As the value of bitcoin soars to unprecedented levels, there’s growing interest in its forthcoming „halving“ and its potential influence on this surge.
The significance of the halving varies depending on perspective. Some view it as a crucial event that will enhance bitcoin’s worth due to its diminishing availability, while others see it merely as a technical adjustment hyped by speculators to boost its value.
So, what is this event, and why does it matter?
Understanding the Halving
The halving refers to a modification in bitcoin’s foundational blockchain technology, aimed at decreasing the pace at which new bitcoins are generated.
From the outset, bitcoin’s enigmatic creator, Satoshi Nakamoto, intended for the cryptocurrency to have a limited supply of 21 million tokens.
Nakamoto embedded the halving mechanism into bitcoin’s programming, effectively slowing down the release of new bitcoins into circulation.
Currently, around 19 million tokens have been issued.
Mechanics of the Halving
Blockchain technology operates by forming records of data, known as ‚blocks,‘ which are sequentially linked in a process called ‚mining.‘
Miners utilize computational power to solve intricate mathematical problems, constructing the blockchain and receiving new bitcoins as a reward.
During the halving, the quantity of bitcoins awarded to miners is reduced by half, diminishing the profitability of mining and decelerating the creation of new bitcoins. (For a graphical explanation of how blockchain functions, click here.)
Timing of the Halving
There’s no fixed date for the halving, but it’s anticipated to occur in late April.
The blockchain is structured so that a halving transpires after every 210,000 blocks are added, which roughly equates to every four years.
Impact on Bitcoin’s Value
Many bitcoin aficionados argue that the cryptocurrency’s scarcity drives its value.
If the supply of an asset decreases while demand remains constant or increases, its price should theoretically rise.
Thus, a reduction in bitcoin’s supply should boost its price, according to some analysts and traders. However, others challenge this notion, suggesting that any potential effects are already reflected in the current price.
The availability of bitcoin in the market is largely controlled by crypto miners, but the sector lacks transparency, with limited data on stockpiles and supplies.
If miners decide to liquidate their reserves, this could exert downward pressure on prices.
Identifying the catalysts behind a crypto rally is challenging, particularly given the limited transparency regarding buyer identities and motives.
The most frequently cited explanation for this year’s surge is the U.S. Securities and Exchange Commission’s approval of bitcoin ETFs in January, coupled with expectations of interest rate cuts by central banks.
However, in the speculative realm of crypto trading, theories proposed by analysts can quickly evolve into market narratives, potentially becoming self-fulfilling prophecies.
Reflections on Past Halvings
There’s no concrete evidence to suggest that previous halvings have directly led to an increase in bitcoin’s price.
Nonetheless, traders and miners have analyzed past halvings to gain insights.
- Following the last halving on May 11, 2020, the price experienced an approximate 12% increase in the subsequent week.
- Later that year, bitcoin embarked on a sharp rally, but numerous factors – including relaxed monetary policies and increased cryptocurrency investments by homebound retail investors – were cited as reasons, with no definitive proof that the halving was a contributing factor.
- A prior halving took place in July 2016, resulting in a roughly 1.3% price increase in the week that followed, before experiencing a significant drop a few weeks later.
In summary, it’s challenging to isolate the specific impact, if any, that halvings have had in the past or to predict their future effects. Despite regulatory warnings about bitcoin’s speculative nature, driven by hype and the fear of missing out (FOMO), and the potential risks to investors, regulators continue to approve bitcoin trading products.
