Effect of Bitcoin Block Reward Halving on its Price
Among Bitcoin community, Bitcoin Halving is the hot topic as it is expected next month around 11th – 12th July 2016. For those who do not know what is Halving, may I first explain this phenomenon of Halving of reward in Bitcoin Mining.
Satoshi Nakamoto, the creator of Bitcoin Software had programmed the software in such a manner that the reward being given to Bitcoin miners will be halved every 2,10,000 blocks which in turn takes approx four years. Miners record a set of bitcoin transactions into a list called Block on an open ledger. They verify and confirm that only legitimate blocks are recorded. Such series of blocks form the Blockchain. In one day 144 blocks are formed. For every successful addition of block to Blockchain, the miner is rewarded with Bitcoins. Currently number of bitcoins rewarded to a Miner for successfully completion of one Block into Blockchain is 25 bitcoins. This has been going on since 2012. Prior to 2012, it was 50 bitcoins. Now around 11th -12th July this year, 4 years will be over and the reward will be reduced to 12.5 bitcoins. This is the bitcoin halving – halving of rewards in Bitcoin Mining.
Impact of Bitcoin Halving on Price of Bitcoin
Now let us see what will be the major impacts of Bitcoin Halving on its Price :
Price of anything in the world is the outcome of Demand Supply relationship. The rewards received by the Miners are actually the new bitcoins generated by the software. Therefore Bitcoin Halving also means supply of bitcoins to be reduced by 50%. However demand for bitcoins is consistently increasing. Refer my post: 12 reasons to invest in Bitcoins. The post shows how Bitcoins have been performing over last few years and what makes them different to invest. It also shows how demand has been over the years. Number of transactions and volume of transactions have been consistently increasing as more and more people got to know about Bitcoin and understand the underlying potential in Bitcoins. Due to this increase in demand, also supply being limited and diminishing, the price of Bitcoin is bound to go up. This equation has made Bitcoin fundamentally strong. It is going to rise for ever. It might stabilize or rate of increase might go down but fundamentally prices are bound to move north. The basic principal that supplies will be lesser and lesser in future whereas number of people using Bitcoins, number of transactions and thereby volume of transactions will keep on increasing makes Bitcoin fundamentally strong to invest in for long term.
Effect of Bitcoin Halving already factored in
People are asking what is going to happen when halving happens. Effect of Bitcoin Halving has already started. As you can see in below price chart of Bitcoin, from May 24th onwards effect has already begin. Price started rising from $430 and as of today 12th June 2016 it has reached $619.50. Halving is yet to happen after one month. But the effect of Bitcoin halving has already been factored. But still more is to come.
Effect of Bitcoin Halving to continue
It is expected that effect of halving will continue for some more time. Bitcoin price is expected to reach $650 level. In fact the effect will continue past halving time. By the end of this year or early next year it should touch $1000.
When Price of Bitcoin may go down :
When I say price of Bitcoin should fundamentally keep on rising, that doesn’t mean that it cannot come down. History tells us that Bitcoin prices have gone drastically up and down at times. The maximum peak that Bitcoin price ever reached was around USD 1000.00. Then it crashed down. Various reasons that each one of us should keep in mind while keeping a watch on Bitcoin prices are :
- Correction after Steep Rise : Whenever there is a steep rise, a correction is inevitable. In current scenario, Bitcoin price has gone up from $430 to $619.50. Bitcoin has very strong support at $430. Thereafter the prices were also stable at $575. So these are some support levels. However correction should be seen as short term fluctuations. Overall Bitcoin price has an upward movement.
- Political Environment : Bitcoins are decentralised. Hence no government has control over it. This fact makes Government of any country vulnerable about Bitcoins. At the same time, they know that if a person has no wrong intension, then there is nothing wrong in using Bitcoins. As such in many countries, Government is still not very clear about its stand on Bitcoin regulation. However countries like US and most of Europe are now getting more and more clearer about acceptance of Bitcoin and their likely usage in their respective country. A brief note on few countries can be found in my earlier post : 12 reasons to invest in Bitcoins. Alternatively a good briefing on most of the country’s policy over Bitcoin is given in Wikipedia : https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country
- Some untoward happening : This refers to incidence such as hacking of a Bitcoin Exchange. This has happened in the past when Mt Gox got hacked and Bitcoin price crashed by more than 70%. See ref link : http://www.wired.com/2014/03/bitcoin-exchange/