Bitcoin’s third halving: The good story ends, what next?

A few days ago, Andreas M. Antonopoulos, the most well-known Bitcoin evangelist in the foreign Bitcoin circle, introduced the Bitcoin halving code in his Youtube video.

It’s the picture below.

According to OKLink, these lines of code were just executed at 3:23 am on May 12, 2020. In the past 11 years, Bitcoin, whose market value has risen from zero to 160 billion US dollars, has just completed its third halving in history.

The so-called halving does not refer to the change in the total amount of Bitcoin, but the change in Bitcoin's production capacity.

The Bitcoin network is connected by blocks, and each block contains a certain amount of Bitcoin as a reward. According to the rules of the Bitcoin network, the number of Bitcoin rewards will be reduced by half every 210,000 blocks. Because the interval between each Bitcoin block is about 10 minutes, the interval between 210,000 blocks is about 4 years.

Initially, each block had 50 bitcoins as a miner reward. After the first halving on November 28, 2012, the bitcoin reward in the block became 25, and the second halving on July 10, 2016 reduced it to 12.5. Just now, the bitcoin reward per block in the network has been reduced to 6.25.

Image source network

An interesting phenomenon is that BlockBeats asked some old Bitcoin players who had experienced the first and second halvings how they felt about the critical time node of halving and the expectations of the industry at that time. Their answers were almost the same: "Nothing left a deep impression on me."

Obviously, the halving was not an event worth paying attention to in 2012 and 2016. The halving is just a few lines of code, a dynamic adjustment in this economic system to ensure the sustainability and non-inflationary characteristics of the system.

But this year's third Bitcoin halving was unprecedented.

This year's industry theme: "Reduce"

If the cryptocurrency industry were to choose a keyword for this year, “reduction” would definitely be the top candidate. The preheating for Bitcoin’s halving has continued from the beginning of the year to now.

In the codes of dozens of projects, large and small, such as BCH, BSV, ETC, DASH, etc., 2020 is a node, the output will either be halved or reduced, and there will definitely be changes in the supply.

Under the guidance of "reduction", the industry has derived a new way of playing: destruction. For example, the PoS project originally decided to reduce the issuance ratio this year; the platform currency originally decided to destroy a large proportion of the total number of tokens this year; and some PoW projects even directly halved the total number of tokens.

Regardless of the method, everyone’s idea is the same, which is to “reduce”, reduce the supply, and use the Bitcoin halving, a once-in-four-years time node and topic, to increase exposure and hype for themselves.

As the Bitcoin halving approached, the theme of "reduction" also reached its peak. On May 11 and May 12, there were 11 events related to the halving, including text live broadcasts in the community, video live broadcasts on the platform, and more than ten hours of non-stop activities, just like the Chinese New Year.

At this time, even mining seems different. According to the plan, the first block of halving is at a height of 630,000, and the block at a height of 629,999 mined by F2Pool contains the headline of the New York Times on April 9, "NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue", which pays tribute to Satoshi Nakamoto's front-page headline of the Times, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" written in the Bitcoin Genesis Block in 2009.

In 2009 and 2020, similar macro environments and similar national measures were recorded on the same network. Especially compared to the first two halvings, which only left some personal emotional memories on the blocks, the third halving and the high inheritance of Bitcoin’s creation brought everyone’s enthusiasm to the highest point.

The source of everyone’s enthusiasm is naturally the potential wealth effect brought about by halving.

From the historical data, halving is indeed somewhat related to the price of Bitcoin. In more than a year after the first halving, the price of Bitcoin rose from $12 to a then-all-time high of $994. In a year and a half after the second halving, Bitcoin rose from $650 to $19,500, which is also the current all-time high.

Therefore, everyone is willing to believe in the effect of the third halving and is willing to look forward to the price of Bitcoin after the halving.

Even the official account of CCTV Finance published an article on May 10 titled "Another surge! Bitcoin price once exceeded 10,000 US dollars." The article started with the Bitcoin halving, reminding people to pay attention to the connection between Bitcoin halving and price.

However, the halving is not directly linked to the secondary market, and the group with the greatest stake in the halving is still the Bitcoin miners.

The three halvings and Bitcoin mining

When the first Bitcoin halving occurred, Bitcoin was still a wild world and miners were mostly doing "homework". For Bitcoin enthusiasts, discussing "whether halving is the best way to control inflation and whether it marks the end of Bitcoin" are two more important topics than "whether halving can bring about a bull market."

The success of Bitcoin’s first halving proved its strong vitality. Four years later, Bitcoin ushered in its second halving. At that time, many mining machine manufacturers such as Bitmain and Canaan Creative had successively developed ASIC mining machines, and specialization and scale gradually became the mainstream.

Miners who enter the market for profit are indeed more concerned about the bull market that may be brought about by halving. However, due to the production capacity of mining machines at the time and the relatively stable price of Bitcoin, the second halving did not have much impact on miners.

