Cryptocurrency investors are getting ready for the hotly-anticipated Bitcoin halving this month, which will see the number of new Bitcoin being created cut by half.
With an estimated eight days left on the clock, prices rallied above US$9,000 per Bitcoin last week for the first time since February and are currently around US$8,800.
The impending event will mark the third time block rewards have halved and going by the previous occasions, market watchers are expecting it will add substantial value to the commodity.
Though Bitcoin expert and DigitalX (ASX: DCC) executive director Leigh Travers told Small Caps that the asset’s best performance is expected to be seen about a year post-halving when supply and demand principles take effect.
“I think buyers at the moment should have a positive outlook over the next year or so,” he said, adding that traders who are trying to time a one or two-week trading event around the halving should understand that it is a relatively high-risk trade due to Bitcoin’s volatility.
What is the Bitcoin halving?
A Bitcoin halving occurs when block rewards, or the number of Bitcoins entering circulation whenever a block is produced (approximately every 10 minutes), is reduced by half. This means new Bitcoin will be subsequently issued half as fast as before.
It occurs on a schedule built into Bitcoin’s programming and happens every 210,000 blocks with the purpose being to issue the total supply into the market less frequently over time. This supply effect increases Bitcoin’s scarcity, which has historically, increased the price.
When Bitcoin first started, 50 Bitcoins were rewarded to miners per block produced. The reward was cut down to 25 Bitcoins in the 2012 first halving, then 12.5 Bitcoins in the 2016 second halving. Thus, the upcoming halving will decrease the block reward to 6.25 coins per block or around US$8 million a day, at current prices.
Halving events will continue until the block reward reaches zero. The process will end with a predetermined total of 21 million Bitcoins, estimated to be around the year 2140.
Why is it important?
The functionality of the Bitcoin network relies on the coin retaining its monetary value. A distribution schedule with regular halvings is designed to support this by creating a supply squeeze.
Each halving also sharply reduces Bitcoin’s inflation rate, with the upcoming May 2020 halving expected to drop the inflation rate to about 1.8% – not far from gold’s 1.45% inflation rate.
“The inflation rate is essentially equivalent to the inflation rate for gold, which is pretty exciting for those that have advocated for Bitcoin as the “digital gold” based on its inflation rate and scarcity.,” Mr Travers said.
Halving events are important for Bitcoin investors because it is anticipated to have a positive effect on Bitcoin prices, though not necessarily instantly.
Of course, nothing is certain, but the basic principles of supply and demand would justify an associated price rise with curtailed supply, so long as demand stays the same or continues to rise.
Bitcoin halving history
The first Bitcoin halving occurred in November 2012, when the network reached 210,000 blocks.
The event was preceded by enthusiastic trading and traders around the world hosting ‘halving parties’, with prices rallying from under $4 at the start of 2012 to reach $13 by year-end.
The second halving was in July 2016, but anticipation peaked a month before the event, resulting in a sell-off by some investors before the event, and market watchers were more practical in general this time around.
But by early 2017, prices had reached $1,000 then rocketed close to $20,000 by the end of the year.
After sliding back to the mid-$3,000s at the start of 2019, prices have been rallying again in anticipation of the third halving.
The price is currently up more than 30% this month at US$8,865 with market watchers expecting the next halving to add significant value to Bitcoin, in line with the previous events.