Bitcoin halving 2020: Dates, charts and what you need to know
What will the halving do to Bitcoin prices, and why?
The Bitcoin halving is a periodic event programmed into Bitcoin. It happens roughly every 4 years.
Bitcoin was created in 2009. The first halving was in 2012, the second was in 2016 and the third is due on 12 May 2020.
Each halving reduces the speed at which new Bitcoin is created, reducing it by half. It’s widely believed that each halving significantly impacts Bitcoin prices.
What happens in the halving?
There will be a maximum of 21 million Bitcoin, but they’re being created gradually. Each halving slows down the speed at which new Bitcoin is created, reducing it by half.
The end result is that the total number of Bitcoin in existence gradually trends upwards over time, while Bitcoin’s inflation rate trends downwards over time until eventually there are practically 21 million Bitcoin in existence, and no more being created.
Each halving is a big step towards this outcome.
Why does Bitcoin halve?
Bitcoin was deliberately designed to be valuable. Its inventor described it as electronic cash and digital gold, and in order to function as money it has to be worth something.
It’s also necessary that the coin be valuable for the Bitcoin network to keep functioning. The miners who operate the Bitcoin network and help process its transactions are paid in newly-created Bitcoin, but if the coin wasn’t worth anything they wouldn’t be getting paid enough to keep doing it.
In other words, Bitcoin is only useful because it’s valuable, and it’s only valuable because it’s useful.
The halving helps support this. It doesn’t directly make Bitcoin any more valuable, but it does make it more scarce. And on paper, if something is less common it’s more valuable.
In theory, each halving makes Bitcoin more valuable. But in the real world the market decides how much it’s worth, and there’s no guarantee that the theory will cleanly translate to the real world.
For the whole picture, let’s first look at why people think the halving will make Bitcoin prices rise, and then let’s look at why people think it won’t.
Will the halving make Bitcoin prices rise?
Both of Bitcoin’s previous halvings were characterised by similar price movements.
The first halving was on 28 November 2012. Bitcoin prices started climbing about six months before the event, then they topped out and dropped a few weeks before the halving actually happened.
The same thing happened for the next halving, on 9 July 2016. Prices more than doubled in the six months before the halving, but dropped significantly before the event.
Despite the initial drops before the previous halvings, the occasion is mostly associated with prices going up.
Late 2012, around the time of the first halving, was the last time anyone could buy Bitcoin for less than US$13. And mid-2016, a month after the second halving, was the last time Bitcoin prices were less than US$600.
It’s clear that both previous halvings were followed by major Bitcoin price rises, but it’s not clear that the halvings actually caused those price rises.
However, there is one theory suggesting that they did.
Bitcoin and the stock to flow theory
It’s called the “stock to flow” theory, and historically it’s been an incredibly good predictor of Bitcoin prices.
There’s a very simple formula behind the stock to flow theory: you take the total number of Bitcoin in existence (the “stock”) and divide it by the number of new Bitcoin created each year (the “flow”). This gives you a nice, clear number called the “stock to flow (S2F) ratio”.
The stock keeps gradually increasing as more Bitcoin is created, while the flow gets cut in half each time Bitcoin halves. Consequently, the S2F ratio is a number that gently increases over time, but jumps sharply every 4 years or so.
|Year||Bitcoin S2F ratio|
|2012 (after the first halving)||9|
|2016 (after the second halving)||25|
|2020 (after the third halving)||56|
The same principle can be applied to other assets. Gold, for example, has an estimated S2F ratio of 54, based on the amount of gold existing above ground (the stock) divided by the amount of gold mined each year (the flow).
Applying the S2F model
By charting Bitcoin prices against its S2F, we can get a model of Bitcoin prices that can accommodate Bitcoin’s price changes from less than a dollar all the way to US$20,000.
Bitcoin’s next stop after the halving, according to this model, is the US$100,000 range.
Firstly, it’s important to note that this chart is an automated creation whose purpose is essentially to create a S2F model that matches Bitcoin prices. This is why it has such peculiar logarithmic scales for Bitcoin prices (left) and S2F ratio (right).
It’s not really a system for predicting Bitcoin prices. Rather, it’s a system that follows prices in an effort to make sense of them. And so far, it has.
Secondly, it’s important to note that the dark blue line represents a very wide possible price range. As of April 2020, Bitcoin prices can swing from about US$5,000 to US$16,000 without going outside the dark blue line, so staying in that range isn’t a huge predictive achievement.
So the formula is (probably) not a magic Bitcoin price prediction machine. Rather, it shows us that once we factor in the halving we have a coherent theory that can rationally explain how Bitcoin prices are equally sensible at both US$0.10 and US$10,000.
It highlights how, according to one of the most historically-accurate Bitcoin economic models ever devised, the halving is perhaps the single most important part of Bitcoin’s price history.
It also gives us a hint of where Bitcoin will go next if we assume past performance is an indicator of future performance – which it’s not.
The next halving will either make or break the impressively-accurate Bitcoin stock to flow model. And if enough people believe in the S2F theory, it could end up becoming a self-fulfilling prophecy.
Is there a chance the price of Bitcoin won’t rise?
Despite the compelling nature of the most bullish Bitcoin price theories, there are still some arguments for betting against Bitcoin in the halving.
The big one is the simple fact that past performance is not a guarantee of future returns.
Plus, Bitcoin is simply not selling at US$100,000. If enough people truly believed in the S2F model, the markets would already have priced in the rise to a greater extent. Taking Bitcoin from US$10,000 to US$100,000 will require a lot more money than taking it from US$0 to US$10,000 did, and there really is no roadmap for what it aims to do now.
It’s also worth noting that Bitcoin isn’t the only cryptocurrency with a halving. Litecoin, Bitcoin Cash and Bitcoin SV all went through their own equivalent halvings recently, with little fanfare and no apparent market impact.
Bitcoin is naturally a completely different can of worms, but it still goes to show that a halving alone isn’t enough to result in a price rise. A cryptocurrency still needs to have something else – such as a sufficient level of awareness or a certain amount of demand and utility – for a halving to result in a price rise.
No one knows what exactly that special sauce is, so no one can be completely certain that Bitcoin has enough of it going into this halving.
One way or another, each halving changes what we know about Bitcoin, and it’s always a momentous occasion for the cryptocurrency.
Disclosure: The author holds BNB, BTC at the time of writing.