On May 11, 2020 Bitcoin’s block subsidy will halve to 6.25 BTC. As the daily production will decrease from about 1,800 BTC to 900 BTC, many observers are speculating on the halving’s impact on the Bitcoin exchange rate.
When Bitcoin was published in 2009, the protocol came with a fully fledged inflation schedule. With each block, the authoring miner gets to mint a limited amount of new bitcoins. This block subsidy doubles as the initial distribution mechanism of the Bitcoin supply and as incentive for the network to bootstrap itself. In addition to the block subsidy, the block reward includes the fees collected from transactions confirmed in a block.
Bitcoin’s inflation schedule follows two simple rules:
- The initial subsidy was 50 BTC per block
- The subsidy halves every 210,000 blocks
While Bitcoin’s production rate was inspired by that of precious metals, it is arguably even more strictly limited. Bitcoin’s total supply will remain just below 21,000,000 Bitcoins forever, enforced by the protocol rules and social consensus of the Bitcoin network. On the other hand, as humans continue to innovate, new gold reserves and methods to extract it continue to be discovered, increasing gold supplies.
At the expected block interval of 10 minutes, 210,000 blocks translate to about four years. Bitcoin recently celebrated its 11th birthday, putting us into the third subsidy era. The first era ended on November 28th, 2012 when the subsidy was reduced to 25 BTC starting with block #210,000. Attempts to keep the 50 BTC block subsidy indefinitely were rejected by the network. The second halving dropped the production to 12.5 BTC per block on July 9, 2016. The upcoming third halving expected on May 11, 2020 will limit miners to mint only 6.25 BTC starting with block #630,000.
Due to the halvings, the subsidy eras form a harmonic series in which each adds as many new bitcoins as all future eras in sum. The first era fielded 10.5m bitcoins, the second era added another quarter of the total supply with 5.25m bitcoins, and the end of the third era will see seven eighths, or 87.5%, of all bitcoins in circulation.
Some believe that the halving will be a non-event, others argue that the sudden supply drop may drive the price to new heights. Either way, Bitcoin will be going through a “quantitative hardening” contrary to the macro trends.
While it is hard to pin price movements of a decentralized currency to specific events, the first and second halving were followed by significant increases in Bitcoin’s exchange rate. In the lead-up to the first halving in November 2012, the Bitcoin price rose from $2 to $12. A few months later it briefly peaked at $266 in April 2013 before settling in the $100 range. Another speculation bubble in November 2013 took the Bitcoin price temporarily beyond $1,000.
The second halving was preceded by a comparably modest run-up from $450 late in May to $770 in mid June. By halving day, July 10, 2016, the price had corrected to about $645. However, a month later, a 17-month bull trend began that eventually culminated just shy of $20,000 in December 2017.
Regardless of whether you side with the bears or bulls, the 2020 Bitcoin halving is widely expected to draw a lot of attention to the Bitcoin market.