Bitcoin is about to undergo a “halving” event for only the fourth time in its 15-year history – and its value could skyrocket even further.
The cryptocurrency has rallied to a near record high of $65,000 in recent weeks, a remarkable turnaround after falling to less than $16,000 in late 2022. The recovery has been particularly “fast and furious” in recent weeks, said Fast Company.
And crypto investors and traders are now in a “buying frenzy” ahead of a halving, or “halvening”, that is expected to occur by the middle of April.
What is a ‘halving’ event?
Bitcoin halving is when the reward for mining the cryptocurrency is cut in half, reducing the rate at which new bitcoins are generated.
Some crypto enthusiasts describe a halving event as being essentially the opposite of quantitative easing, and sometimes refer to it as “quantitative hardening”, said The Independent.
A halving takes place roughly every four years, or whenever 210,000 blocks have been mined. This year it is predicted to take place around 19 April, and will see the reward fall from 6.25 bitcoins for every block harvested to 3.125 bitcoins.
Why does it happen?
A halving event isn’t controlled or governed by a centralized body. Instead, it was hard-coded into bitcoin’s mining algorithm by the cryptocurrency’s mysterious creator (or creators) Satoshi Nakamoto back in 2008.
Bitcoin was developed as an answer to the perceived flaws in the financial system that contributed to the 2007-08 financial crisis. By cutting the supply of bitcoin, halving events are intended to counteract inflation by maintaining its scarcity, mimicking the scarcity of other finite resources such as gold.
Halving is also intended to slow the supply of coins as it approaches its total supply. Bitcoin was created with a cap of 21 million, and more than 19 million bitcoins have already been mined. By current estimates, the last bitcoin will be mined around the year 2140.
What does this year’s halving mean for bitcoin?
When the first halving happened in 2012 – in the early days of the currency – the halving event had a “negligible” effect on bitcoin’s value, said Forbes Advisor.
But the 2016 event was preceded by a 300% rise in bitcoin’s value, while in the 16 months that followed the 2020 halving, the price of bitcoin rose by more than 600%.
While the simplest explanation for these price increases is the basic economic principle of supply and demand – a drop in supply while demand is high pushes prices higher – the “decentralized and semi-anonymous nature of bitcoin means it is difficult to attribute specific gains or losses to a specific event”, said The Independent.
Periods around halving events have certainly seen “tremendous growth” for the cryptocurrency, said Forbes. But “past performance is no indication of future results.”