Before explaining this recent Bitcoin event, I would first like to affirm that I do not personally endorse Bitcoin investment, it as a haven for illicit money, its “pyramid” style mechanics and the amount of energy burned by Bitcoin miners in pursuit of profits. Its growth has been astounding, but to make gains this way without fully understanding the ethics involved feels uncomfortable to me.
It’s been a topic at dinner parties and bar-room chats for a few years and some people have not wanted to “miss out”. Even Wall Street and The City have jumped on the bandwagon with Bitcoin ETF’s but again, the search for profits here is disappointing to any ethical financial planner. In comparison, Big Pharma groups come under attack for profits over ethics but many of the same people likely invest in Bitcoin! On the other hand, some decent folk, through no fault of their own, have little choice of investment, outside simple bank deposits.
What is Bitcoin Halving?
A Bitcoin halving is an event where the reward for mining new blocks is halved, meaning miners receive 50 percent fewer Bitcoins for verifying transactions. Bitcoin halvings are scheduled to occur once every 210,000 blocks, roughly every 4 years, until the maximum supply of 21 million bitcoins has been generated by the network. Bitcoin halvings are important events for traders because they reduce the number of new Bitcoins being generated by the network. This limits the supply of new coins, so prices could rise if demand remains strong.
The halving policy was written into Bitcoin’s blockchain algorithm by a mysterious person or group using the assumed pseudonym “Satoshi Nakamoto”. A decentralised network of validators verify all Bitcoin transactions in a process called mining. They are paid 3.125 BTC when they are the first to use complex math to add a group of transactions to the Bitcoin blockchain as part of its proof-of-work mechanism.
Miners face a profitability squeeze after a halving event, due to the increased computing power and energy needed to mint new coins. Larger miners should have the resources to invest in new hardware and find more efficient energy sources, but a significant use of energy is still required.
Why does Bitcoin Halve?
While Satoshi never explicitly explained the reasons behind halvings, many have speculated that the system was designed to distribute coins more quickly at the beginning to incentivise people to join the network and mine new blocks.
One criticism of Bitcoin’s design, including halvings and the finite supply of 21 million coins, is that it encourages users to invest rather than spend (which is the real point of digital currency) in the hopes that coins will increase in value over time. This may have fuelled boom and bust cycles in the past, with users hoarding coins only to cash out at key levels. The available supply of conventional currencies rises and falls under the watchful eyes of national central banks, but there will only ever be 21 million Bitcoins. At present, a few more than 19 million have been mined, leaving just under two million left to be created.
What Happened in Previous Bitcoin Halvings?
Bitcoin previously underwent a halving event on 11 May 2020, where rewards for mining fell from 12.5 new Bitcoins per block to 6.25 BTC. The tightening supply provided for a bullish scenario in which prices surged from US$6,877.62 on 11 April (a month before the halving) to US$8,821 at the time of the event itself. Despite significant volatility, the price continued to rise over the course of the next year to reach US$49,504 on 11 May 2021. Looking back at other previous halving events, the market has experienced significant price appreciation in the months following each halving.
The last halving will occur in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created. From there, miners will just be paid with transaction fees.
In my country of origin, the UK, although it is similar for many countries, cryptocurrency is unregulated. The Financial Conduct Authority has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation. Cryptos have also had their fair share of hacking, blocks disappearing, ransoms, plus losses of the codes required to open wallets. It could all very easily be fool’s gold.
For more informed decisions related to your own circumstances, speak with your trusted financial adviser. moneytalks@thenanjinger.com
