Currency traders are seemingly obsessed with trying to predict the Federal Reserve’s next move, meticulously analyzing every word of every official communique for clues about the future path of monetary policy.
There’s nothing like that in the world of bitcoin. Instead, the rate at which the bitcoin supply increases is preordained by a few lines of code.
And on Saturday, that rate will fall dramatically after a quadrennial event called “the halving.” Some say the event, which will cut the rate at which new bitcoins are created in half, could cause the price to jump.
Here’s what you need to know:
What is the halving?
Satoshi Nakamoto, the pseudonym used by the mysterious creator, or creators, of bitcoin, intended for the supply of bitcoin to be inherently deflationary, contrasting sharply with the policies of central banks, which can, in theory, print a limitless supply of new currency.
So he created a mechanism for gradually reducing the supply of new coins created, and wrote it into the underlying bitcoin software.
This is how bitcoins are created: Miners process transactions on the network by using powerful computers to solve complex cryptographic puzzles that bundle transactions into blocks, which are then stored on the blockchain — the supposedly immutable record of every bitcoin transaction. These computers lend the network the computing power it needs to function.
Miners race to be the first to solve these puzzles. The winner is rewarded with a cache of new bitcoins. This process repeats about every 10 minutes, on average. The time allotted for mining a single block can vary dramatically.
Miners can hold on to these bitcoins, or turn around and sell them on the open market. Either way, this is the mechanism through which new coins are introduced into the bitcoin ecosystem.
The halving is expected to take place Saturday around 11 a.m. Eastern, when the 210,000th block is mined. The miner who successfully fuses this block to the blockchain will receive 25 bitcoins. The miner who processes the next block will receive 12.5 coins.
What’s the outlook for the price?
The price of a single coin gradually increased after the first halving, which took place on Nov. 28, 2012. But its moves likely had more to do with increasing interest in the then-nascent digital currency, which contributed to a sharp runup in bitcoin’s price during 2013.
Some have attributed the runup in the price of a coin so far this year to anticipation of the halving. This time around, it’s anyone’s guess what might happen to the price after the halving, said Erik Voorhees, chief executive of ShapeShift.io, a platform for exchange cryptocurrencies.
Nearly $225 million worth of bitcoin changed hands over the past 24 hours, according to data provided by CoinCap.io. The number of new coins being mined each day — currently about 3,600, or about $2.2 million at the current price — is small in comparison.
“It’s a question of how many of the 3,600 coins being created today are being sold on the market,” Voorhees said. “If they’re all being sold on the market, then the halving could cut that supply in half. If very few are being sold, then it would have less of an effect.”
Miners’ margins come under pressure
After the halving, miners will effectively be paid half as much for expending the same amount of energy.
If there isn’t a commensurate increase in the price of a single coin, miners with the thinnest margins could struggle, possibly forcing some to turn off their equipment, said Mike Segal, director of security and development at DigitalX, a company that mines bitcoin, but which has also built several bitcoin software products.
This risks ceding more control to some of the biggest miners, who have the largest economies of scale, which could further compromise the ideal of bitcoin being a decentralized network, Segal added. A recent story in the New York Times examined how a handful of large miners in China have effectively assumed majority control of the network.
“The fear has always been centralization of mining. The bitcoin ideal is a decentralized mining market. But economies of scale make it possible for the largest players to put smaller ones out of the market,” Segal said.
Some small miners might be able to survive if they have lower operating costs — like cheaper electricity or if they have a low or nonexistent debt burden.
“The impact of the halving isn’t based on size, it’s based on marginal profitability,” Voorhees said.
A small miner running his or her operation out of an apartment building where the landlord pays for tenants’ electricity could have lower operating costs than a massive miner somewhere else, Voorhees said.
To be sure, the halving is easily predictable, almost down to the day. So if they’re smart, miners have had time to prepare for any drop off in revenue.
But the true fallout may not be known until weeks later, when the impact on the price, if any, becomes apparent.