Satoshi Nakamoto, the anonymous creator of Bitcoin, still wields influence over the cryptocurrency almost 14 years after vanishing.
This week, a protocol crafted by Nakamoto (an individual or group that went silent in December 2010) will trigger the “Bitcoin halving,” which has historically been tied to price increases. The upcoming halving is set to occur this Saturday.
Here’s a breakdown of what the Bitcoin halving entails and its potential ramifications.
What is Bitcoin halving?
It revolves around how Bitcoins are recorded and generated. Cryptocurrency transactions are recorded on a public ledger called the blockchain. These transactions are grouped into blocks by “miners,” solved, and linked. Miners use specialized hardware to solve cryptographic puzzles and, crucially, receive rewards in newly minted Bitcoins.
Nakamoto’s goal was to cap the total number of Bitcoins at 21 million, so the protocol adjusts to limit the influx of new coins into the market. This is accomplished by halving miners’ rewards every 210,000 blocks, approximately every four years.
The imminent halving is slated to take place early Saturday in the US and UK, reducing the reward for adding a new block to the blockchain from 6.25 Bitcoins to 3.125 Bitcoins. Bitcoin, currently with over 19 million coins in circulation, will continue halving until an estimated 21 million by 2140.
What impact will it have on the price of Bitcoin?
A halving leads to a decrease in the supply of new Bitcoin, potentially raising its price. It’s an economic principle that a decrease in supply with stable demand should drive up the price of an asset.
Data from 10x Research shows that the average prices following the past three halvings (2020, 2016, 2012) increased by 16% in the subsequent 60 days. The 2016 halving initially saw a 6% dip but then rebounded strongly in 2017.
Experts suggest that halvings usually lead to rising prices due to reduced supply, with a peak typically occurring around 500 days post-halving. However, markets have already factored in the halving, and significant price hikes aren’t expected immediately after.
Are there any negative effects?
Bitcoin mining companies, which bear energy and equipment costs to validate transactions, may face financial strain as rewards shrink.
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Andrew O’Neill, managing director of digital assets research at S&P Global, notes that halving the block rewards can impact miners’ profitability significantly, leading to potential closures of unprofitable businesses.
For Bitcoin mining to be economically sustainable, broader adoption across the global economy is required to boost miners’ earnings from transaction fees. However, concerns are rising about the environmental unsustainability of energy-intensive Bitcoin mining.
Critics fear that amateur investors may be drawn into price spikes and hype surrounding the halving, adding another layer of negative impact.
Source: www.theguardian.com
