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BTC · 5w

The Economics of Halving: What Will Happen to the Price?

Bitcoin is circling $10,000 again, and of course, you are wondering what will happen next. 2020 is a special year for Bitcoin in many ways. One of them is even written by Satoshi Nakamoto himself into its DNA — yes, the halving. The next halving is estimated to occur on 12 May 2020, so let’s take a closer look at what will happen afterwards.

There are many theories about what halving does to price, and most have some reasonable basis in economics. Although they often do not speak about it explicitly, they point to changes in the supply and demand side. Economists like this simple model. If we expect a decrease in supply or an increase in demand, Bitcoin should grow. Let’s together economically dive into halving and see why Bitcoin should — or shouldn’t — rise to new all-time highs.

Supply: Bitcoin Inflation Falls to 1.8%

That’s the whole principle of halving. Instead of 12.5 BTC, the reward is halved in May 2020 to 6.25 BTC. Only about 900 coins will be created every day instead of the current 1800. The annual increase to the total Bitcoin money supply will thus fall by more than half to 1.8%.

To compare it with something we know better, in 2019, money supply growth in the United States was 5.15%. Over the past 50 years, the US dollar has managed to fall below two percent only in 1993 and 1994.

Of course, someone may argue that many bitcoins are lost, so inflation is actually higher. If all the lost or unspendable bitcoins represent one-fifth of the overall supply, the actual BTC inflation is around 2.25%. That would change almost nothing in comparison to the US. We would just have to add one year on each side of 1993–1994 (meaning 1992 and 1995) where dollar inflation was lower than 2.25%.

In other words, Bitcoin already has little monetary inflation, which will drop even further.

And what does it mean economically? Fewer new bitcoins mean reducing supply growth. Miners now spend part of the newly mined bitcoins or se...

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