Bitcoin halving is approaching fast. It’s scheduled for May 2020. That is just under 110 days. Halving is when block reward for mining a block reduces to half. This happens every 4 years and it has a mega affect on the over-all economics of Bitcoin. Let me explain.
Roughly every 10 minutes, a Bitcoin block is mined. The miner or the pool of miners that mine the Block, a process needed to protect the Bitcoin network and confirm pending transactions, get rewarded for mining the block. At inception, this reward was set to 50 Bitcoins per block. 50 Bitcoins were given away as a reward to miner every 10 minutes. This reward reduces to half every 4 years. Right now it’s 12.5 Bitcoins per block. This reward will reduce to 6.25 Bitcoins per block in about 100 days.
How does halving affect Bitcoin? What is it’s significance? At the time of writing, an average miner spends approximately $5,000 in hardware and utilities to mine 1 single Bitcoin. The miner is then able to sell this Bitcoin at a premium in open market at about $8,300 which is what the Bitcoin is worth right now.
Almost always the open market rate is higher than the miner’s cost. If the open market rate gets lower at some point, the miners will not be able to protect the Bitcoin network and confirm transactions profitably. Which means some of the miners will discontinue their operations at that point. But the miners are also likely to stop selling Bitcoins below the cost hence miners in a way set the floor pricing for Bitcoin as well.
As the block reward halving happens in the coming weeks, the cost to mine 1 bitcoin will instantly jump from $5,000 to $10,000. As that happens, the open market rate is likely to float above the cost of mining. Add premium to that and we could see Bitcoin trading consistently above $10,000 may be even $15,000.
However, if the open market price is unable to catch up, some of the miners will withdraw operations to cut losses reducing mining difficulty, and pulling the price further down.
Where does Bitcoin get its value from? It is an ever confusing question with no single correct answer because Bitcoin means different things to different people. Some say the scarce fixed supply which makes it rather rare to own is what gives it value. Some say the value comes from the event of halving of mining reward every 4 years making it even harder to obtain. And then there is bitcoin mining cost incurred due to computational power and electricity bills to keep the bitcoin network secure, which sets the floor selling price for the trading market. The average cost to mine 1 bitcoin at the time of this writing is $5,200. I think the value comes from all of above, and more.
In 2013, we had a large scale influencer marketing business running. We worked with 300 influencers and used their social media’s influence to drive traffic to content websites and e-commerce stores. The problem was it was difficult to run this business from Pakistan. Influencers were spread in different parts of the world. We had to make weekly payments (300 x 4 = 1200 transactions a month) to stay competitive in business and the banking infrastructure in Pakistan wasn’t just easy to run this kind of business at least in an automated manner.
While speaking of these issues at a conference in Mountain View, CA , I got advised by someone who had come from Germany to attend the conference. He asked me why do I not use Bitcoin to solve this payment crisis. That was the first time I heard of Bitcoin and had no clue what it meant. After looking it up on Google, I was blown away by the value this new invention offered.
Although we never used Bitcoin to solve that payment crisis, it made me believe that the value of Bitcoin also comes from utility like the one mentioned above. It solves a problem and that’s also Bitcoin’s value proposition.
Will Bitcoin trade above $100,000? I think so. Can I be wrong about this? Absolutely. I think there is a higher chance of me being wrong than right. Despite that, it still makes it an interesting risk/reward play.
Disclaimer: This is not an investment advice and should not be taken as one. I accept no responsibility for any loss, damage, cost or expense incurred by you as a result of any error, omission or misrepresentation on this site.