Later today, a major event will take place in the cryptocurrency space as Bitcoin prepares to engage in a ‘halving’, which has the potential to majorly affect the price of the digital currency.
A halving (or ‘halvening’), takes place every four years and results in the number of new Bitcoins issued every 10 minutes by the Bitcoin blockchain being cut in half.
In the current cycle, this means the number of new Bitcoins issued every 10 minutes will fall to 6.25 from 12.5, having previously halved to 12.5 from 25 in 2016.
A halving is significant as it reduces the amount of Bitcoin generated when a transactional ‘block’ on the Bitcoin blockchain is completed, meaning the supply of new Bitcoins is lower and it becomes harder for crypto miners to generate the same amount of crypto as they must resolve more transactions on the blockchain.
Bitcoin is also not the only cryptocurrency to engage in halving, with fellow digital currency Litecoin due to participate in its own ‘halvening’ in August 2023.
Effect on Bitcoin prices
As a halving decreases the amount of new Bitcoin entering the supply, providing demand remains steady this usually results in the price increasing, with previous halvings preceding some of the biggest runs in Bitcoin's history.
For example, since the last halving in July 2016, the price of Bitcoin has increased by roughly 1,180% to its current level of around US$8,838, although with some very dramatic swings in the intervening period.
In a report last week, analysts at Bitcoin storage and transaction specialist Luno said this next halving could see a potential Bitcoin price increase of around 270% until the next halving in 2024, taking it up towards US$33,000.
However, others such as former Goldman Sachs hedge fund manager Raoul Paul have claimed the digital currency could go even further, potentially rising to US$1mln over the next four years.
Meanwhile, Danny Scott, chief executive of cryptocurrency exchange CoinCorner, has predicted that within three to nine months Bitcoin will be pushing its previous all-time high of US$19,511, reached during a buying frenzy in 2017.
Investors should be cautious in the short-term
While the impending halving may have may Bitcoin investors preparing for a bullish bonanza, Leonard Neo, head of research at Bitcoin index fund provider Stack, has said he expects a “short-term pullback” in Bitcoin prices immediately after the halving as traders “begin taking profits and the market converges back towards the [moving averages]”.
However, in the longer-term Neo is upbeat, saying they expected Bitcoin to “register significant price appreciation towards the end of 2020 and early 2021”.
Another reason for long-term positivity is growing institutional investor interest in Bitcoin and other crypto investments.
OANDA’s Edward Moya said last Friday that this trend will provide “major support going forward” as institutions began spending money again once concern over the coronavirus pandemic abated.
“After the dust settles, Bitcoin could see a strong bullish trend emerge as long financial markets do not see a second wave of [coronavirus] spread across Europe and America trigger a flight-to-safety move”, he added.
In late-morning trading on Monday, Bitcoin was 0.2% higher at US$8,838.