With the exception of May and June, 2019 has been a rather uneventful year for Bitcoin and the entire crypto universe. Bitcoin has been trading sideways-to-lower following its price peak on 26 June (see Chart #1 below). Cryptocurrencies need some type of event to serve as a catalyst for kick-starting a new bull market. It wasn’t the launch of Bakkt, so could it be the next Bitcoin halving?
The Next Crypto Bull Market
Many traders and investors within the crypto community expected the recent launch of Bakkt to generate a new wave of buying pressure for BTC and other cryptocurrencies. However, buying never materialized. In fact, Bitcoin is much lower today in comparison to the Bakkt launch date on 23 September (see Chart #2 below).
What will it take to unleash a new crypto bull market? Many cryptocurrency traders are convinced that the next Bitcoin halving in May 2020 will create a powerful new bull market. But what is Bitcoin halving and why could it generate a new run? Let’s explore the details.
Bitcoin Halving Has a Perfect Track Record for Launching Bull Markets
Arguably, Bitcoin’s greatest feature is the fact that Satoshi Nakamoto only created 21 million coins. There will never be more than 21 million bitcoins in circulation. It was pure “genius” for Nakamoto to strictly limit the supply of BTC. This is what separates BTC from fiat currencies. Without having a limited amount of bitcoins, cryptocurrencies would be no better than paper currencies.
BTC and other cryptos would eventually become worthless in terms of purchasing power. Of course, this is exactly what has befallen fiat currencies. Their purchasing power has slowly eroded over the course of the past several decades. By restricting the number of bitcoins, cryptocurrency investors will never have to deal with this decline in purchasing power. This is what makes cryptocurrencies an excellent store of value.
As you know, bitcoins are entered into circulation through the process of mining. Essentially, BTC mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. Added together, these past transactions create a chain of blocks, known as a blockchain. Miners are rewarded when a new block is discovered. Currently, the reward is 12.5 BTC.
In addition to limiting the number of bitcoins to 21 million, Nakamoto made a brilliant decision to gradually reduce the mining reward as new bitcoins were added into circulation. The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 210,000 blocks, which should occur approximately every four years. Ultimately, this will result in a total of 21 million bitcoins in circulation.
The Importance of Capping Bitcoin’s Supply
Why was Nakamoto’s decision to reduce the mining reward such a brilliant decision? Because it dramatically increases the odds of a steady increase in the price of Bitcoin well into the future. A reduction in the BTC mining reward is known as a “Bitcoin halving.”
Whenever a halving occurs, it automatically reduces the BTC mining reward by 50%. As discussed earlier, the current Bitcoin mining reward is 12.5 bitcoins for the discovery of a new block. The next Bitcoin halving is scheduled for May 2020, when the mining reward will be cut in half to 6.25 BTC.
What has happened to the price of BTC during previous Bitcoin halving occurrences? Let’s examine the data.
BTC Price After Bitcoin Halving
The first Bitcoin halving occurred on 28 November 2012, when the mining reward was reduced to 25 bitcoins. At the time of the halving, the price of BTC was approximately $11. Over the course of the next 12 months, Bitcoin enjoyed a dramatic bull market. BTC reached a peak of $1,135 on 29 November 2013.
This represents an amazing price increase of 10,218%.
The next Bitcoin halving occurred on 16 July 2016. The mining reward was reduced to 12.5 bitcoins per block. What happened to the price of BTC following the reduction in the mining reward? Initially, nothing.
In fact, for several months after the mining reward was reduced, BTC was locked in a boring trading range between $500 and $800. The trading range continued for five months, July through December 2016.
Many traders in the crypto community began to doubt their bitcoin trading strategies and whether the 2016 halving would generate a substantial rally similar to the 2012 halving. Finally, on 21 December 2016, BTC generated a bullish breakout, when the price penetrated $800. The halving rally was underway!
Bitcoin exploded to the upside throughout the next 12 months. The final top was obtained on 18 December 2017 @ $19,862. In percentage terms, BTC enjoyed a rally of 2,847%. Please review the following table.
Will the May 2020 Bitcoin Halving Unleash a Bull Market?
Of course, it’s impossible to predict the future direction of any speculative asset. However, based on previous Bitcoin halving occurrences, it’s fairly safe to assume that BTC will generate some type of rally following the May 2020 halving. Let’s attempt to calculate an educated guess regarding the size of the rally.
Unfortunately, we only have two previous Bitcoin halving episodes. Therefore, our data sample is very small. Let’s assume that BTC is trading near its current price of $7,400 in May 2020. Given the fact that BTC is trading at a substantially higher price compared to the 2012 halving and 2016 halving, it’s highly unlikely that Bitcoin will enjoy such a dramatic percentage price increase for the May 2020 halving.
In fact, you can see that there was a dramatic reduction in percentage gains in 2016 versus 2012. Bitcoin’s gain from the 2016 halving was 72% less than the gain from the 2012 halving.
In an attempt to calculate a price forecast for the upcoming May 2020 halving, let’s assume that the Bitcoin halving rally will be 72% less than the 2016 halving rally. If we use these numbers in our calculation, we can conclude that BTC will enjoy a substantial gain of 797%.
Based on a price of $7,400, Bitcoin will reach a peak of $58,978 within 12 to 18 months from May 2020. Therefore, the price peak will occur between May 2021 and November 2021.
Of course, nobody should take these forecasts too seriously. Several things can change within the crypto universe before May 2020. Additionally, there is absolutely no guarantee that Bitcoin will rally following the May 2020 halving. There is no rule which says that BTC must rally following each halving.
However, given the fact that the BTC mining reward will be cut in half, it’s probably safe to assume that there will be at least a modest rally. Without question, it will be very exciting to watch the price of Bitcoin as we approach the May 2020 halving.
Full Disclosure: I own BTC on the spot market, BTC futures and BTC exchange-traded notes.