Trading bitcoin has proved to be more challenging than trading stocks – that was my hard-learned lesson of 2018. While I managed to make a couple of thousands, I held onto the most of my bitcoins, encouraged by the rally in 2017. Now, just like other Bitcoin enthusiasts, I am stuck in the “HODL” zone, not ready yet to let go and move on. However, there is still hope that BTC will rebound soon – as the next “halving” date is not far away.
As a part of my Minimalist Finance initiative, I am currently reevaluating some of my investments and financial tools. This includes Bitcoin, which I have been trading since 2017. My initial plan was to sell all my bitcoins and write off the losses. Thanks to using Gemini I can even report those losses in my tax return to offset some of my gains. However, after careful consideration, I decided to hold for another year and a half and hopefully, recoup my losses. In this post, I describe the reason behind this decision.
Bitcoin Supply 101
Bitcoin is a decentralized currency with a finite supply. Over the entire lifecycle, only 21 million coins are to be released in total. Every time a new block is discovered (mined) and added to the network, the miner is rewarded with bitcoins. That’s how bitcoins come into the world (“minted”), gradually increasing the total available supply of the coins.
Initially, this reward was set to 50 BTC, but in 2012 it was reset to 25 BTC, and in 2016 it went down to 12.5 BTC per block. This event is known as “halving” and is hardcoded to happen approximately every 4 years. To control the growth of supply, bitcoin code explicitly states that every 210,00 blocks, the supply of new coins is to be cut in half.
As soon as the number of halvings exceeds 64, the minting will stop completely.
Effects of Halving on Trading Bitcoin
Halvings have a direct effect on trading bitcoins: as the production of the bitcoins slows down, the demand grows (or at least stays the same). As a result, the valuation of bitcoin is going up. This chart from CoinDesk summarizes this trend nicely:
Here’s your #bitcoin halving and price guide.
– 1st halving (11/28/2012): Price bottomed 378 days before then rose 510%
– 2nd halving (07/09/2016): Price bottomed 539 days before then rose 309%
– 3rd halving (~05/25/2020): Roughly 497 days until halving
— CoinDesk Markets (@CoinDeskMarkets) January 31, 2019
The date of the next halving is still a year and some away. But many folks trading bitcoins already believe that BTC’s record-breaking decline is nearing its end, and the things will start looking up soon. While I remain cautiously optimistic, I won’t be buying any bitcoin anymore and my current decision for 2019 is to HOLD.