Although there are only two historical moments one can refer back to, bitcoin has bumped several times after each block reward halve. There was usually no other positive news around halving period. Bitcoin has skyrocketed, giving a strong belief to its supporters.
Therefore, it has been less than 2 months before the 2020 halving, and Bitcoin has responsively experienced a quick rise, which has more than tripled before the COV-19 world crisis. However, the situation is different from the past, and may have hinted a disastrous ending for bitcoin.
Why should we invest in Bitcoin? Different people might have different reasons but its business model is a key to preserve its value.
In the Bitcoin network, in order for miners to have the motivation to maintain the security of the network, Satoshi Nakamoto designed the rules of Proof of Work. The issued Bitcoin is rewarded to the winning miners and halved every 210,000 blocks. Since the time gap between two blocks is 10 min, the halving takes place about every 4 years. At the beginning, the mining reward was 50 bitcoin for each block. It has been halved twice and the next halving brings it down to 6.25.
Based on the theory of the supply and demand on prices, the bitcoin might have good opportunity to hover. Firstly on the supply side, the decrease of mining reward will create a big shortage of bitcoin supply which can be a strong driving for the price to increase. On the other hand, bitcoin is accepted by more and more organizations as way of payments, and we haven’t seen any strong proof for the demand to decrease sharply.
Therefore, before the next halving day arrives, there’s still a good chance for bitcoin to increase in price as the two historical halvings.
The bitcoin halving, which turning from 50 btc to 25 in 2012, 25 to 12.5 in 2016 and 12.5 to 6.25 this year, has direct and negative impacts on the benefits of miners who are also the key contributors to the network security. So whether the miners are still profitable or not can be the most fundamental question to determine the living or death of the bitcoin network.
It is easy to tell that the total revenue of the miners depends on how many bitcoin they can be earning and the price of bitcoin. The halving brings the number of bitcoin earning to the half, so it requires the price of bitcoin to increase to maintain a stable profit and cover the cost. If the price is unable to cover the cost of bitcoin mining, we can expect to lose a good number of miners.
As a decentralized network bitcoin security is guaranteed by the number of miners. With more computing power contributed by miners, the more difficult the entire bitcoin network is successfully Double-Spend attacked.
Someone may say that why bitcoin has not vanished during the 2012 halving and 2016 halving. One reason is that the price increase of bitcoin which kept attracting more miners to step in. What’s more, Technical progress has reduced the cost of miners, since they have got better mining machine during those two halvings. However, the product development of the bitcoin mining industry has encountered a bottleneck and mainstream mining machines have not been updated for 2-3 years.
Admittedly, bitcoin has become a major currency used by more and more people around the world and its value has been recognized by growing numbers of people and organizations. However, no one can guarantee that the market can continue to be bullish this time as the first two halvings since its totally different situation, as well as the world’s economy is going through its worst times in the latest decade. People suggest to increase minners benefits by increasing the transaction fees, but who can promise this will not lead to bigger loss for them. So optimizing your investment with alternative hedging solutions and strictly controlling the risk could be smart moves for all investors.