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Bitcoin’s Upcoming Halving - the Harvest of Hopes

 

As the financial world is on its knees, knocked down by the pandemic, Bitcoin is preparing for its halving amidst the chaos. The Bitcoin halving is an event which takes place every 4 years. It was designed to reduce the number of Bitcoin’s mining block rewards by half, which creates scarcity and boosts Bitcoin’s value. Mining rewards are issued every 10 minutes, and the halving takes place every 210,000 blocks. On average, 144 new blocks are mined every day, which is why it takes roughly 4 years to reach the number of blocks required for the Bitcoin Halving. Interestingly, Bitcoin’s protocol was constructed to progressively reduce the number of new Bitcoins until 2140, when their creation will ultimately come to an end.

This is exactly what sets Bitcoin apart from traditional ‘fiat’ currencies, which can be printed anytime governments deem it necessary. The printing of new money often causes inflation, called the “public enemy number one”, and Bitcoin’s halvings eliminate it from that game, reducing the number of newly created coins, rather than increasing it. The number of coins is controlled by algorithms and mathematically designed to guarantee that Bitcoin will become scarce over time, unlike traditional currencies. Such a stable quantity pattern is inflation’s killer. In fact, the upcoming Bitcoin Halving is set to bring Bitcoin’s inflation to 3,7%, compared to the 2020 worldwide inflation rate of 4,6%. By 2025, it is predicted to be lower than 1%, and by 2055 it will drop to such low levels that it will be invisible.

Given that fiat currencies are plagued by inflation’s whims, Bitcoin’s inflation-proof nature is one of its greatest powers. Is it, however, enough to accelerate its rise to global prominence? It is in Bitcoin’s nature to oppose everything traditional money systems stand for. Decentralised, independent of governments, and global by design, Bitcoin was created amidst the 2008 financial crisis to change the way we think about money. To avoid problems that traditional currencies face, such as inflation, Bitcoin bows to no one, but an algorithm, which determines Bitcoin’s past, present, and future. The algorithm was created to ensure Bitcoin’s supply will never exceed 21 million coins, and halving plays an essential role in ensuring that outcome.

The first halving took place in November 2012, and it was Bitcoin’s breakthrough moment. Its price went up from $12,5 to $1150 within a year, when Chinese miners entered the market. An impressive 9100% growth rate helped Bitcoin capture the world’s attention, and the 2016 halving was a highly anticipated event. Interestingly, the aftermath brought no significant changes, and Bitcoin’s prices only went down, rather than up. The expected rise in price came one year later, taking the Bitcoin price to a record $20,000 in December 2017. Earlier that year, one Bitcoin was already more expensive than an ounce of gold, which earned Bitcoin the nickname ‘digital gold’. After the record high, things went downhill, and Bitcoin’s price went as low as $3,321 in December 2018 to eventually reclimb and hit $10,000 in June 2019. The digital currency’s price run is a true roller coaster, but after every fall, Bitcoin rises again.

The upcoming halving has sparked great interest and ignited hopes for Bitcoin’s future prominence. Now, amidst the pandemic, all that seems to be left are dashed hopes, although the world has never favoured cashless transactions more than today. Upon the virus’ outbreak, main fiat currencies grew stronger, whereas Bitcoin’s price had been steadily decreasing. Nevertheless, despite Bitcoin’s fluctuations in price, using Bitcoin’s early April 2020 price of $6,800, one Bitcoin was worth 4 ounces of gold, given gold’s price of $1,700 per ounce. Gold has been traditionally seen as a safe haven for a time of crisis, so Bitcoin’s potential is still undeniable.

Will Bitcoin’s future be determined by the upcoming halving? Will it meet the expectations or bury people’s hopes? The halving is merely a month away, and people’s predictions of the event vary from carefully optimistic to slightly sceptical to openly pessimistic. The current daily number of newly generated bitcoins is 1800, but after the halving, it will be reduced to 900 Bitcoins per day. Many think that reduced daily supply will inevitably cause the demand for Bitcoin to steadily rise after the spring’s halving. Others argue that the event will not change the digital currency’s price, or could perhaps even accelerate its fall. Judging by previous halvings, Bitcoin’s success becomes apparent only long after the halving event has passed, so perhaps 2021 will see Bitcoin’s financial triumph.

