The launch of Bitcoin in January 2009 marked the start of a rollercoaster ride for the largest and most talked-about digital asset. With a market capitalisation that reached a high of over US$1.4 trillion (£1.125 trillion) this February, Bitcoin has been attracting a lot of attention due to its volatile swings.
Recently, the much-anticipated bitcoin halving event, which occurs every four years, took place. However, the value of cryptocurrency can also be influenced by various other factors.
To understand the halving and its potential impact, it is important to have a clear understanding of how bitcoin operates. As a digital currency, it utilizes blockchain technology to store, record, and publish all transactions securely. Unlike fiat currency, such as the dollar or pound, bitcoin has no central authority, and all network members have equal power. Each transaction is made and recorded using the user’s public address, ensuring anonymity.
Bitcoins are created through a process called “mining,” where individuals provide computing power to secure the network and solve complex mathematical problems to process transactional data. In return, miners are awarded newly-minted bitcoins for their efforts.
In 2008, a mysterious person or group using the pseudonym Satoshi Nakamoto published a whitepaper introducing the concept of Bitcoin. In order to combat inflation, Nakamoto coded a limit of 21 million bitcoins that could ever exist. Currently, over 19.6 million bitcoins have been mined.
Since 2009, miners were initially rewarded 50 bitcoins per block they mined. However, this reward is halved every 210,000 blocks, which occurs roughly every four years. In 2012, the reward dropped to 25 bitcoins, then to 12.5 bitcoins in 2016, and finally to 6.25 bitcoins in 2020. The most recent halving event resulted in a reward of only 3.125 bitcoins.
The reasons for the halving have never been explicitly explained by Nakamoto. It is believed that it was designed to distribute more coins at the start to incentivize people to join the blockchain and mine blocks. As the network grows, the value of the coins is expected to increase.
However, it is also possible that many users hold bitcoins for speculative purposes rather than using it as a currency. The limited supply of 21 million bitcoins, compared to traditional currencies like the dollar or euro, makes them rare and valuable to some.
The halving event, in theory, should not have a direct impact on the price of bitcoin. In fact, as the number of new bitcoins in circulation decreases, the demand for them should increase, theoretically causing the price to rise.
However, the past halving events have shown that the price of bitcoin can be affected, at least temporarily. For instance, after the second halving event in 2016, the price initially dropped by 10%, then quickly rebounded. Some argue that the bull market of 2017 was a delayed result of this halving.
Most recently, in 2020 during a bullish period, the third halving occurred, and the price of bitcoin continued to rise in 2021, reaching an all-time high of over US$56,000.
One of Bitcoin’s most significant characteristics is its scarcity, especially in a time of high inflation, quantitative easing, and high interest rates. As the value of traditional currencies falls, bitcoin’s limited supply becomes an attractive feature and can provide reassurance for investors.
The recent approval of Bitcoin exchange-traded funds has made it easier for both retail investors and large banks to invest in bitcoin, leading to an all-time high in February. With a more favorable regulatory environment and increased integration into financial systems, the rise of bitcoin is likely to continue in the coming years.
