The price of bitcoin appears to be getting less volatile
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What is the bitcoin halving?
Bitcoin is a digital currency that operates free from central control: rather than an authority like a bank or a government keeping track of who owns what, bitcoin relies on cryptography.
So-called miners collect information about transactions and log them in a ledger called a blockchain. These miners use computers to perform vast numbers of calculations with the aim of completing a cryptographic problem, consuming about 0.7 per cent of electricity globally in the process. The first miner to solve this problem adds their collection of transaction data – a block – to the blockchain.
They are also rewarded with a set amount of newly created bitcoin, a figure that is enshrined in the source code that describes and runs the network. After every 210,000 blocks, there is an event called the halving where the size of the reward shrinks by 50 per cent. This is intended to avoid inflation due to too many coins being created.
The first blocks ever mined saw rewards of 50 coins, but this has now dropped following three halvings to 6.25 coins. The last halving was in May 2020.
When is the next bitcoin halving?
The next bitcoin halving is expected some time around 19 April and will reduce miner rewards to 3.125 coins. The rewards will continue to diminish before disappearing entirely after 21 million coins have been created, somewhere around the year 2140. At that point, no new coins will ever exist.
Why does it matter?
For people using bitcoin to buy goods or services, or holding the coins as an investment, nothing will change. The current pool of bitcoin will remain. But miners will see the value of the rewards they earn drop significantly.
This could see some miners shut up shop if they decide the effort is no longer worth the rewards. But in truth, the economics of mining are always changing and the industry is likely to adapt and continue much as before.
More powerful computers are constantly being created that can do the mining calculations faster, meaning blocks are mined more easily. But feedback mechanisms within bitcoin’s code constantly adapt to this by ramping up or down the difficulty of the calculations in response to the total computer power currently dedicated to mining. The aim of the bitcoin source code is to regulate the network so that a new block is created roughly every 10 minutes, speeding up and slowing down when needed.
When bitcoin was first launched in 2009, it was possible to almost instantaneously mine a coin using even a basic computer. Now it requires rooms full of powerful equipment, often high-end graphics cards or custom hardware that is adept at crunching through the calculations. As a result, each reward is usually split among many miners working as a team.
What could happen to the price of bitcoin?
The recent emergence of exchange-traded funds (ETFs) – regulated financial products available from major banks, offering a simpler way to invest in bitcoin – has been long-awaited and was expected to push up prices. Some analysts now estimate that around 704,400 coins are already in the hands of ETFs.
There are now two schools of thought on the effect of the halving: some believe it will provide another boost to bitcoin and push prices ever higher, while others think the impact is already priced-in. While the regulatory approval of bitcoin ETFs was never a certainty, the halving is, so its effect may already be reflected in the price. But it is almost certain that the halving won’t cause the price to double.
The wild swings in price that bitcoin experienced in prior years are becoming less frequent and metrics that track volatility seem to be trending downwards. But discussions around bitcoin price are ultimately just speculation.
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