Last week saw the second “halving” in Bitcoin’s history. The founding algorithm upon which Bitcoin operates limited the total number of coins to be created at 21 million in total. The majority were created early, with an ongoing amount that gradually tapers downwards every four years or so.
Until last week, the process, called mining, that the system needs to independently validate transactions, known as the blockchain, provided a reward of 25 bitcoins every 10 minutes. This reward is provided for solving the complex mathematical puzzles that the underlying cryptography uses. With this halving in place, the new reward that miners are competing for is just 12.5 bitcoin.
While many of the coins created stay in the hands of miners, they are forced to sell some regularly to pay the bills for their sizable operations. With the reward now halved, combined with a gradual but substantial increase in adoption of the currency, many are predicting a supply crunch where less coins are coming onto the market than the market actually wants and needs to buy.
If this happens, as many of the longer-term investors and early adopters hope and believe, then the price at which one Bitcoin trades is likely to increase substantially in the coming months. Since this is a permanent reduction in the reward miners receive, it is also possible that we are now at the beginning of a new and permanent supply crunch. If this happens to be true, which is very plausible, then Bitcoin is likely to be one of the best performing investment assets of the century.
In addition to this, the crypto-currency seems to be what author Nassim Nicholas Taleb described as ‘antifragile’, meaning that it gains strength from disorder. It has certainly been visible so far that economic problems around the world bring more people and more money into the ecosystem. Should the current warnings of recession in the US, UK and others come true, it would likely be very bullish for the price.
One reason for this strength is that it has been difficult to purchase bitcoin using anything other than cash until recently. The result is that unlike the financial system at large, there is very little debt in the price of Bitcoin. Real money has been used to purchase and mine coins and when combined with the deflationary power of a guaranteed limit to supply, it’s fans are understandably confident about the future.
The Bitcoin community typically offers astoundingly bullish predictions, usually accompanied by the words, “To the moon!”. However, more sober suggestions have predicted the price doubling in 2016. As it stands, a 100% gain in price would be very welcome for investors and would provide more proof to the traditional investment community that bitcoin is an asset class to watch.
Bitcoin is not without risks, however. It is possible that a number of technical or economic situations may come to pass which could see the project fail and the price fall. As each day passes, failure seems to become a little less likely, but it is still a possibility.
The keen interest in blockchain technology that established financial services firms, including some of the biggest banks in the world, have shown this year suggests that this emerging technology is here to stay in some form.