The Bitcoin “halvening” is approaching, and it is expected to result in a significant price change for the world’s biggest cryptocurrency.
Analysts and cryptocurrency experts have argued over the direction of this price change, citing everything from economic theory to the building hype around the halving event as evidence for their positions.
Dubbed the “halvening”, this halving 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.
The halving will take place when the 630,000th block is added to the Bitcoin blockchain, which is expected to occur in the early hours of 12 May.
Speaking at an online roundtable about the upcoming halving, Luno brand ambassador Jason Deane outlined a number of possible cases following this event.
Firstly, the Bitcoin blockchain 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.
The halving refers to a pre-coded 50% reduction in block mining rewards which occurs roughly every four years.
This lowers the supply of the cryptocurrency and makes it more difficult for miners to earn Bitcoin from their operations.
“The halving is fundamental to Bitcoin’s principles,” Deane said.
“After the halving, for the first time, Bitcoin’s annual inflation rate will be lower than gold’s.”
“It is likely that the mining hash rate will drop, as this has happened at every halving so far,” Deane said.
He added that the security of the blockchain and its rate of adoption should remain largely unaffected, but the price was the subject of much speculation.
Deane said there were a number of “bullish” and “bearish” scenarios for Bitcoin’s price which could occur following the halving event.
“We don’t really know what’s going to happen here. We’ve only had two halvings, and that only gives us two data points. That is not significant enough to give us any real basis for comparison.”
Deane said the bearish cases describe a possibility where miners sell off their Bitcoin to pay for upgrades to their equipment, which will be needed as it becomes more difficult to mine Bitcoin profitably.
Additionally, the widespread effects of the COVID-19 outbreak might mean that consumers are not thinking about Bitcoin, and therefore purchasing will decline.
On the other hand, Deane cited basic economic theory as an argument for a potential increase in the price of Bitcoin.
“If you drop your supply rate by 50%, you must drop your demand rate by 50% for the price to remain the same,” he said. “If the demand stays the same, the price will be forced upwards.”
“Markets also run on sentiment. The expectation of a bull run could be enough to create a bull run,” Deane said.
The price of Bitcoin and other cryptocurrencies is extremely volatile, with their price attributed far more to speculation than to their utility value.
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.