The price of the digital currency Bitcoin have hit a two-year high, trading above $700 AUD on Monday morning after it spiked 21% over the weekend as traders raced in front of an event programmed to occur only once every four years called the ‘halving’, an adjustment to bitcoin’s protocol designed to reduce the supply of new bitcoins by half.
“The halving reduces the amount of new Bitcoins available to be mined by exactly half to 12.5 down from 25 Bitcoins in a block which takes on average 10 minutes to produce.” says, Sam Lee, CEO of Bitcoin Group, Australia’s largest Bitcoin Mining company.
“Halving is currently estimated to happen in less than a month, this reduces the global supply of Bitcoins, and we are seeing as a result the price moving up because of this.”
“The impact of halving will be felt, but considering that Bitcoin’s value has quadrupled in value since a year ago, so even with the halving, the market opportunity of Bitcoin Mining is still double what it is since a year ago in USD terms.”
Most recently, it was trading at AU$952 (US$703), which is up over 300% from AU$315 (US$233) this time last year.
Any time you’re talking about bitcoin prices and the reasons for any move, it’s best to keep in mind that this is still a relatively thin market. The volume of bitcoin traded over the past 24 hours was about 400,000, worth about $277 million, according to CoinMarketCap. That’s large by cryptocurrency standards, but small by capital market standards; this is still a market that can be pushed by a small amount of trading. Don’t forget China, either. A lot of trading comes from China, where bitcoin is an enthusiastically speculative market. Lastly, the risk-off selling in the wider capital market sometimes triggers bitcoin’s gold-like qualities, driving a small store-of-value crowd into the currency.
The more important factor, though, is almost surely a rare event in the bitcoin world that is coming within a month: the ‘halving’.
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A quick explanation: Bitcoin is designed to be run by a network of computers that independently confirm transactions on the network. To ensure that individuals are willing to contribute their computing power, a reward is included for every block of transactions confirmed: a batch of newly created bitcoins. Because this process somewhat resembles physical mining, the contributors are dubbed the miners.
When bitcoin was released, it had a ‘cap’ programmed into it: no more than 21 million bitcoins would ever be produced (about 15.7 million have been mined so far). To ensure that those bitcoins would be mined over a long time (well into the next century), certain speed bumps were programmed in. One was a roughly ten-minute lag between confirmed blocks. The other was a quadrennial reset of the mining reward, an event called the halving. Every four years, the mining reward is cut in half. When bitcoin launched, the reward was 50 bitcoins. In 2012, it was cut to 25. In less than 30 days, it will be cut again, to 12.5 bitcoins.
This second halving is currently slated to occur in about 26 days.
It isn’t exactly clear what will happen during this halving. On the one hand, it should have a pretty predictable supply-and-demand effect: with the supply getting cut, demand should push prices higher. That is what seems to be happening now, as traders are essentially ‘front running’ the halving.
On the other hand, the bitcoin network has changed dramatically in four years. At the last halving, on Nov. 28, 2012, bitcoin was still a tiny, mostly hobbyist network, with miners still using desktop computers and graphics cards. Now miners are multi-million, enterprise-level operations. Cutting the reward in half could wreak havoc with their business models. Already, one miner, Sweden-based KnCMiner, has filed for bankruptcy protection. If the price rises enough to offset the lowered reward, then the other miners will chug happily along.
If miners were profitable at $450, they should still be profitable at $900, and they’ve got 26 days to get bitcoin’s price there. If the price doesn’t hew to the laws of supply and demand – and this is still an unusual experiment in currency creation, remember – then the miners could be in for a rough storm.
Bitcoin Group attempted an IPO, lodging their first prospectus on the 29th of June last year, after regulators gave the prospectus the green light. However regulators ultimately denied the listings citing “no reasonable grounds for forward looking statements as bitcoin to have no future value”.