In this post we conduct a thorough analysis of Bitcoin’s pre-and-post halving price performance, as many references are being made about it in the media, and we want to get the facts straight.
We had conducted an observation of Litecoin’s pre-and-post halving price performance sometime over a month ago, and at the time had also made an observation about Bitcoin.
At the time we had come across articles claiming it was a great opportunity to buy Litecoin, although since it was already so close to the halving date, we had warned readers to be extremely careful as it was already too late.
We had observed that Litecoin was likely to be experiencing a classical pump and dump, and therefore anyone buying Litecoin so close to the halving date should think twice.
As a matter of fact from the day of the halving event on 5th August to date, the price of Litecoin is down by approximately 30%.
This analysis is purely focused on Bitcoin.
We analyse the price performance of Bitcoin during the previous two halving events, focusing on the 12-month price performance in run up to its previous halving events as well as the 12-month price performance after the halving events occurred.
What are the Bitcoin halving dates?
The first halving of the Bitcoin block reward occurred on November 28th, 2012 and the second halving occurred on 9th July, 2016. The next is expected to take place on 16th May, 2020.
How is the Bitcoin halving period calculated?
Bitcoin’s block rewards halve as soon as 210,000 blocks are mined and successfully added to the Bitcoin blockchain. That implies the halving occurs approximately every 4 years since it takes around 10 minutes to mine each Bitcoin block.
The math is as follows:
Bitcoin halving period: 210,000 blocks x 10 minutes per block / 60 minutes per hour / 24 hours per day / 365 days per year = 4 years.
Based on the chart above, we note the price changes of the second halving event are smaller when compared to the performance of the first halving for the same time period. This could be due to the increasing supply of Bitcoins (and the Bitcoin inflation rate).
What do you we mean by Bitcoin inflation rate?
The Bitcoin inflation basically refers to the new supply of Bitcoins flooding the market every 10 minutes. You may observe the Bitcoin inflation rate diminishing over time in chart below.
How is this possible? It all has to do with the block reward. Before the first halving occurred, miners were receiving 50 BTC approximately every 10 minutes, then after the first halving miners received 25 BTC every 10 minutes. On the halving that took place on 9th July 2016, the block rewards fell to 12.5 BTC and in May 2020 will drop to 6.25 BTC.
So how is the Bitcoin inflation rate calculated?
When the initial block rewards for miners was 50 BTC there were 7,200 new coins created daily. This fell to 3,600 new coins daily when the block reward fell to 25 BTC, and currently it is 1,800 new coins daily (based on 12.5 BTC).
When summing all of the coins minted over the last 10 years, we get approximately 17,925,888 Bitcoins in circulation (circulation supply) today.
And from today until 16th May 2020 there will be a further 450,000 new Bitcoins created.
On 16th May 2020, the block reward halves to 6.25, so that means there will be a further 105,000 Bitcoins created from the halving date to 10th September 2020 (one year from today).
That means that from today until 10th September 2020 there will be approximately 555,000 (450k+ 105K) new Bitcoins created.
The math is as follows:
Bitcoin inflation rate calculation: 555,000 new Bitcoins created over a year /17,925,888 today’s total circulation supply of Bitcoin =3.1% Bitcoin inflation rate.
We can see from the chart above the Bitcoin inflation rate declining from around 35% on 28th November 2012 (first halving) to 9.4% on 9th July 2016 (second halving). Currently the Bitcoin inflation rate is around 3%-4%.
What does the inflation rate and circulation supply have to do with Bitcoin’s performance?
1) We note the pre-and-post price performance in the second halving event was less pronounced than the first halving event. The delta (or price change) may have been less pronounced (or more muted) in the second halving because of the increase in the supply of Bitcoins. The chart below shows the increase of Bitcoin’s circulation supply over time.
2) We observe the price performance of Bitcoin has been the least bullish during the 3-month period preceding the halving dates and the 3-month period after the halving events, with the price actually dipping slightly during the second halving.
3) We also observe that the pre-and-post price performance of Bitcoin has been the most bullish during the 6-12 month period preceding the halving dates and the 6-12 month period after the halving dates.
We note it is impossible to make any statistically significant observations with only two previous events to base our analysis on.
However, if we assume that history will repeat itself again, the price of Bitcoin over the next year and a half is very likely to be much higher than it is today – and that may at the very least help to dispel some of the bearish bias surrounding Bitcoin at the moment.
At the same time we warn anyone expecting a 3x price increase to tread carefully as we anticipate price gains to be even less pronounced than those witnessed around second halving event.
In the meantime, you may read our previous post concerning the pre-and-post price performance of Litecoin’s halving here.
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