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Satoshi Nakamoto, the pseudonymous creator of bitcoin, still has influence on the cryptocurrency almost 14 years after his demise.
This week, the protocol designed by Nakamoto – an individual or group of individuals who remained silent in December 2010 – will trigger what is known as the “bitcoin halving,” a process that has coincided with price increases in the past. . The latest halving is expected to take place on Saturday.
Here we explain what the bitcoin halving entails and its potential impact.
What is bitcoin halving?
It is related to how bitcoins are registered and created. Cryptocurrency transactions are recorded on a universally accessible ledger called a blockchain. These transactions are placed on the blockchain by “miners” who package them into blocks that are then linked (or “chained”) together. They do this by solving a cryptographic puzzle using specialized hardware and (this is the key) they receive a reward in newly created bitcoins.
Nakamoto intended that the number of bitcoins entering circulation would be finite, 21 million, so the protocol seeks to control the number of new coins entering the market. It does this by halving the size of the miners’ reward every 210,000 blocks, approximately every four years.
The latest halving is expected to take place in the early hours of Saturday in the US and UK, when the reward for adding a new block of transactions to the blockchain will decrease from 6.25 bitcoins to 3,125. Bitcoin – of which there are more than 19 million in circulation – will continue to halve until it reaches the 21 million point, expected in 2140.
What will be the impact on the price of bitcoin?
Halving reduces the supply of new bitcoins, which in theory should increase the price. It is an economic axiom that if the demand for an asset remains stable while its supply decreases, its price should rise.
The last three halvings (in 2020, 2016 and 2012) have resulted in an average price increase of 16% over the following 60 days, according to data from asset research firm 10x Research. The 2016 halving resulted in a 6% decline over the next 60 days, although it then rebounded strongly throughout 2017.
Markus Thielen, head of research at 10x, says the halving is “associated with price increases due to reduced supply,” but investors will have to wait for a price peak, which typically occurs 500 days after halving.
In recent weeks, bitcoin has fallen sharply from a recent all-time high of over $70,000 (£56,175) to around $62,000, but it remains a top-performing asset, up 40% so far in 2024 and more than double that of the same time last year. year.
It is worth noting that while prices eventually rose after the halvings of 2016 and 2020, they suffered prolonged declines – the so-called “crypto winters” in 2018 and 2022, where prices suffered a prolonged decline.
“The setup is very familiar from past occasions where there has been a very sharp rally and a top forms… then it breaks,” says Neil Wilson, chief analyst at brokerage Finalto. Analysts at Deutsche Bank wrote Thursday that the halving was “already partially priced in by the market” and that they “did not expect prices to rise significantly after the halving event.”
Will there be a negative impact?
Bitcoin mining companies, which shoulder the costs of energy and equipment to validate transactions, are facing a financial hit as their reward falls.
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Andrew O’Neill, managing director of the digital asset research lab at credit rating firm S&P Global, wrote this week: “The block reward remains a significant part of miners’ income, so reducing the reward half affects profitability.”
He added: “Some operations will become unprofitable and will close as a result, especially those with higher energy costs.”
For bitcoin mining to be financially sustainable, S&P says, the currency will need to be used more widely across the global economy to increase miners’ income through transaction fees. However, increased use of cryptocurrency raises concerns that energy-intensive bitcoin mining may already be environmentally unsustainable.
For bitcoin’s many critics, there is also the negative impact of amateur investors being lured into any price increases (and hype) that follow the halving.
Bitcoin has gained legitimacy this year, increasing its price, and the US Securities and Exchange Commission allows exchange-traded funds (ETFs), a basket of assets that can be bought and sold like stocks on an exchange, which track the price of the cryptocurrency. . However, SEC Chairman Gary Gensler was reluctant to give the go-ahead, describing Bitcoin as a volatile asset used for “illicit activities including ransomware, money laundering, sanctions evasion, and terrorist financing.”
O’Neill is also skeptical that a price boom will occur. “The BTC [bitcoin] “The market is in a very different situation than when the previous halvings occurred four, eight and 12 years ago,” he says. “Other drivers, such as the growth of BTC ETFs in the US, and macroeconomic factors such as interest rates and market liquidity, will also influence the price.”
Carol Alexander, a professor of finance at the University of Sussex business school, says any price rise from the halving will ultimately be illusory.
“It will probably surpass the all-time high, but in the long term its value will be zero because there is no intrinsic value in bitcoin,” he says. “It’s simply a speculative asset.”