NOVEMBER 28 2012… July9 2016… May 11 2020… April 2024. All massively significant dates in the timeline of Bitcoin, the original cryptocurrency.
They’re the dates of the Bitcoin ‘halving’ – an event which reduces the rewards for ‘mining’ new blocks. The reward is effectively cut in half, roughly every four years, but always every 210,000 blocks. This reduction also impacts the rate at which new Bitcoins are created.
It is often regarded as the opposite action of quantitative easing – the controversial practice deployed by central banks, and a monetary policy where the Bank of England or the US Federal Reserve, for example, purchase open market securities in an attempt to lower interest rates and artificially increase the supply of cash.
It also provides extra liquidity for banks and, therefore, has led to an upturn in investment and lending.
Quantitative easing – a term first coined in 1995by German economist Richard Werner – certainly has no shortage of critics.
The policy has been repeatedly slammed over efficacy and the potential for risk such as no guarantee of economic recovery, limited lending power, currency devaluation, inflation, and unwinding positions.
Champions of decentralised finance will certainly baulk at the thought of quantitative easing, hence the enthusiasm in the DeFi community for the halving.
To understand Bitcoin halving events, it’s necessary to understand the basic workings of Bitcoin itself.
The flagship cryptocurrency is underpinned by blockchain technology – a global network of computers – or ‘nodes’ - running its software.
The nodes maintain and archive a completely comprehensive history of network transactions.
Within this vast collection of nodes are ‘miners’ – people who use their specialized computers to validate and then process Bitcoin transactions within the secure network.
Validation is possible through a system known as ‘proof-of-work’– a status that confirms time and energy was spent in solving encrypted ‘hash’.
Once a block reaches its capacity of transactions, it is shut off and pushed on to a mining queue where miners compete to find a hash value number lower than a specific target. The miner who discovers the number is rewarded with the newly-mined Bitcoin and is then permitted to create the next block.
In the previous halving of May 2020 the block reward was 6.25 BTC.
The block reward next month will be 3.125 BTC.
Eventually, each future halving will diminish the reward until it reaches the smallest denomination of Bitcoin – one Satoshi.
This makes halvings crucial for the scarcity of the Bitcoin ecosystem by reducing the rate of issuance, thereby counteracting inflation.
The total amount of Bitcoin in circulation is expected to reach the theoretical maximum supply of 21 million in the year2140. More than 19 million Bitcoins have already been mined.
Uniquely, the halving is hard-coded into the blockchain technology, and was set in stone by its creator – the pseudonymous Satoshi Nakamoto.
Nakamoto – whether it was he, she or them – purposely included the halving to ensure scarcity and prevent extreme inflation in a desire to tackle what were seen as flaws in traditional finance that led to the financial crisis of 2007.
While no computer or human could accurately predict the weather for April, let alone the price of Bitcoin, it is widely accepted through historical data that halving events herald the prelude to significant price rallies.
Previous halvings have seen price spikes followed by dramatic volatility as miners, traders and investors come to terms with the new parameters.
Following the first halving in 2012, the price of Bitcoin rose from $12 to$1,000 across the year. In 2016 it went from $650 at the time of the halving to$2,550. In the 2020 halving, Bitcoin’s price was around $9,000 before it reached an all-time high of $64,899 within 12 months.
The historical figures demonstrate that, while it is widely recognised halvings have a direct impact on price, the effects may not be immediate.
Again, the unpredictability of cryptocurrency values mean any prediction should be taken with large pinches of salt.
Next month’s halving will be set against the backdrop of global economic uncertainty – something analysts will point to as a narrative towards Bitcoin growing as a potential safe-haven asset class, as evidence during the Covid-19 pandemic.
Prices are currently on a high – close to the 2021 peaks, in fact. If these levels are maintained into April, Bitcoin will be approaching the halving with wind its sails.
The upward movement has been driven by the January approval of exchange-traded funds in the US which have seen billions of dollars in fresh institutional investment ploughed into the cryptocurrency markets.
Although not unanimously welcomed, ETF investments have introduced a certain maturity into the arena.
These unprecedented conditions have left optimistic observers anticipating bullish surges to the upside.
For the pessimistic, though, it’s worth noting there’s a genuine concern about ‘overreach’ and the possibility of a consequential collapse in prices across the board.
There is also, of course, the genuine prospect that absolutely nothing will happen at all and that values will simply maintain current trajectories.
As noted above, the market conditions for 2024 are unprecedented, therefore the outcomes cannot be modelled on previous events.