Take a look at the terms ‘Bitcoin halving’ and ‘stock split’. They certainly sound similar, don’t they? With the keywords “halving” and “split” implying division, it should come as no surprise if someone mistakes them for essentially being the same thing. However, people who assume this are wrong.
There is, in fact, a considerable amount of difference between the two terms. This article will dive into that, explaining what they are and debunking their supposed likeness in the process.
Computers & Nodes
Before we start dissecting Bitcoin halving, we first need to explain how the network operates. It is integral to the illustration of the ‘halving’ concept.
At their core, Bitcoin and its blockchain are an assortment of computers, or nodes, from around the world. These are computers that all have Bitcoin’s code downloaded into their system. Each one of these computers also possesses all of Bitcoin’s blockchain inside them. This basically means that each computer has the entire history of Bitcoin transactions within their system. This arrangement ensures that no one is able to cheat the system because every computer would decline the transaction.
In this sense, Bitcoin is completely transparent. No one is able to conduct a transaction without everyone watching it unfold. And this applies to those who aren’t even participants in the network as a node or miner. They can easily watch these transactions take place in real-time by simply looking at block explorers.
The more computers – or nodes – that go onto the blockchain, the more its stability and security increases. There are roughly 100,000 nodes that are running Bitcoin’s code. It’s true that anyone can participate in Bitcoin’s network as a node. However, it is imperative that they have enough storage to download the entire blockchain and its history of transactions. Moreover, it is important to note that not all of them are miners.
‘Bitcoin mining’ is a vital process regarding the creation of bitcoin. People use their computers to take part in Bitcoin’s blockchain network, operating as a transaction processor. Bitcoin typically utilizes a system going by the name of ‘proof of work’ (PoW). What this means is that miners need to prove that they have put effort into processing transactions in order to receive a reward. This effort will usually include the time and energy that is crucial for properly running the computer hardware. It is also important for solving complex mathematical problems.
Faster computers that employ certain types of hardware frequently yield larger rewards. Furthermore, there are some companies that design computer chips that are specifically for mining. These computers typically have the task of processing bitcoin transactions and they receive a reward for their contribution.
To learn more about bitcoin mining, read “What is Bitcoin Mining?’
So, what is the halving?
There is a reward that is up for grabs for every 210,000 blocks mined. In simpler terms, this is about every four years. However, there is a catch to this particular reward. Bitcoin miners receive it for their efforts in processing transactions, sure, but it is actually cut in half. This effectively cuts the rate at which new Bitcoin is released into circulation in half. In a way, this is Bitcoin’s method of using a synthetic form of inflation. One that halves at a rate of every four years until all bitcoin is in circulation.
This system will continue to operate until the year 2140, give or take. It will be at this point in time that miners will receive rewards, along with fees, for processing transactions that network users will pay. These fees guarantee that miners still have the necessary motivation to mine and preserve the network’s operations. The core idea behind this is that competition for these fees will ensure that they remain low after halvings conclude.
The importance of this process
The halving process is a significant one. It marks another step concerning Bitcoin’s continuously dwindling finite supply. There are currently only 21 million Bitcoins that exist. At the time of writing, there are 18,382,487.5 Bitcoins that are already in circulation. This leaves just 2,617,512.5 that remains to see an official release by way of mining rewards.
The reward for each of the chain’s blocks mined back in 2009 was 50 BTC. Following the very first halving, it was down to 25, then 12.5. Come May 11th, 2020 (an event we will cover further later) and it would become 6.25 BTC per block. Putting this in a familiar context, let’s imagine that the gold mined out of the Earth was cut in half every four years. Should the gold’s value draw from its scarcity, then “halving” the output every four years would theoretically increase its price.
These instances of halving greatly cut down on the creation rate of new coins. As a result, they also lower the available supply considerably. This can lead to some implications for investors. Specifically, because other assets with low supply, such as gold, are capable of possessing high demand and boost prices.
Based on past events, these Bitcoin halvings often correspond with a massive surge in Bitcoin’s price. The first halving in November of 2012 would witness a substantial increase from roughly $11 to almost $1,150. The second Bitcoin halving was in July of 2016, where the price was at about $650. By December 16th of 2017, Bitcoin’s price would skyrocket up to nearly $20,000. As you can imagine, the price would proceed to fall. Specifically, over the course of a year from this peak. It would decrease and end up at around $3,200. This is a price that’s approximately 400% higher than its pre-halving price.
There is a theory surrounding the halving and the chain reaction that it sets off. It works in a way that goes something like this:
Halving the reward → half the inflation → cut down on available supply → higher demand → higher price → miners’ incentive remains the same, regardless of smaller rewards, because the value of Bitcoin increases in the process
In recent news and overall impact
As we briefly touched upon earlier, the latest bitcoin mining block reward halving just reduced the Bitcoin block reward. It went from 12.5 BTC to now being 6.25 BTC. The occurrence of this third halving event was on the 11th of May, according to data deriving from Tradeblock.com. Going beyond the halving, Bitcoin is now trading at about $9,355. Moreover, it is trading with market dominance of roughly 66% at the time of this writing.
