While Bitcoin is currently well off the massive highs seen at the end of 2017, the next rally in the price of the original cryptocurrency could be closer than you think.
This is due to a process called Bitcoin halving, where the reward for validating transactions on the Bitcoin blockchain (also known as ‘mining’), is reduced by 50%.
A halving happens once every four years, with the next one scheduled for May 2020 when the reward for mining a single ‘block’ falls from 12.5 Bitcoins to 6.25.
When a halving occurs, as it has already on two occasions since Bitcoin was created in 2009, the price tends to experience a jump in value about a year or so after.
This is because after a halving Bitcoin becomes more scarce as it now takes twice as long to produce the same amount, restricting the supply and pushing up prices provided demand stays the same.
For example, Bitcoin’s second halving on 9 July 2016, which lowered the reward to 12.5 Bitcoins from 25, saw the price rise around 289% to US$2,580 12 months later.
“So far, the halving has been a major catalyst in starting the [Bitcoin] bull run” says George McDonaugh, chief executive at digital asset investment firm KR1 PLC (LON:KR1), although the halving is, aptly, only half the story when it comes to Bitcoin rallies.
While the halving is often a signal for the ‘smart money’ and sector-focused investors to put cash into Bitcoin, the main driver of previous highs is media hype.
“What really begins to move Bitcoin is the media…[when the price jumps] the media goes crazy and everyone starts buying”. The halving is the signal for those who are technically involved in Bitcoin, the rest of the market comes in on the media movement,” McDonaugh says.
However, this renewed mainstream interest means Bitcoin can quickly reach overbought levels as more and more buyers are drawn in, resulting in a sharp downward correction similar to that seen at the end of 2017 when Bitcoin plunged from an all-time high of around US$17,000 in December to less than US$8,000 two months later.
Basically, once the mainstream retail investors come knocking, it may be time to start considering a sale.
While Bitcoin is currently nowhere near the highs of late-2017, the cryptocurrency is still retaining a value well above its price at the time of the last halving, and if the model continues to hold true we could be seeing yet another bull run on the cards next year.
McDonaugh says that following its dramatic rise and fall last year, the mainstream market has “forgotten about Bitcoin” but that frenzied interest will return when Bitcoin reaches the next milestone, most likely when it returns to US$10,000. He estimates a renewed buying frenzy could push the currency as high as US$60,000 in the longer term.
“[The mainstream] will continue to forget about it until the media starts covering the price again, which will bring all the retail buyers back.”
He also predicts that there could be as many as five bull runs left that will mirror the dramatic movements seen in 2017.
“With Bitcoin and blockchain technology, everything is multiplied. The cycles are quicker, the fluctuations are higher, the bear markets are lower, everything is heightened…it’s a perfect storm in terms of speculation.”