Bitcoin faces a key technical event on Monday known as the “halving.” Because it will take place later in the day, industry insiders are debating what effect it might have on the cryptocurrency market.
So what is halving? You can think of it as an update to the underlying network that records all bitcoin transactions. There are so-called “miners” in this network with specialized computer equipment competing to solve complex mathematical problems to validate bitcoin transactions. Whoever wins that race will be rewarded in bitcoin.
On Monday, the amount of bitcoins rewarded to those miners will be cut in half. This is something that happens about every four years to control inflation. The current reward is 12.5 bitcoins, or BTC, so it will now drop to 6.25 BTC.
Unlike fiat currencies like the dollar, there is no central bank that manages bitcoin’s supply or its inflation rate. Instead, this is maintained thanks to a rule written in the bitcoin code by pseudonymous inventor Satoshi Nakamoto.
The total number of bitcoins that will ever be mined has a limit of 21 million. The rewards for bitcoin miners keep halving to zero. Bitcoin bulls say this shortage is part of what underpins the value of the cryptocurrency and makes it a potential “hedge” against currencies that are vulnerable to devaluation in times of economic crisis.
How might prices react?
Investors are likely to closely watch the reaction of bitcoin and other cryptocurrency prices to the halving event later in the day. Some believe that the event has already been applied primarily to markets, but there are others who think it could increase prices.
The last two halves led to opposite short-term price movements, according to the British bitcoin exchange CoinCorner. Bitcoin rose 7% one month after the first halving event in 2012, but fell 10% one month after the second halving in 2016. However, the price increased 944% six months after halving. 2012 and 38% in the same period in 2016