Bitcoin slid on Monday in volatile trading, after it went through a technical adjustment that reduced the rate at which new coins are created, but the outlook remained upbeat as the increase in supply slows down.
Monday’s “halving” cuts the rewards given to those who “mine” bitcoin to 6.25 new coins from 12.5. The next halving will be in 2024.
Bitcoin relies on so-called “mining” computers that validate blocks of transactions by competing to solve mathematical puzzles every 10 minutes. In return, the first to solve the puzzle and clear the transaction is rewarded new bitcoins.
In late afternoon trading, bitcoin was last down 1.3% at $8,620.43 against the dollar BTC=BTSP on the Bitstamp platform. It briefly turned higher.
“The incentive is less for miners now to mine bitcoin and they will probably switch to more profitable cryptocurrencies. So in the short term, there’s going to be pressure for bitcoin,” said Edward Moya, senior market analyst at OANDA in New York.
“But longer term, you’re probably going to see higher prices. With all the fiscal and monetary stimulus that’s being pumped into the global economy, there’s renewed interest from institutional traders looking for alternatives to modern government-backed currencies.”
Bitcoin has gained more than 20% since the beginning of the year. It touched $10,000 last week, a roughly three-month high, after Bloomberg reported that hedge fund manager Paul Tudor Jones has backed bitcoin as a hedge against inflation.
Traders said the prospect of bitcoin’s halving has fueled gains in the asset this year.
Bitcoin two earlier “halvings”— one in November 2012 and the other in July 2016 — had signaled the start of bitcoin’s most dramatic bull runs over a period of several years, although not before a brief sell-off.
The previous two bitcoin events propelled rallies of about 10,000% from late 2012 to 2014, and roughly 2,500% from mid-2016 to the currency’s all-time high just shy of $20,000 in December 2017, according to traders.