“I started paying attention to mining at the end of 2016. At that time, the price of BTC was rising, and miners were living a relatively comfortable life. Mining machines were in short supply and even had to be pre-ordered. It was at a stage where you could make a profit if you bought one.” Chen Hua, founder of Spider Mining Pool, told BlockBeats. With this halving, the entire Bitcoin mining ecosystem has undergone major changes.

First, the volume of the first two halvings accounted for a relatively large proportion of the entire market, but the third halving, calculated by the inflation rate, is relatively small, so the impact of the halving factor on the market may be more reflected in investor expectations; secondly, the computing power of the entire network has increased significantly with each halving compared to the previous one. "In 2016, the market was not so cruel. I expect that 30% of the computing power (mining machines) of the entire network may be temporarily stopped this time."

Miners with insufficient funds will be the first to be cleaned out, while miners who are prepared have already taken action.

Among the miners Chen Hua has contacted, some had already hedged when the price of Bitcoin rose to US$10,000 two days ago; some had bought double-limit insurance of call and put options, and some had even sold some Bitcoin before, all in order to reduce the uncertainty of income.

Not only miners are affected, but also mining pools. After the halving is completed, since mining pools charge a certain percentage of service fees based on output, the income of mining pools will also be halved. "For our mining pools, it is actually quite unhappy, but this is the law of Bitcoin, and we just need to respect the law."

Yang Zhou, CEO of PayPal Finance, the largest lending company in the industry, expressed the same view, "Miners are hedging against uncertainty."

The uncertainty faced by miners is actually a microcosm of the crypto industry this year.

In the first two halvings, the cryptocurrency industry had not yet prospered, and most players were still only trading Bitcoin spot. However, after the historic bull market in 2017, the secondary market derivatives of cryptocurrencies are abundant, and derivatives such as spot leverage, futures contracts, and options have become standard features of mainstream trading platforms. The industry ecology and scale have long surpassed the first two halvings.

If Bitcoin still had the attributes of "digital gold" and "value storage" during the first two halvings, then during the third halving, Bitcoin has completed the transformation of commodity attributes. This also makes Bitcoin the commodity with the highest yield among all commodities this year.

Therefore, the secondary market analysis of Bitcoin can no longer focus solely on the cryptocurrency market. The price of Bitcoin is no longer independent. It is necessary to consider U.S. stocks, oil, and changes in the global secondary market to determine the trend of Bitcoin.

In a sense, the first two halvings were the execution of system code, and the third halving was the first major time node in the cryptocurrency industry. This is why the third Bitcoin halving has received such high attention.

Bitcoin after halving

Of course, the price of Bitcoin after halving is what everyone is most concerned about, but it is difficult for us to accurately predict the price.

After the halving was completed, according to the OKEx trading platform, the price of Bitcoin was around US$8,500, with a slight increase, and still maintained the high volatility before the halving.

William, chief researcher of OKEx Research, said that in the medium and long term, the price of Bitcoin will rise due to two factors: first, the decline in the growth rate of production after the halving will lead to slow growth in the supply of Bitcoin, while the demand for Bitcoin is rising. When the increase in the supply of Bitcoin cannot keep up with the demand of new funds, the price of Bitcoin will rise; secondly, with the implementation of monetary easing policies by major central banks around the world to save the market, the nominal price increase of various assets around the world is inevitable, so the price of Bitcoin will also rise in the future, but due to the time lag of monetary policy, this effect will only be apparent in the medium and long term.

He believes that in addition to the impact on Bitcoin prices in the medium and long term, the most direct impact of this halving is to raise the mining cost of Bitcoin. Many small mining companies will be forced to shut down old mining machines, and may withdraw from the mining industry because they cannot afford the high cost of new mining machines. On the other hand, in order to cope with the halving of production, miners have to upgrade their mining machines and have higher performance and efficiency requirements for mining machines. For mining equipment manufacturers, whoever takes the lead in technology first will occupy more market share, and the upstream mining machine market structure may also change.

Regarding the issue of supply and demand, on May 9, Willy Woo, the originator of the Bitcoin NVT valuation model, put forward a very interesting point of view. He believes that after this halving, trading platforms will replace miners and become net sellers in the market.

He listed the data, before the halving, miners mined 1,800 bitcoins a day, after the halving, miners can only mine 900 a day, while the daily fee income of trading platforms is 1,200 bitcoins, which is more than the miners. In order to pay for operating costs, these trading platforms will definitely sell this part of bitcoin to the market. Therefore, compared with miners, the biggest bearish pressure on the future crypto market is likely to come from these platforms.

This point of view is very interesting. In other words, the supply side of Bitcoin has changed after the halving, which may affect the subsequent trend of Bitcoin.

But we also need to understand that the value of Bitcoin is not simply based on changes in supply and demand. Its value is the story.

People are willing to believe that this currency that is not backed by national credit can tell a perfect story. The more people believe in it, the greater the value the story carries, just like people believe in gold and diamonds.

The story of halving has come to an end for now. Let us look forward to the good stories that will happen to Bitcoin in the next four years.

*BlockBeats reminds all investors to guard against the risk of chasing high prices. The views expressed in this article do not constitute any investment advice.