Halving Aftermath Points To Rosy Future For Price Of Bitcoin
So, ‘The Halving’ came and went and, as I anticipated a couple of weeks ago, it was not exactly earth-shattering for Bitcoin. The price did drop slightly as a result of a somewhat predictable ‘buy the rumor, sell the fact’ kind of pattern, but the drop was well within the range of normal for the volatile currency. From a price perspective, the fact that there was a drop at all is actually quite interesting, and would seem to set up BTC for a sustained period of gains.
Logically, according to basic economic theory, the halving should result in an increase in price. After all, its very purpose was to reduce the rate of supply of coins and economics 101 tells us that, all other things being equal, a reduction in supply leads to an increase in price.
With Bitcoin, though, it is not quite that simple. The rate of supply is controlled by the reward offered to miners for ‘discovery’ of bitcoin by solving complex computing problems. In this case, the reward for discovering one block was cut from 25 bitcoin to 12.5, but there are two ways for miners to make up for that cut.
One is by way of a price increase, which would conform to conventional economic theory as supply is reduced, but the other is by reducing the cost of mining. For that to happen, what is known as the ‘hash rate’ will have to fall. At the risk of oversimplification, the hash rate can be thought of as a measure of the difficulty of problems that must be solved to discover a block, and therefore get the Bitcoin reward.
This post was published at Nasdaq on July 21, 2016,.