Explained: Bitcoin halving and the expected bull-market for digital assets

Written By: Johan Castell
Delhi Published: Apr 30, 2020, 10:00 AM(IST)

File photo. Photograph:( Reuters )

Story highlights

The next bitcoin halving is scheduled to happen on May 12, and investors are expecting that the digital asset will see new all-time highs

Digital assets and cryptocurrencies like bitcoin, ethereum and XRP have often been called highly volatile and risky assets used by either speculators or dubious characters for dark web anonymous transactions facilitating illegal activities. Bitcoin has been around for over ten years at this point and it has proven to be useful for more than just speculation, and when it comes to using it for illegal transactions, it is not a clever solution to use a payment where the payment history is ending up on a permanent blockchain freely accessible.

The industries and companies that are developing technology using blockchain are now numbering in the thousands, and with more and more incentive to solve problems with fiat currencies, the industry is set to expand exponentially in the coming years. A fundamental difference between regular fiat currencies like the dollar, and bitcoin, is that the dollar is an inflationary currency that loses value over time due to money printing. Bitcoin, on the other hand, is a deflationary currency with a fixed, limited total supply.

Another characteristic of bitcoin besides the limited supply is the periodic halving of the reward handed out to miners processing transactions on the network and in turn increase the security of it. Currently, miners are rewarded with 12.5 bitcoins per block of transactions confirmed on the network, after the halving the reward will be reduced to 6.25 bitcoins per block. The next bitcoin halving is scheduled to happen on May 12, and investors are expecting that the digital asset will see new all-time highs as there will be a smaller supply of newly created Bitcoins.

When bitcoin halvings have happened historically, it has lead to a bull-market pushing the price of Bitcoin up dramatically in the months following the halving, which takes place roughly every four years.

Twitter handle PlanB @100trillionUSD has created a useful data model to explain these periodic cycles of price fluctuations in relation to the halving events:

Data Model

This model predicts that following the halving event on May 12, the price of bitcoin will rise into a new phase around $100,000 after the flow of new bitcoins into the market gets factored in and reflected into the price. The different phases of this model also take into consideration how the use case for bitcoin develops over time. In the early days, the most popular bitcoin narrative was “proof of concept”, in the next phase that changed to “payments”, followed by “E-gold” where the price of one bitcoin was close to the price of one ounce of gold. This model has proven its value over the previous halvings on the network, but it is worth noting that some of the scaling issues that appeared during the bull-market of 2017 are yet to be resolved.

Twitter user @C3_Nik states: “The Scalability issues surrounding #Bitcoin $BTC haven't been improved over the last few years. Nothing in terms of the technology has changed since the BTC network slowed down to a crawl and the average fee rose to 60$ in late 2017. It can kill the next bull run for BTC, easily.”

During all-time high bull-market of 2017, the network slowed down significantly, while the transaction fees rose to levels above what most people are comfortable with for smaller transactions, leading to a lot of investments flowing into altcoins where transactions were faster and cheaper.

@C3_Nik goes on to state “And this isn't some 'maybe', it is a proven fact. The data is there. Next time it will happen again. #Bitcoin $BTC will become unusable right in the middle of the next bull run. What will happen then? I hope that the market realises that there are better solutions that work.”

In the years following the launch of bitcoin, several other cryptocurrencies have been launched. One notable example is Ripple's XRP that focuses on international remittances and on-demand liquidity. While some people in the digital assets community think of Ripple as the banker's coin that does not follow the ethos of Bitcoin, Ripple labs went to meet with regulators as soon as possible in order to work with regulators and speed up the process of adoption and implementation. XRP is today the third biggest digital asset by market cap and has partnerships with more than 300 banks around the world. With all the developments in the recent months with the coronavirus pandemic and the economic fall out of that, there is now an added incentive for people to use digital payments instead of using cash due to the risk of getting infected. When the governments around the world are printing money on a large scale leading to inflation and the devaluing of their population's savings and retirements accounts, digital assets can, like gold and silver be used as a safe haven investment for protecting their wealth.

Whether or not the stock to flow model holds true and bitcoin reaches $100,000, the cryptocurrency industry is here to stay, and there are many other solutions than Bitcoin for secure digital payments. During these testing times, the future looks bright for digital assets.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)
  

 

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