Bitcoin, the world’s largest cryptocurrency, completed its “halving,” a phenomenon that occurs every four years, according to CoinGecko, a cryptocurrency analysis company.
Bitcoin remained rather stable afterward, sliding 0.47% to $63,747. The halving comes after Bitcoin hit a record high of $73,803.25 in March. But what precisely is the halving, and why does it matter?
What is Bitcoin halving?
Bitcoin’s halving, which occurs every four years, is a shift in the underlying blockchain technology that reduces the rate at which new Bitcoins are generated.
Bitcoin was planned from the start by its pseudonymous creator, Satoshi Nakamoto, to have a limited amount of 21 million tokens.
Nakamoto included the halving in Bitcoin’s code, and it works by slowing the rate at which new Bitcoins are introduced into circulation.
So far, around 19 million tokens have been released.
The blockchain is designed so that a halving occurs every time 210,000 blocks are added to the chain
Blockchain technology involves the creation of information records known as ‘blocks’, which are then added to the chain through a process known as ‘mining.’
Miners use computational power to solve complicated mathematical riddles to build the blockchain and earn new Bitcoin as a reward.
The blockchain is designed so that a halving occurs every time 210,000 blocks are added to the chain, roughly every four years.
At the halving, the quantity of Bitcoin available as rewards for miners is reduced by half. This reduces mining profitability and decreases the production of new bitcoins.
It is difficult to determine the impact of halving, if any, on Bitcoin’s price change
Some Bitcoin enthusiasts believe that the currency’s scarcity adds value. Since reaching new highs last month, Bitcoin’s price has fallen below $64,000.
Identifying the reasons for a cryptocurrency rally is difficult, as there is significantly less transparency than in conventional markets.
The most prevalent explanation for this year’s spike is the US Securities and Exchange Commission’s January approval of Bitcoin ETFs, as well as predictions that central banks may lower interest rates.
However, in the speculative world of cryptocurrency trading, explanations for price fluctuations can snowball into market narratives that become self-fulfilling.
There is no evidence to imply that prior halvings caused Bitcoin’s subsequent price rises. Still, traders and miners have analyzed previous halvings to gain an advantage.
When the last halving occurred on May 11, 2020, the price increased by about 12% the following week and 659% during the next year.
However, there were numerous theories for the increase, including loose monetary policy and stay-at-home individual investors with extra cash, and no actual proof that the halving was the cause.
An earlier halving happened in July 2016. Bitcoin climbed by about 1.3% the following week, before plummeting a few weeks later and then recovering.
In a nutshell, it is difficult to determine the impact, if any, of prior halvings or anticipate what will happen this time.