Bitcoin has been on a tear this year, rising almost 200% since the start of the year. There are multiple theories as to why, and one in particular is gaining traction.
It’s being called “the halvening”, an event where the rewards to so-called bitcoin miners are cut in half. To understand what that means, it’s important to know how bitcoin’s underlying technology — the blockchain — works.
Miners with high-powered computers compete to solve complex math problems to validate bitcoin transactions. Whoever wins that race gets rewarded in bitcoin.
Currently, the number of bitcoins miners are rewarded in stands at 12.5. The rewards are halved every few years to keep a lid on inflation. By May 2020, experts say, the reward per miner will be cut in half again, to 6.25 new bitcoins.
“Bitcoin’s current inflation rate is approximately 3.76%,” Mati Greenspan, senior market analyst at social trading platform eToro, told CNBC by email. “In May of next year, it’s scheduled to be reduced to 1.8%.”
Why does this happen?
This process takes place roughly every four years. That’s due to a rule encompassed in bitcoin’s software, which was established by Satoshi Nakamoto, the unknown person or people that created bitcoin.
“One of the key features of bitcoin is predictability around the new supply that’s being released,” Garrick Hileman, head of research at cryptocurrency services firm Blockchain, told CNBC over the phone.
Bitcoin is often referred to as “digital gold,” because of its supply and liquidity dynamics. Experts say the cryptocurrency’s value is underpinned by the scarcity of the total number of bitcoins in existence.
The total number of bitcoins that will ever be minted is capped at 21 million. Roughly 80% of that amount has already been mined, Hileman said, adding that the hard cap won’t be reached for another 120 years.
How could it affect prices?
Traders see the potential for upside with such an event, as it ultimately causes supply to dampen, bumping up the price of the digital asset.
“It’s the tightening of supply that forces the price upwards and the anticipation of less liquidity coming onto the market,” Charles Hayter, CEO of digital currency comparison site CryptoCompare, told CNBC. The digital currency recently reached a 15-month high.
Hayter said the event could be an uncertain one for bitcoin miners, though, as there would be a “clean out” of less competitive mining gear, “on which the price is correlated.”
But the ultimate expectation in the market is for “a shift in demand for the newly minted bitcoins,” Hayter said, “and with less coming onto the market, the price per bitcoin could be expected to rise.”
As previously mentioned, there are a number of other theories as to why bitcoin’s price is on the rise this year, all the way from investors using it as a hedge amid the U.S.-China trade war to Facebook forming its own cryptocurrency.
Now back above a price of $11,000, bitcoin has been getting more love from investors this year. But the picture was less rosy last year, with the virtual currency plummeting over 70%. That came on the back of a near-$20,000 record high for bitcoin in late 2017.