In a little, less than 10 months from now, an event that has perhaps been the most significant throughout the price history of Bitcoin and cryptocurrency as a whole is occurring: the Bitcoin halvening.
Although Bitcoin’s price has typically not been directly affected at the exact point that halvenings have occurred in the past, the 4-yearly anti-inflationary mechanism designed by Satoshi Nakamoto has consistently acted as a reliable marker for impending new all-time highs within the following 12-18 months after the event.
Now as we begin the countdown to the 3rd Bitcoin halvening in May 2020, crypto analyst, PlanB, has released the details of a stock-to-flow prediction model he’s developed that clearly shows the coincidence of all-time highs in the Bitcoin price 1 year after each previous halvening.
What makes this model stand out is that it has historical accuracy against the price of Bitcoin at a predictive confidence level of 99.5%. If this model remains accurate throughout the coming 24 months, the implications are truly staggering; a new all-time high Bitcoin price of $100,000 at the end of 2021, increasing to levels of $1 million per BTC by 2025.
In this article, we’ll take an in-depth look at what the Bitcoin halvening mechanism is, how an understanding of Bitcoin price fluctuations over time can make you a better crypto investor, and what the road to a $1 million Bitcoin by 2025 will look like.
What Halvenings Are & How They Impact Mining Revenues & The Price of Bitcoin
When Bitcoin’s creator(s), Satoshi Nakamoto, was designing the way that Bitcoin would be distributed they decided to implement a system called ‘Proof of Work’ (PoW). PoW allows for the decentralized control over who would get newly minted coins and to incentivize users to help secure the Bitcoin network by validating transactions.
Users could connect their computers to the Bitcoin network and run a program that allowed them to compete in a cryptographic competition against other users. The system was designed to ensure that roughly every 10 minutes one user that is competing, or ‘mining’ for Bitcoin, will be rewarded as a way of recuperating the costs of equipment and electricity and to be incentivized with additional profit.
However, Satoshi realized that an economic system that did not manage inflation effectively would be doomed to fail and that using mechanisms to ensure that investment earlier would lead to significant profits later was key for the long-term success of Bitcoin.
One such mechanism that they implemented is the reduction of the reward given to winning miners by 50% every 210,000 blocks, or 4 years approximately, known as a ‘halvening’.
When the Bitcoin blockchain launched in 2009, the reward for mining a new block amounted to 50 Bitcoins, which in May 2012 reduced to 25. Within 18 months of that event, two major bull runs ended with new all-time highs of $260 in April 2013 and $1,127.20 in December 2013.
2016’s halvening saw the reward reduced to 12.5 BTC, and the start of the now world-renowned bull run of 2017, that ended with the current all-time high price of $19,891 per Bitcoin in December 2017 occurring roughly 18 months following that event. On May 2nd, 2020, the next halvening will take place, with the mining reward dropping from 12.5 BTC down to 6.25 BTC.
As can be expected, Bitcoin miners are impacted by the reward they receive decreasing by 50%. The cost of running a Bitcoin mine, especially large scale facilities, can be significant. Strangely, however, against what would be expected, the hash rate remained fairly stable during the last halvening in 2016.
During the 12 month period following the halvening, miners will be receiving 50% of the reward they were getting previously. The explanation for how and why miners could continue to operate profitably following halvenings may simply come down to their understanding of the intrinsic connection between each halvening and the bull run to follow.
Invest Better in Bitcoin by Trading With the Halvening Cycles
Today we are 289 days away from the next Bitcoin halvening. Interestingly, if long positions were placed 289 days before the first halvening on Nov 28th, 2012 and the second halvening on July 9th, 2016, and those investments were liquidated at just 50% of the total potential maximum price within the following bull runs, they would have yielded ROIs of 4,437% and 1,450% respectively.
Conversely to this, many new traders only started paying attention to Bitcoin prices when they saw extensive media coverage during the tail end of the 2017 bull run and suffered significant losses as a result of not using the halvening bull and bear cycle to their advantage.
If the accuracy of PlanB’s model continues to hold up throughout the next halvening and bull run, the point we find ourselves today may present traders with strong margin trading opportunities also. With that model showing a 99.5% statistical confidence rate that from now until the end of 2021 Bitcoin’s price will be moving upwards, leveraged long positions would be particularly attractive if suitable entry points can be found.
Bitcoin margin trading platforms such as PrimeXBT and BitMEX offer 1:100 leverage on Bitcoin, and where the returns of naked long positions over a coming bull run would still be significant, ROIs with high leveraging placed as we are coming up to a halvening are particularly strong opportunities.
The trend to margin trade has grown considerably since the beginning of 2019 as confidence has returned to the crypto market and traders have adopted more advanced strategies as it has become more favorable to do so. Also, the influx of traditional investors who are well accustomed to margin trading has added to this growing trend.
Furthermore, margin trading presents a way to continue to profit irrespective of the market’s movement by going long or going short – depending on whether it is rising or falling. This means at the tail end of the next bull run, shorting with leverage at Bitcoin’s peak could lead to further astronomical returns as the price corrects again (as shown in this example – Short Selling with Leverage).
Beyond the upcoming Bitcoin halvening, there is a great deal of positive sentiment surrounding Bitcoin and cryptocurrency in general with a number of significant events occurring, including Facebook’s Libra, ETF announcements, and Bakkt to name a few.
Furthermore, based on the stock-to-flow prediction model and the relationship between scarcity and market value that clearly exists, it is fair to assume that the Bitcoin market is gearing up for its next all-time high. However, only time will tell and we will only know for sure one or two years after the halvening in 2020.
Regardless, there is much opportunity to profit in the meantime as institutional investors boost the crypto market as they increasingly discover the best performing asset of the last 10 years.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.