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Bitcoin's 'halving': what is it and does it matter?
By Reuters
April 19, 20245:22 AM EDTUpdated 5 days
ago
LONDON,
April 19 (Reuters) - Bitcoin's long-anticipated 'halving' is, depending on
where you sit, a vital event that will burnish the cryptocurrency's value as an
increasingly scarce commodity, or little more than a technical change talked up
by speculators to inflate its price.
The halving
comes after bitcoin hit an all-time high of $73,803.25 in March .
But what
exactly is the halving, and does it really matter?
WHAT IS IT?
The halving,
which happens roughly every four years, the latest of which is expected this week, is a change in bitcoin's underlying blockchain technology
designed to reduce the rate at which new bitcoins are created.
Bitcoin was
designed from its inception by its pseudonymous creator Satoshi Nakamoto to
have a capped supply of 21 million tokens.
Nakamoto
wrote the halving into bitcoin's code and it works by reducing the rate at
which new bitcoin are released into circulation.
So far,
about 19 million tokens have been released.
HOW DOES IT HAPPEN?
Blockchain
technology involves creating records of information - called 'blocks' - which
are added to the chain in a process called 'mining'.
Miners use
computing power to solve complex mathematical puzzles to build the blockchain
and earn rewards in the form of new bitcoin.
The
blockchain is designed so that a halving occurs every time 210,000 blocks are
added to the chain, roughly every four years.
At the
halving, the amount of bitcoin available as rewards for miners is cut in half.
This makes mining less profitable and slows the production of new bitcoins.
(For a
visual explanation of how blockchain works, click here.)
WHAT HAS IT
GOT TO DO WITH BITCOIN'S PRICE?
Some bitcoin
enthusiasts say that bitcoin's scarcity gives it value.
The lower
the supply of a commodity, all other things being equal, the price should rise
when people try and buy more. Bitcoin is no different, they argue.
Others
dispute the logic, noting that any impact would have already been factored in
to the price.
The supply
of bitcoin to the market is also largely down to crypto miners but the sector
is opaque, with data on inventories and supplies scarce. If miners sell their
reserves, that could pressure prices lower.
Since
hitting record highs last month, bitcoin's price has sunk below $64,000. JP
Morgan analysts said this week they expect the price to fall further after the
halving.
Establishing
the reasons for a crypto rally is also hard, not least as there is far less
transparency than in other markets.
The most
common reason given for this year's surge is the U.S. Securities and Exchange
Commission's January approval of bitcoin ETFs, and expectations that central
banks will cut interest rates.
But in the speculative
world of crypto trading, explanations for price changes can snowball into
market narratives that become self-fulfilling.
WHAT ABOUT PREVIOUS HALVINGS?
There's no
evidence to suggest that previous halvings have been behind bitcoin's
subsequent price rises.
Still,
traders and miners have studied past halvings to try and gain an edge.
When the
last halving happened on May 11, 2020, the price rose around 12% in the
following week and 659% in the following 12 months.
But there
were many explanations for the rally - including loose monetary policy and
stay-at-home retail investors with spare cash - and no real evidence the
halving was behind it.
An earlier
halving occurred in July 2016. Bitcoin rose around 1.3% in the following week,
before plunging a few weeks later and then rallying.
In short:
it's hard to isolate the impact, if any, halvings may have had previously or
predict what could happen this time around.
Regulators
have repeatedly warned that bitcoin is a speculative market driven by hype and
one that poses harm to investors.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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