In May 2020, Bitcoin is scheduled to have its third halving, an event that will reduce production of the digital currency by 50%. While the Bitcoin network has experienced two halvings already, in 2012 and 2016, market participants are paying keen attention to this upcoming event to see whether it turns out differently.
The digital currency markets have changed over the years, attracting a more diverse group of participants and benefiting from a steadily evolving regulatory environment. As for why this latest halving may be different, market observers are focused on a handful of key considerations.
The Halving Explained
Approximately every four years, the Bitcoin network undergoes a halving that results in the mining incentive, which is the reward that miners receive for mining blocks, being reduced by 50%. When the 2020 halving takes place, the mining reward will be reduced to 6.25 BTC, down from its previous value of 12.5 BTC.
How Is The 2020 Halving Different?
One major reason the halving may be different this time is that the digital currency markets have become more mature over time. Arthur Vayloyan, who is both CEO and a board member of financial services firm Bitcoin Suisse AG, spoke to this during an interview with CNN Money Switzerland.
"We have seen a major change in the participants," he said in regards to the people and organisations involved with the crypto industry. "Before, it was the interested technical people with a high affinity to something new. But more and more we see now institutionals [sic] coming in — be it the banks, be it the central banks even. And they look at the technical opportunity that stands behind the crypto technology."
"I think, after ten years, it's fair to say that it has reached a fair level of maturity," said Vayloyan when describing the Bitcoin market. "And maybe the best gauge I can give: looking at the institutionals [sic] — those who have assets from their clients — they have an extra fiduciary responsibility to look at it. And they come in and look at it and do things."
Another sign of the crypto market's continued progression is the interest of central banks. Several of these financial institutions are working on creating their own digital currencies, which would be fiat currencies (for example, the U.S. dollar) issued in digital form.
How Will The Halving Impact The Markets?
The last two halvings have been followed by compelling gains, as the price of Bitcoin climbed sharply in the year after these events. This time around, market experts have differing views on whether the halving is already priced into the markets.
Many investors have already prepared for the event, so they have probably priced in this particular halving more than the previous ones, according to a Reuters survey gathering responses from seven crypto traders and miners.
The Reuters poll participants also predicted that the event would likely result in more robust trading activity and heightened volatility. One development that is portending higher volatility close to the time of the halving is the markets for Bitcoin derivatives, according to Jeff Dorman, chief investment officer of financial services firm Arca.
Many crypto traders are paying close attention to the 2020 halving because they want to see whether it ends up being different from prior halvings. The digital currency markets have evolved over time and drawn a more diverse group of interested parties. Retail investors, financial institutions and even central banks have taken an interest in digital currencies, and now central banks around the world are working on creating digital fiat currencies.
After the first two halvings, in 2012 and 2016, the digital currency experienced some notable upside. As for whether investors have already priced in the 2020 halving, analysts have offered mixed responses, with a Reuters survey finding that many market participants are prepared for the event.
Past performance: Past performance is not an indicator of future results.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…