The third bitcoin halving happened against the backdrop of the pandemic, possibly challenging the global dominance of the US dollar, with the digital yuan and Libra laying the foundation.
Bitcoin is viewed by some as digital gold with decentralised, blockchain technology-encrypted characteristics. Others see it as one of the biggest scams in history.
Created in 2008 by a person or group writing under the pseudonym Satoshi Nakamoto as a peer-to-peer decentralised electronic cash system, in 2009 50 bitcoins per block were given as a reward to miners.
After 210,000 blocks are mined, about every four years, the block reward halves and will keep on halving until the reward per block becomes zero, which will be near 2140, according to bitcoinblockhalf.com
The latest halving took place early Tuesday morning local time. In the latest halving, the total number of bitcoins mined per block is reduced from 12.5 to 6.25.
Halving is when cryptocurrency mining companies and individuals find out the reduced payment that they will receive in return for their contribution to the system’s smooth operation.
By design, the number of bitcoins in existence is capped at 21 million.
The first halving began at a value of US$2.01 per bitcoin in 2012, with the reward reduced to 25 bitcoins per block. The second halving began in 2016 when bitcoin was valued at $664.44, with the block reward halved to 12.5 bitcoins.
Bitcoin trading reached a fever pitch in 2017 as surging demand pushed the price to an all-time high of $19,511.
The price of bitcoin has continued to fluctuate during the first five months of 2020. But as halving approached the price rose from around $6,000 in early April to nearly $9,000, almost touching $10,000 at one point, a sharp contrast to the price movement of other physical financial assets during the global virus pandemic.
The price of bitcoin is valued at $8,810 as of press time.
Although there is much hype surrounding the price outlook of bitcoin, the price effect from bitcoin halving might not occur instantly, said Piriya Sambandaraksa, managing director of ChalokeDotCom.
Halving itself does not affect the price of bitcoin, but rather the cryptocurrency’s fundamentals as circulation is reduced, said Mr Piriya. This in turn affects investors’ reaction toward the demand of bitcoin.
“Many investors speculated on bitcoin before the halving occurred. Among them were newcomers and those who did not know much about the cryptocurrency. Some bought on expectations the price could overshoot, while others purchased based on rumours and would sell after the halving,” he said.
“The most important factor is demand. Demand for bitcoin does not increase from halving, but rather other factors.”
Based on previous statistics, every time the stock-to-flow ratio changes, demand increases, said Mr Piriya, noting there could be a new narrative with bitcoin demand as an asset to hedge investment risks, for instance.
Although the supply of bitcoin has decreased this year, organic demand similar to the phenomenon in 2017 is still missing, said Sanjay Popli, chief executive at Cryptomind.
“Halving has created a lot of FOMO [fear of missing out] for some newcomers, but we didn’t see any real volume at all. The market is still in the consolidation phase as many institutional investors are still not confident about this asset class at the moment,” said Mr Sanjay.
Optimism about bitcoin has centred on its scarcity and stored value, but it will take a while for this cryptocurrency to cement its reputation in the digital realm.
“Whether bitcoin will be a substitute for physical gold is difficult to say as many people still have yet to accept it. It is not widely used like Promptpay transactions and there has to be a well-established system for people to use bitcoin widely,” said Prinya Hom-anek, president and chief executive at ACIS Professional Center.
As bitcoin mania has subsided from the frenzy three years ago, the digital currency currently in the spotlight is the digital yuan.
Akin to Facebook’s proposed Libra digital currency and other cryptocurrencies such as bitcoin, the officially named Digital Currency Electronic Payment will be powered partially by blockchain technology and dispersed through digital wallets, Reuters reported.
What sets it somewhat apart, however, is the digital currency’s design seemingly provides Beijing with unprecedented oversight over money flows, giving Chinese authorities a degree of control over their economy that most central banks do not have.
“This should be a closely watched development for whether [the digital yuan] is widely used and accepted in daily use, both inside and outside of China,” said Mr Prinya.
The digital yuan could also have implications in shifting the global financial paradigm long dominated by the greenback in the long run.
“I think the first aim would be to increase the yuan circulation on the global level,” said Mr Sanjay. “I would say it won’t rock the dollar yet, but we are seeing a different type of war waged. With [the digital yuan], the Chinese can offer this option to countries that are sanctioned by the US.”