Bitcoin fever is rising again, with investors and traders growing increasingly excited over an important change to the blockchain expected in May 2020.
Dubbed the “halvening”, this event will see a change to the flow of Bitcoin into the blockchain system – which could have a serious effect on the price of the cryptocurrency.
Traders and speculators have pointed to the event as a catalyst for everything from price surges reminiscent of those in 2017 to a steep decline in adoption.
Before we can understand why this event is so important, however, we must look at exactly how it works and its effect on the Bitcoin blockchain when it occurred previously.
A halvening – traditionally referred to as a halving – essentially reduces the amount of Bitcoin being channelled into the network by halving the rewards for Bitcoin miners.
Bitcoin miners use powerful, specialised PC hardware to verify blocks added to the Bitcoin blockchain.
This is secured by proof-of-work, where miners back up their decision to include a block by solving complex and resource-intensive cryptographic problems and providing the proof along with their verification of the block in question.
For the work they have done to verify Bitcoin transactions and mine the block, they are rewarded with a sum of Bitcoin.
These rewards incentives miners to continue mining and earning Bitcoin, but the amount is not constant.
According to the rules of the blockchain, the reward for Bitcoin miners must be halved at certain points. This effectively results in miners earning less cryptocurrency from each block mined.
These halving events have happened before, and they have historically led to a major price increase due to the constricted supply of the tokens.
The graph below from Bloomberg shows previous price movements after halving events in 2012 and 2016.
Predictions and speculation
During the year after the 2012 halving, Bitcoin’s price rose by 8,000%. 18 months after the 2016 halving, it had increased by 2,000%.
The mechanism of reducing supply and the historical occurrences of price increases has therefore led many to speculate that the price of Bitcoin will increase yet again after this year’s halving event.
Blockchain expert Simon Dingle previously told MyBroadband that he does not make price predictions, but if previous trends are repeated, then Bitcoin may see a large price increase coming.
“If previous halving events are anything to go by – and they are – then we should see the price of Bitcoin picking up substantially towards the end of 2020,” he said.
Others have argued that due to the speculative nature of Bitcoin’s value, the upcoming halving event is already priced in and the cryptocurrency will not see another big jump in price.
Another reason that traders might expect the price of Bitcoin to rise is due to the need for miners to sell their Bitcoin following a halving, but this may not be the case if miners have enough capital to hold onto their cryptocurrency.
The price of Bitcoin and other cryptocurrencies is extremely volatile, with its price attributed far more to speculation than to its utility value.
It is important to realise this when you are thinking of buying cryptocurrency, as you could lose your entire investment just as easily as you could make quick returns.
There are a number of dangers associated with buying Bitcoin for the first time, and it is best to educate yourself on how the technology works as well as the best exchange services to use before getting involved.