Bitcoin Halving and its Impact on the Price in 2016

The year 2016 will see twofold reduction in mining rewards for a found block.

The overall supply of bitcoins is finite, and comprises 21 million coins. A coin first sees the light every time a miner solves a block. The bitcoin protocol dictates that the quantity of bitcoins used as a reward from a block shall half every 210,000 blocks. In average, there are around six blocks deciphered in an hour; therefore, generating 210,000 blocks takes roughly 4 years.

This means that miner reward will drop to 12.5 BTC as opposed to 25 BTC in the years 2012 to 2016. The final amount of 21 million bitcoins will have been mined by 2140.

The reason behind that is the necessity to control inflations. Bitcoin at its essence resembles commodities like gold rather than fiat currencies. If a centralized issuer prints too much money, it will devaluate, while the supply of gold is limited, and its mining becomes gradually different over time. Due to its limited supply, gold may retain its properties as an international means of exchange. Bitcoin designers hoped that the cryptocurrency would behave more or less the same.

As a single block takes roughly ten minutes to be mined, the reward halving is set to occur in July or August 2016. However, some bitcoin community members reasonably say that it takes roughly 9 minutes 20 seconds to mine a block, which is 7% less than the generally accepted value. Considering the fact, the halving may occur as early as on June 20, 2016.

The main question is how the halving may affect the bitcoin price. The answer is nobody knows for sure; however, the most popular scenarios state that it is either surge in price, or retention of current dynamics. Some say that the community has been ready for the halving in advance, and no one will be surprised. Therefore, they say, the price will not change, as it is expectations conflict or unpredictability that cause price fluctuations. Others say that due to reduction of bitcoin supply, the demand will grow, which will result in the surge of price. However, both parties agree that the halving will not result in the price’s dropping.

However, some say that abrupt reduction of the reward combined with price retention may cause de-incentivizing of mining, which may result in monopolization and volatility growth. Some miners may consider it unprofitable to keep their capabilities on, and may bowl off. Moreover, the drop of mining profitability and outflow of market participants may signify reduction of bitcoin’s investment prospects. Its further popularization and acceptance in that case may also be subject to fading.

Halving has already occurred on November 28, 2012. Back then, bitcoin was worth $13.42, and the halving had no effect on the price. However, bitcoin was not as popular as nowadays. Shortly after the price rocketed to $230. Nevertheless, experts associate it with then-crisis in Cyprus.

Daniel Masters, former oil trader at Shell and current co-founder of a multimillion bitcoin hedge fund Global Advisors, expects that bitcoin could overcome its historical all-time high of $1,100, or even peak at $4,400 by late 2017.

Masters reasons his predictions with increased acceptance of bitcoin payments by major corporate players and governments, further development of investment and interest in the underlying technology, the blockchain, and further growth of demand from China caused by its deceleration of economic growth and devaluation of Yuan.

  • Alex Sheibani

    The everyday usage of bit coin has increased more than 100% in the last year, demand is going up both in trading & in usage for buying products & services. With the current mood in the market, currently miners sell all their bitcoins as soon as they receive them to pay for expenses, with less of them being given out the mood may change & miners may hold onto them since demand is increasing it means the loss of bit coins available to trade is not just half, but more than half of new bit coins, so it is difficult to predict what it will do in real dollar terms. In the mid-term demand is expected to double again, who knows how traders will bet in the short term.

    • Jeff K

      I don’t think miners holding onto bitcoin is a relevent concern even if they were to do that. I also see no reason they would do that, they still have bills to pay so getting rewarded half the coins they used to isn’t going to change that. If anything it might hasten their liquidation of bitcoin in order to cover expenses.

      You gotta remember that 3/4th of all possible bitcoins have already been mined and out there. The last 5 million something will be mined over the next 125 years. That is the estimated time it will take to mine that last 5million. The amount of bitcoins rewarded to miners over any near term is going to be a tiny drop in the bucket. The amount of new coins is going to be limited by constantly increasing difficulty with dwindling reward, not miners hoarding.

      The immediate result of the halving I think is obvious. The cost of mining is constantly increasing as difficulty increases and more mining power is required to process the same amount of work. This means increased use of real power as well. So the cost of mining is going to continue to increase continously. It already is impossible for all but huge mining farms to even make a profit mining. Cost of power makes it impossible to break even for smaller operations. Even the large ones are not making much over cost at the current reward. With the halving they will be getting half the pay for alot more work and alot more expenses (power and new equipment). These expenses will continously increase, not just every 4 years or so that the halving occurs. More cost with a steady reward, half of what its been. The only way for mining to not totally fall because it not being able to cover cost getting only half the reward if the price stays the same, is for it to not stay the same. The price will have to double almost immediately to get to just a break even point again, and continue to rise overtime to cover the ever increasing cost of mining.

  • Alex Sheibani

    Who knows when & how the major main stream sites will consider the use of bit coins. Top Ten Sites like amazon, alibaba, youtube, ebay, google, facebook, yahoo, bing, pinterest & netflix are not allowing payments in bit coins, if they do allow bit coins for their products & services, then demand for bit coins will go up in a massive way. For now the demand & usage is being led by the preferences of the consumer over credit cards, because many consumers do not want to give up their credit card info every time they order online with sites that they know are reputable.

  • Steven Rachko

    seems kind of obvious with BTC being hard coded deflationary spiral…

  • Jim