says Swanepoel.
“Should bitcoin’s mainstream appeal increase after the halving – as we expect it to – it will only accelerate the adoption of bitcoin from mainstream financial institutions. As we see more and more reputable financial institutions adopt cryptocurrency, that will naturally filter through the industry.”
However, others are keen to point out that while the halving could cause a growth in support among financial institutions, this will not occur as a result of any new benefits the event brings to bitcoin.
“The halving specifically won’t mean a lot to new financial institutions though, the core features that bitcoin has around its scarcity, censor resistance and it being unconfiscatable were true before and still true after the halving,” says Bitcoin Lessons’s Stephens.
“More people may discover these qualities and look to allocate a percentage of their portfolio due to information they discover due to the halving occurring.”
“The design of the halving event is an elegant and brilliant design that generates a lot of buzz every four years, serving as a reminder of Bitcoin’s highly compelling economics,” agrees LMAX Group’s Kruger.
“This is a reminder that with each passing halving event, bitcoin is sure to generate more mainstream adoption from financial institutions. The longer bitcoin is around, the more it proves its concept. The more it proves its concept, the more attractive the value proposition becomes.”
The only way is up
While the general consensus for the long-term prospects of bitcoin is an upward trajectory, experts are divided about how much the halving will shape this.
“Overall, we expect a continued upward trend over the medium to longer term, but believe this to be less a function of one single event and more a function of the totality of bitcoin’s compelling economics,” says LMAX Group’s Kruger.
What is clear, however, is that the bitcoin halving provides an opportunity for the cryptocurrency to increase its profile, and with the coronavirus and recession, the opportunities to capitalise on the changing world are significant.
“The halving itself doesn’t help mainstream adoption, but it will get attention and headlines and help bring in the next wave of people who end up being long term holders,” says Bitcoin Lessons’s Stephens.
However, this will not happen on its own; the cryptocurrency industry still has considerable work to do if bitcoin is to ever achieve a truly pervasive presence in the mainstream.
“While the halving is unlikely to act as a silver bullet for the mainstream adoption of bitcoin, it will have a significant impact on its mainstream appeal,” says Luno’s Swanepoel.
“People are resistant to change, especially when it concerns something as important and emotive as money. The challenge will be to educate and convince the general public to abandon traditional currencies that have been used since time immemorial.”