IIf you’ve talked to someone who has invested in bitcoin recently, there’s a good chance you’ve heard about the halving. Some crypto enthusiasts view the halving as a religious event with almost mystical importance: they believe its mechanics are crucial to the continued rise in the price of bitcoin. However, detractors claim that the halving is closer to a marketing gimmick.
The halving is expected to occur on April 19 or 20, depending on the current rate of bitcoin creation. So what is this exactly? And is it a coded genie or smoke and mirrors?
What is the Bitcoin halving?
The halving dates back to the origin story of bitcoin, born in the ashes of the 2008 financial crisis. The cryptocurrency’s creator – who was called Satoshi Nakamoto, but whose real identity remains unknown – invented bitcoin the following year and dreamed of creating a international currency that operates outside the control of governments or central banks. Crucially, Satoshi wrote that there would only be 21 million bitcoins in existence, in order to moderate their inflation and potentially make each bitcoin more valuable over time.
While the Federal Reserve, on the other hand, can adjust the supply of dollars when it deems necessary, bitcoins would be released at a predetermined and increasingly slow pace. Satoshi determined that approximately every four years, the reward for creating new bitcoins would be reduced by half, in events known as “halvings”. As it became more difficult to create new bitcoins, each one would become rarer and more valuable, the theory went. Eventually, new bitcoins would stop being created altogether (this probably won’t happen for at least another century).
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What happened during the latest bitcoin halvings?
The halving was designed to make bitcoin more scarce and, apparently, to increase the price of bitcoin. And in the last three halves, that’s exactly what happened. After the first bitcoin halving in November 2012, the price of bitcoin rose from $12.35 to $127 five months later. After the second halving in 2016, the price of bitcoin doubled to $1,280 in eight months. And between the third halving in May 2020 and March 2021, the price of bitcoin rose from $8,700 to $60,000.
But correlation does not imply causation, especially with such a small sample size. First, it is possible that the timing of these increases was purely coincidental. It’s also possible that bitcoin’s rise has less to do with the actual mechanics of halvings, as opposed to the narratives of halvings. With each halving, excitement about bitcoin’s potential increases, prompting more people to buy. This increase in demand causes the price to increase, which causes even more interest in a self-reinforcing cycle.
What will happen to bitcoin during this halving?
The halving will likely not cause a significant price movement on the day it happens. Some of the halving’s economic impact has likely already occurred, with investors buying bitcoin in anticipation of the event, and the halving’s aftershocks will continue for months or years afterward, experts say.
“Given past history, the day tends to be a non-event for price,” says Matthew Sigel, head of digital asset research at global investment manager VanEck.
Another factor that makes it difficult to predict where Bitcoin will go after the halving is that the economic circumstances surrounding it are different this time. This is the first time bitcoin has reached its peak before a halving, unlike what happened afterwards – last month, bitcoin rose to an all-time high of $70,000 before falling again. This recovery has been aided by the rise of bitcoin ETFs: investment vehicles that allow major institutional investors to bet on the price of bitcoin without having to actually buy bitcoin itself.
But there are some pessimists who believe that bitcoin’s big run has already happened, thanks to ETFs – and that its price will actually to decrease after half. A big reason for this, they believe, will be the actions of traders who embark on the trading strategy. “sell the news”, who profit from their holdings to capitalize on a potential gold rush from interested buyers. JP Morgan predicted in February that the price of bitcoin drop to $42,000 after “Bitcoin halving-induced euphoria subsides.”
“Have we already created the buzz for bitcoin before the halving – or is it the ETF that allows Bitcoin to make similar increases to what we have seen in previous halvings?” says Adam Sullivan, CEO of bitcoin mining company Core Scientific. “We don’t need to answer that question yet.”
Although many bitcoin optimists swear that its price will increase dramatically in the months following the halving, it is important to remember that bitcoin does not always behave rationally, especially during chaotic global news events. After Iran launched a missile attack on Israel on April 13, for example, shaking the global economy, the price of bitcoin fell 7% in less than an hour.
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What will happen to bitcoin miners during the halving?
While it is challenging to determine the impact of the halving on average bitcoin investors, it seems certain that the halving will drastically change the bitcoin mining industry. Bitcoin “miners” are essentially the network’s watchdogs, who protect the network from attacks, create new bitcoins, and are financially rewarded for doing so. After the halving, miner rewards for processing new transactions will be reduced from 6.25 bitcoins to 3.125 (about $200,000) – a significant immediate reduction in revenue.
As a result, mining will no longer be profitable for many smaller operations. As they spin off or sell to larger operations like Marathon Digital Holdings Inc. or CleanSpark Inc., the industry will likely consolidate. “People will operate in a marginally profitable environment as long as they can,” says Sullivan. “These are people who will probably try to be recalled, probably within six to 12 months.”
But bitcoin mining companies that weather the storm and gain market share from those who dropped out could reap huge rewards, says Matthew Sigel. “Miners are always the roaches of the energy markets; they are very agile,” he says. “We believe the second half of the year will be very strong for bitcoin miners as long as the price of bitcoin rises.”
This story originally appeared on Time.com read the full story
