Here’s what you need to know

A visual representation of digital cryptocurrency bitcoin.

Yu Chun Christopher Wong | S3studio | Getty Images

Bitcoin faces a key technical event on Monday known as “halving”. Due to the end of the day, industry insiders are debating the effect this could have on the cryptocurrency market.

So what is the halving? You can think of it as an update to the underlying network that records all bitcoin transactions. There are so-called “miners” on this network with specialized computer platforms competing to solve complex mathematical problems to validate bitcoin transactions. Whoever wins this race is rewarded in bitcoin.

On Monday, the amount of bitcoins rewarded for these miners should be cut in half. This is something that takes place approximately every four years to limit inflation. The current reward is 12.5 bitcoins, or BTC, which will now be reduced to 6.25 BTC.

Unlike fiat currencies like the dollar, there is no central bank that manages the supply of bitcoin or its rate of inflation. Instead, this is maintained through a rule written in the bitcoin code by the pseudonymous inventor Satoshi Nakamoto.

The total number of bitcoins that will never be mined is capped at 21 million. The rewards given to bitcoin miners continue to halve until they reach zero. Bitcoin bulls say this scarcity is part of what underlies the value of cryptocurrency and makes it a potential “hedge” against currencies that are vulnerable to devaluation in times of economic crisis.

“With its finished and scheduled supply and decentralized architecture, BTC in particular offers the certainty needed in times like these, and will likely become a new safe haven asset class,” wrote the loan start-up. of Nexo cryptocurrency in a Note last week.

How could prices react?

Investors are likely to closely monitor the reaction of prices of bitcoin and other cryptocurrencies to the halving event later today. Some believe that the event has already been mainly integrated into the markets, but others believe that it could drive up prices.

The last two halves have led to opposite short-term price movements, according to the British bitcoin exchange CoinCorner. Bitcoin climbed 7% a month after the first halving event in 2012, but slid 10% a month after the second in 2016. However, the price rose 944% six months after the halving in 2012 and 38% over the same period in 2016.

“While many anticipate bullish movements after the halving, we believe the supply shock that occurs immediately after the halving event is expected to have a limited impact on prices in the short term,” said Lennard Neo , research director at Indonesian fund provider Bitcoin Stack, Stack, said in a note Thursday. “As the overall reward for miners decreases, there will be a time lag as miners (on the supply side) reposition themselves towards market equilibrium.”

“We anticipate that it could take 6 to 9 months before this balance is found and Bitcoin realizes a price appreciation induced by the reduction by half. That said, further turbulence in the wider economies could accelerate its upward trajectory.”

But it is also to be feared that the halving of 2020 will also have an impact on miners’ incomes, as they will need more competitive mining equipment to earn rewards in bitcoins.

“Miners currently have to produce more work to get the same reward,” said Ed Hindi, IT director of the Cayman Islands-based cryptocurrency hedge fund, Tyr Capital. “Publications that cut their expected yields in half will be cut in half.”

Bitcoin has increased by more than 20% since the start of the year. The virtual currency, known for its volatility, suffered a sharp decline this weekend. It briefly touched $ 10,000 on Friday, but has since dropped to around $ 8,800 on Monday morning.

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