CNN — NEW YORK (CNN) — Bitcoin soared to $50,000 on Monday for the first time in two years, boosted by new investor enthusiasm and rising expectations for a mysterious-sounding event known as the “halving.”
Bitcoin, the world’s most popular cryptocurrency, returned to the low $40s on Tuesday, marking its seventh straight day of gains but still far from its all-time high of about $69,000. However, Bitcoin has made a remarkable comeback over the past year and a half, rising more than 200% from its 2022 low of $16,000.
Several key factors are driving Bitcoin’s recent euphoria, including an influx of investor capital into newly created Bitcoin exchange-traded funds and excitement over the halving, which will reduce Bitcoin’s production rate. be.
Antoni Trenchev, co-founder of crypto finance company Nexo Capital, said: “As the narrative switches from ETFs to the upcoming halving, we will break $50,000, then $69,000 in 2024, followed by $100,000. dollar looks achievable.” “This is interesting because if history is anything to go by, the next 12 to 18 months will be a scorching period for cryptocurrencies.”
Halving, also known as “halving,” is a fundamental concept in Bitcoin philosophy.
Simply put, halving is a feature of Bitcoin’s infrastructure that automatically reduces the proportion of new coins in circulation. This happens approximately every four years and theoretically drives up the price of Bitcoin.
To understand how it works, you need to understand the core idea of Bitcoin as a decentralized asset. That is, its value is controlled not by a central bank or other institution, but by a vast peer-to-peer network. A powerful computer that audits every Bitcoin transaction that takes place in a complex and power-intensive process called mining.
The people behind the computers connected to the network are compensated in Bitcoin for their work.
But approximately every four years, the number of Bitcoins miners (or auditors) receive is cut in half.
There are several reasons.
Bitcoin is by design a finite resource, with only 21 million coins in circulation, and its scarcity is key to its value proposition, proponents say. (However, critics say such artificial scarcity creates no real fundamental value.)
Cutting rewards in half every few years will help keep inflation in check while also incentivizing miners. In theory, as inflation decreases and Bitcoin becomes more scarce, the price will increase.
“Historically, halvings have always resulted in some kind of bullish price action,” said Gareth Rose, a former deputy superintendent at the New York State Department of Financial Services and now a managing director at Pacific Street, a research and advisory firm. speaks. “This is not surprising since we would expect prices to rise as demand constraints increase.”
In 2020, the reward went from 12.5 Bitcoin to 6.25 Bitcoin. This year it will probably drop from 6.25 to 3.125 in April.
Get your bulls ready
Investors have good reason to be excited if they can withstand the short-term volatility associated with cryptocurrencies.
In the two years before and after Bitcoin’s first halving in 2012, the price rose about 30,000%, Rose said. In 2016, he was almost 800% in his two years. In the 2020 halving, the investor sees his 700% return.
Henry Robinson, co-founder of Decimal Digital Currency, said in an email that the impending Bitcoin halving is setting the market up for an epic chess game. “Sentiment is bullish, especially over the long term, but sentiment around such important events can cause large swings.
“We could see frenzied bullish moves, dramatic declines, or both before and after the halving, as market participants move in and out of halving bets,” Robinson added. .
The timing of this year’s halving is also significant, coming just months after the U.S. Securities and Exchange Commission approved the first spot Bitcoin ETF. Nine of those funds, led by BlackRock and Fidelity, have collectively brought in about $2.8 billion in net inflows since they were launched on Jan. 11, according to Bloomberg.
“Last month was all about cryptocurrencies,” Trenchev said. “Investors who bought the Bitcoin ETF at the recent low of $38,500 saw only a 30% gain, while investors who bought it at $49,000 on January 11th saw a 20% plunge and a baptism of fire. I had to endure it. Welcome to cryptocurrencies, not for the faint of heart.”
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