While Elon Musk is sceptical of cryptocurrencies’ potential, Blockware Solutions’ CEO Matt D’Souza says that halving and the post-halving reality is “kind of like this perfect storm for Bitcoin”, and its ultimate outcome will be determined by the supply, positive sentiment and “debt financing, collateralization of Bitcoin”. He states that “markets are driven by sentiment”, and positive sentiment makes people chase the momentum, which in turn improves demand. In his conversation with Stephan Livera, Matt explains that “once prices start to improve” people are likely to “chase the momentum”, which paints a hopeful picture of Bitcoin’s future. In any case, the coming weeks will be extremely interesting for Bitcoin: with the upcoming halving and extension of the tax season, anything could happen. Normally April and May are Bitcoin’s golden months after investors re-enter markets as tax season ends. After a sharp drop in price in March, Bitcoin’s popularity has been rising again, which may signal that investors are ready to give it a green light.

However, what is Bitcoin’s legal standing? Bitcoin is technically neither a currency nor legal tender according to United States’ Treasury. It is not issued by any country, it acts as an independent, borderless payment method, and it therefore does not fall within the accepted definition of a currency, although it functions as one. Various countries have manifested different approaches towards Bitcoin: in the majority of European countries, Bitcoin is considered legal, whereas in northern Africa it is deemed illegal. Certain countries like Canada and China partly limit the use of Bitcoin, imposing a banking ban. In Canada, the bank of Canada has ‘the sole right to issue notes’, so whereas Bitcoin is not illegal there, it faces a banking ban. Other countries, such as Japan, welcome cryptocurrencies with open arms, recognising it as a legal means of payment.

Either seen as money or a commodity, Bitcoin is a subject to legal speculations all around the world, and if its importance increases after the halving, many governments will have to address the way they regulate Bitcoin transactions. Interestingly, governments may need to handle the matter carefully so as not to repeat Australian mistakes. In 2014, Australia viewed Blockchain as ‘an intangible asset’ and made it subject to double taxation. Many startups left the country, and double taxation was abolished in 2017. With the development of several national, digital currencies, and the rising prominence of digital payment methods, Bitcoin’s legal future looks interesting. Can a decentralised, global payment system make peace with national currencies? Anything could happen.

All things considered, the future has never been more mysterious. With the raging pandemic, inevitable financial crash, and changing approach to assets, Bitcoin’s fate is yet to be determined. Whether it will grow due to an increasing lack of confidence in traditional systems, or fall into oblivion with other volatile assets, only time will tell. Within the last decade, it has definitely come a long way from less than $1 per Bitcoin in 2010 to almost $7,000 in 2020. Certain experts say that Bitcoin is unlikely to become a popular payment method, but it has potential to become a great tool for savings, as it is independent of governments and free from inflation’s deadly blows. Perhaps the upcoming halving will determine its future, for better or worse, but in the current climate, certainty is the true scarce resource.

Sources:
1. Fair market value of bitcoin: halving effect
2. https://www.ledger.com/academy/crypto/bitcoin-halving
3. https://www.etftrends.com/disruptive-technology-channel/tax-season-could... e-price-gains-for-bitcoin/
4. https://blog.kraken.com/wp-content/uploads/2020/02/Bitcoin_Halving_F_v09...
5. https://www.forbes.com/sites/ktorpey/2020/04/08/a-perfect-storm-is-brewi... itcoin-price/#7f5e8aaf6ab0
6. https://www.buybitcoinworldwide.com/price/
7. https://coindiligent.com/2020-bitcoin-halving-facts
8. https://medium.com/in-bitcoin-we-trust/3-scenarios-for-bitcoin-price-whe... urs-in-may-2020-1332729acf74
9. https://stephanlivera.com/episode/162/
10. Regulating Blockchain: Techno-Social and Legal Challenges. Edited by Philipp Hacker, Ioannis Lianos, Georgios Dimitropoulos, Stefan Eich. Oxford University Press, 2019.

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