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Ethan Lou<\/i><\/a>\u2019s<\/i> latest book is <\/i>Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West<\/a>.<\/p>\n In the cryptocurrency world, there\u2019s an event similar to a central bank rate adjustment in the mainstream economy: bitcoin\u2019s \u201chalving.\u201d<\/p>\n It\u2019s far from the same as changing the benchmark interest rate, but it is also a high-level, wide-impact event that foretells which way the market winds will blow. And much like how central bank rate hikes \u2013 and the talk of them \u2013 have dampened the past year\u2019s surging stocks, bitcoin\u2019s halving trends are now also pointing to a bear market for cryptocurrency.<\/p>\n The halving is a reduction of the rate at which new bitcoins are introduced into the system. That process happens through so-called \u201cminers,\u201d who process transactions by solving mathematical puzzles through special computers. The miners are rewarded with bitcoins for their work. Every four years, that reward gets cut in half. The last halving was in 2020, when the reward for processing a \u201cblock\u201d of transactions became 6.25 bitcoins.<\/p>\n Those reductions are significant for price because bitcoin does not have much of a circulating supply. The creator Satoshi Nakamoto\u2019s more-than 1 million bitcoins, for example, have never moved. Many long-term investors do not sell. And examples abound of people losing their private keys, the equivalent of a password, rendering their coins forever lost.<\/p>\n Research published in the industry\u2019s Bitcoin Magazine<\/i> shows that 76 per cent of the close to 19 million bitcoins currently in the system can be considered \u201cilliquid.\u201d The new bitcoins that miners introduce into the system are important in satisfying demand.<\/p>\n So, when one day, miners pump out only half as many new bitcoins as before, it\u2019s a big blow to supply. It does take a while for the impact to trickle into the market, but past halvings have always been followed by sharp price rallies. By the end of 2020, bitcoin was up four times its price at the beginning of that year. Bitcoin prices usually lift the wider cryptocurrency market, too.<\/p>\n At the same time, though, rapid growth brings hype and absurdity \u2013 the sort that eventually becomes sobering. A year or so after the halving, bitcoin usually reaches an unprecedented price. And there comes a point when people tire of it all and wonder, \u201cWhat am I doing with this $300,000 picture of an ape?\u201d<\/p>\n Brutal bust cycles have also always followed the cryptocurrency booms, with drops as much as 80 per cent \u2013 until the next halving. Such has been the market cycles for the past 13 years bitcoin has been in existence.<\/p>\n Now, we are some two years after the last halving, which could be a cause for concern because this is usually around the time the bust starts.<\/p>\n Of course, like all market phenomena, this is the sort of quantum-physics situation in which having an observer affects the outcome. If everyone knows about this mechanism and thinks that bitcoin\u2019s prices are affected by the halving, it will be baked in, and then prices will no longer be so affected by the halving. This time around, will we see history repeat?<\/p>\n It might be helpful to look further into history. There is this saying that past performance is no guarantee of future results, but for every such platitude there\u2019s an opposite: \u201cHistory doesn\u2019t repeat, but it often rhymes,\u201d \u201cthose that fail to learn from history are doomed to repeat it\u201d and so on.<\/p>\n The latest bitcoin price peak of nearly US$69,000 was a little more than triple of the last peak of US$20,000, in 2017. Yet that earlier peak was about 20 times of the peak before to it. And before the first halving that sent bitcoin to US$1,000, bitcoin\u2019s peak was only US$20 \u2013 that rally was 50-fold.<\/p>\n The numbers might seem bigger now, but in percentage terms, bitcoin\u2019s price movement has become less volatile. That does validate the view that the impact of the halvings has been increasingly baked in.<\/p>\n It\u2019s much like the central bank rate hikes these days. Bankers have not so much been telegraphing them, but beating them in with a stick. That blunts the otherwise sharp shocks, but the downward pressure on stocks is still there.<\/p>\n The bottom line is that, for a decentralized cryptocurrency ecosystem designed with no single point of failure, the bitcoin halving is perhaps the only factor that can have such a big and across-the-board impact. Like a central bank rate adjustment, it\u2019s a factor that every investor must take into account.<\/p>\n Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening.<\/i> Sign up today<\/i><\/a>.<\/i><\/p>\n<\/div>\n