The two previous Bitcoin halvings would go on to positively impact Bitcoin’s price. Over time, Bitcoin halvings became the subject of a diverse range of price predictions and speculation. There are some crypto players who believe that the third Bitcoin halving will have little to no effect on Bitcoin’s price. However, there are others who think that the halving will have effects on the price of the cryptocurrency. This is mostly because of a cut in the new Bitcoin supply.
Looking at it a certain way, the Bitcoin price correlation is seemingly quite questionable. Be that as it may, the latest Bitcoin halving will prove to have a direct impact on miners. There are a good number of crypto experts who predict that the new halving will trigger something in miners. It will result in them shutting down the creation of new Bitcoin due to an array of mining devices suddenly becoming obsolete. Mining pool Poolin’s vice president, Alejandro De La Torre, says that a number of unprofitable miners were starting to shut their equipment down. And they were doing so prior to the Bitcoin halving.
Stock split definition
So, now that we know what exactly halving is, we can start emphasizing differences by explaining what a ‘stock split’ is.
This is a corporate action that typically involves a company dividing its existing shares into multiple shares. Doing so will effectively boost the overall liquidity of the shares. The total number of shares outstanding increases by a specific multiple. However, the total dollar value of the shares will remain the same, especially in comparison to pre-split amounts. This is mostly due to the split never adding any real value.
The most common of split ratios are 2-for-1 or 3-for-1. What this means is that the stockholder will possess two or three shares, respectively, for every share they initially hold.
Companies basically make the choice to split their shares so that they can diminish the trading price of their stock. They usually lessen it to a range that most investors deem “comfortable” and boost the liquidity of the shares. Taking human psychology into account, a lot of investors find comfort in purchasing – for example – 100 shares of $10 stock instead of 10 shares of $100 stock. Therefore, when a company’s share price rises extensively, plenty of public firms will later declare a stock split at some point. As a result, it will cut down on the price to a more popular trading price.
The number of shares outstanding will increase during a stock split. Again, while this may be the case, the total dollar value of the shares does not change in comparison to pre-split amounts.
A split in reverse
A conventional stock split is also recognizable as a ‘forward stock split’. But wait, “forward” would imply that there has to be a split that operates in “reverse,” right? The answer is yes.
A ‘reverse stock split’ is obviously the opposite of a forward stock split. A company that distributes a reverse stock split basically decreases the number of its outstanding shares. In turn, it effectively boosts the share price.
Similar to a forward stock split, the market value of the company following a reverse stock split remains the same. A company that utilizes this corporate action will often do so if its share price deteriorates to a certain level. One that suggests it will run the risk of being delisted from an exchange for failing to meet the minimum price that’s mandatory for listing. There are some cases when a company may reverse split its stock to make it appear more attractive to investors. Oftentimes, investors will end up perceiving it as comparatively more valuable if it has a higher stock price.
A ‘reverse/forward stock split’ is a very special strategy that many companies frequently use. With it, they can eliminate shareholders that possess fewer than a specific number of shares of that company’s stock. A reverse/forward stock split employs the use of a reverse stock split then a forward stock split. The reverse split reduces the total number of shares that a shareholder owns. This results in some shareholders holding less than the minimum that the split requires in order to be cashed out. Meanwhile, the forward stock split expands the overall number of shares that a shareholder possesses.
Stock split history – what are the reasons for a split?
So, why do companies bother going through the hassle of conducting a stock split? Well, there are actually two reasons for this. First of all, a split commencement typically occurs when the stock price is rather high. This makes it quite expensive for investors to acquire a standard board lot that consists of 100 shares.
Let’s use Apple Inc. as an example. Back In 2004, they issued a 7-for-1 stock split following its share price climbing to approximately $700 per share. The board of directors saw the price as being too high for the average retail investor. As a result, they would implement the stock split to transform the accessibility of the shares to a wider set of potential shareholders. The stock price would later close at $645 the day before the split’s activation. At market open, Apple’s shares were trading at roughly $92, which was the price after the 7-for-1 stock split.
The second reason is a higher number of shares outstanding can lead to greater liquidity for the stock. This effectively simplifies trading and could potentially narrow the bid-ask spread. By increasing a stock’s liquidity, trading in the stock becomes a lot easier for buyers and sellers. Liquidity provides exceptional flexibility in which investors are able to buy and sell shares in the company. And they can do so without ever needing to make too great an impact on the share price.
Theoretically speaking, a split should not have an impact on a stock’s price. However, it usually results in revived interest on the investors’ part. This, in turn, can have a positive effect on the stock price.
What about “forks”?
Just like with Bitcoin halving, many people think Bitcoin ‘forks’ are the same thing as stock splits. While the intentions behind this belief mean well, a fork is nothing like a stock split.
A ‘fork’ is a notable change to the software of the digital currency. This is an alteration that is responsible for creating two separate versions of the blockchain with a joint history. Forks are capable of being temporary, lasting a total of maybe a few minutes. Alternatively, they can be a permanent split in the network, effectively creating two different versions of the blockchain. Whenever this happens, so too is their creation of two different digital currencies.
Probably the most popular intent behind stock splits is to reduce the price of individual shares of stock. The idea is to bring it within the financial reach of retail investors. Admittedly, the core reasons for the split into two cryptocurrencies are quite complex. Still, they have very little to do with ease-of-access pertaining to retail investors.