For the first time in nearly four years, and for only the third time in its 11-year history, bitcoin is about to undergo a seismic shift to its technological foundations. The halving event will not only affect how bitcoin is created, it will likely also have a significant impact on the entire cryptocurrency market.
Scheduled to take place next month, the event all stems from bitcoin’s unique digital design. Unlike traditional currencies, the number of bitcoins that will ever exist is fixed. The mathematical code underpinning the cryptocurrency means that only 21 million bitcoins can ever be produced and no amount of quantitative easing can artificially inflate this.
More than 18 million bitcoins have already been produced through a process called mining, whereby new units of the cryptocurrency are generated by networks of computers programmed to solve complex mathematical puzzles.
The imminent halving of bitcoin, however, is about to make this process considerably more difficult.
What is halving and why is it necessary?
The halving event, sometimes referred to as “the halvening”, is essentially the opposite of quantitative easing – so much so that some crypto enthusiasts refer to it as quantitative hardening.
As the name indicates, the halving cuts the production of bitcoin in half in such a way that mining the cryptocurrency only generates 50 per cent of the yield it used to.
The event is not determined or governed by a centralised body. Instead, it is hard-coded into bitcoin’s underlying blockchain that was created in 2008 by its pseudonymous creator Satoshi Nakamoto.
Bitcoin was developed as an antidote to the perceived flaws in the established financial system, which had contributed to the global crisis of 2007-2008. By cutting the supply, the halving event is designed to ensure the scarcity of bitcoin while preventing extreme price inflation.
Will it affect the price of bitcoin?
Previous halvings have resulted in sharp price increases and severe market volatility for bitcoin and other cryptocurrencies, as traders and miners adjust to the new production limitations of the world’s most valuable virtual currency.
The halving in 2012 saw bitcoin’s value shoot up by 80 times, while the 2016 halving preceded a 300 per cent rise in bitcoin’s value. The simplest explanation for these price increases is the basic economic principle of supply and demand: if the supply suddenly drops but demand stays the same, the price will inevitably rise. But the decentralised and semi-anonymous nature of bitcoin means it is difficult to attribute specific gains or losses to a specific event.
May’s bitcoin halving comes in the middle of a global economic meltdown, though it is not yet clear whether collapsing markets is driving money away from traditional assets into cryptocurrency. Some analysts claim that bitcoin is becoming a safe-haven asset similar to gold, and early evidence suggests that investors may already be looking towards it as an alternative store-of-value.
The CEO of one of the world’s largest cryptocurrency exchanges recently revealed data showing a spike in deposits of $1,200 – the exact same size as the US government’s stimulus cheque.
Bitcoin is yet to be tested by global economic disruption on this scale, and it may well go the same way as stocks or other assets as investors rush to liquidate holdings into cash. Some analysts are hopeful, however, that the halving event combined with traditional market chaos could see the cryptocurrency reach above the record highs of $20,000 that it saw in 2017.
“Many eyes have been on bitcoin since the bull run of 2017, with people eagerly awaiting its next big moment. We believe that moment is coming and we can expect to see an explosive year for bitcoin,” Danny Scott, CEO of British-based cryptocurrency exchange CoinCorner, told The Independent.
“With both the current unexpected global crisis and the halving event, we can only expect the price of bitcoin to continue in the direction that everything is currently pointing: towards that $20,000 figure and beyond.”