Overview 

What is the 2020 bitcoin halving?

A 50% reduction in block rewards on the Bitcoin network is what is referred to as the bitcoin “halving” event, and it is less than a year away. Of course an abnormal change in hashrate could affect the target timeframe. However, regardless of the exact date, the reward for successful Bitcoin miners will decrease from 12.5 to 6.25 BTC per block around May 2020. The current network hash rate is 74.5 million tera hashes per second — TH/s, which represents an almost 140% increase in the amount of computing power used to secure the network since late 2018. A halving occurs every four years or after 210,000 blocks have been mined. Things have changed since the last bitcoin halving in 2016, and mining has become more competitive than ever, but the real question is: what will it do to the price?

Bitcoin Halving Price Impact

Both the 2012 and 2016 halving events happened before significant bull runs. It is not known if the halving events triggered these bull runs – or if they occurred coincidentally. A year after the 2012 bitcoin halving, the price rose to an all-time-high in Nov. A year after the 2016 halving, another all-time high of $19,500 was reached in Dec 2017. 

Total number of bitcoins mined
(as of this posting):
17,804,488.38437415
New bitcoins until halving
(as of this posting):
570,513 btc / 45,641 blocks
Total Bitcoins to be Mined

21,000,000

When Bitcoin was created, the initial reward was 50 btc for each block mined. In Nov 2012, it dropped to 25 btc after the first halving. The second halving took place in July 2016, decreasing the reward to 12.5 btc, and in 2020 the reward will drop to 6.25 btc.

As for any other type of asset, Bitcoin price depends solely on demand and supply. The halving affects supply, but the reduction will already be priced in the exchange rate due to market anticipation. 

Unlike fiat currencies, which are generally inflationary, the upper limit for Bitcoin‘s supply is 21 million. Once the network reaches that limit, no more Bitcoin can be mined or generated. The creator of bitcoin’s idea behind the constant halving of the mining reward is to ensure Bitcoin doesn’t suffer from intense inflation as it is distributed. To encourage sustainable growth, Satoshi Nakamoto chose a logarithmic scale on which to set dates for the halving. This means that, even though 80% of the bitcoin supply has been mined in its first 10 years, the final Bitcoin won’t be released until 2140.

Many years of guaranteed incentive remain for miners to participate in the network, and for the market to figure out just how much Bitcoin is worth. 

Bitcoin Halving Strategy 

Buying now and waiting for Halving Day to realize gains is not the best strategy. Planning ahead with dollar cost averaging to accumulate bitcoin will likely be far more profitable. The preceding and following months surrounding the two prior events showed continued growth that led to some famous bitcoin price rallies and all-time-highs. There are sure to be short-term rallies and crashes, but the more interesting aspect will be whether the up-trend in price continues. 

Best Practices

Dollar cost averaging (DCA) is an investment strategy with the goal of reducing the impact of volatility on large purchases of financial assets. 

Using this strategy, you invest a set dollar amount on a regular basis, such as every week, month or quarter. When the price of bitcoin rises, your scheduled investment amount will buy less bitcoin. When the price falls, your dollars buy more bitcoin. This ensures that you buy more bitcoin when prices are low. While it is not a guarantee that you will make money, especially in a consistently rising market, it can help investors overcome the fear of buying “at the wrong time.”

Don’t know when to buy, or how much to buy? Worried the price will drop after you buy? Think it’s too late now that the price is higher than a year, or a month, or a week ago? History has shown us that those who buy using dollar cost averaging set themselves up for success later. 

How does it work? 

If you bought 1 bitcoin at a price of $10,000, your average cost per bitcoin is $10,000. Say bitcoin drops to $7,000 – and you buy 1 more bitcoin, so you now have 2 bitcoins and you have spent a total of $17,000 on those two coins, which means that your average cost per bitcoin is now only $8,500 ($17,000 divided by 2). 

Perhaps you’ve heard the saying “buy when there is blood in the streets”. It means that as the price falls, it is “on sale” and you should be buying to greatly reducing your average cost per bitcoin with a greater chance for increased profitability later. 

Suppose you buy another 4 bitcoins at $6,000 each for a total of $24,000. Now you have a total of 6 bitcoins for a total cost of $41,000 – divided by 6 is $6,833 per coin so your average cost per coin is much, much less than your initial $10,000 per coin. 

Most don’t have either the income or the confidence to buy in single-coin increments at today’s bitcoin prices.  Fortunately, you don’t have to buy a whole bitcoin, but the math does get a bit more complicated with weird amounts like 0.04327585 btc. Throw your buys into a simple spreadsheet to keep track, and you’ll see the math works just the same!

As long as the price of Bitcoin is below your average cost, you are in the “acquisition phase” where you buy and/or keep the bitcoin you have. When the price is above your average cost, you are in “the utilization phase” where you could sell a small portion, take profits, and get more goods and services for your fiat money – or hold the fiat and buy more bitcoin when the price dips again. When enough bitcoiners practice this strategy, we will see more of an upward trend in Bitcoin’s value because fewer will panic-sell their coins, and more will acquire Bitcoin for future savings. 

When you acquire below your average cost per coin (receive or buy), your average cost per coin falls. When you utilize above your average cost per coin (spend or sell), your average cost per coin also falls. A win-win in either direction! 

Conclusion 

The demand for Bitcoin is only increasing as more individuals, retail and institutional investors see the benefits of a decentralized and immutable digital store of value. After the 2020 halving, the Bitcoin inflation will be below that of the most recent 2.1% of Core US inflation. 

Now could be a good time to educate yourself on bitcoin and take advantage of the pending 2020 halving.

 

 

 

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