Over in crypto-land, the Fed concerns dogging Wall Street aren't souring the mood quite as much. Rate cuts would be welcome, of course, but bitcoin enthusiasts are fired up for other reasons.
Here's why: Bitcoin, which briefly rose above $50,000 this week before settling back in the high 40s, is benefiting from an influx of money from newly launched bitcoin exchange-traded funds and excitement over an event known as the "halving."
It's a decidedly cryptic idea, but it's also foundational to the whole bitcoin ~thing~. So bear with me.
Put simply: The halving (also called the "halvening") is a feature in bitcoin's infrastructure that automatically reduces the rate of new coins entering circulation. It takes place roughly every four years and, in theory, pushes the price of bitcoin higher.
To understand how it works, you have to wrap your head around the core idea of bitcoin as a decentralized asset — that is, one whose value is not controlled by a central bank or other institution but rather by a vast peer-to-peer network of powerful computers that audit all bitcoin transactions in a complex, power-intensive process called mining.
The people behind those networked computers are rewarded for their work in bitcoins.
Every four years or so, however, the number of bitcoins a miner (or auditor) receives gets cut in half.
Why?
*Deep breath*
Bitcoin is, by design, a finite resource — there will only ever be 21 million coins in circulation, and that scarcity is key to its value proposition, according to advocates. (Though critics say such manufactured scarcity doesn't create any real underlying value.)
Cutting the reward in half every few years helps control against inflation while also incentivizing miners to keep at it. In theory, as the inflation decreases, and bitcoin become more scarce, the price will increase.
"Every halving has historically resulted in some sort of bullish price action," said Gareth Rhodes, former deputy superintendent at the New York State Department of Financial Services, who is now the managing director at research and advisory firm Pacific Street. "Which makes sense, because you expect with more demand constraints that prices increase."
In 2020, the reward went from 12.5 bitcoin to 6.25. This year, likely in April, it will go from 6.25 down to 3.125.
"The imminent bitcoin halving is setting up a grand chess game in the markets," Henry Robinson, co-founder of Decimal Digital Currency, said in an email. "Sentiments are bullish, especially in the long term, but the psychology around such a significant event can create major volatility.
"We may see exuberant bullish action, dramatic sell-offs, or both, before and after the halving as market participants roll into and out of their halving bets," Robinson added.
The timing of this year's halving is also significant, coming just a few months after the US Securities and Exchange Commission approved the first spot bitcoin ETFs. Since nine of those funds launched on January 11, they have brought in about $2.8 billion in total net inflows, led by BlackRock and Fidelity, according to Bloomberg.
"The last month was crypto in a nutshell," says Antoni Trenchev, co-founder of crypto lender Nexo. "Those investors who bought Bitcoin ETFs at the recent low of $38,500 are sitting on a 30% gain, whereas those who bought at $49,000 on January 11th have had to endure a 20% plunge and a baptism of fire. Welcome to crypto, it's not for the faint-hearted."
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