At exactly 10.26 pm (EAT) on May 11, 2020, a historic moment in the cryptocurrency field took effect in what experts say is the evolving future of financial systems. It was the third time the most dominant digital currency in the world – Bitcoin – that birthed blockchain technology in 2009, halved.
The prospects of cryptocurrency traders amassing riches in the next few years has drawn global attention after the event, which has seen the amount of supply entering the Bitcoin blockchain system suddenly shrinking.
Bitcoin’s halving has spurred an interesting anticipation about the future of digital money and how the market will respond in both the short and long-term.
But what does all that actually mean?
Mr Benjamin Arunda, a blockchain expert and author of ‘Understanding the Blockchain’ says that halving simply means that the supply of Bitcoins will be cut into half.
“The first Bitcoin block was mined in 2009. At that time miners were being rewarded with 50 Bitcoins every time they added a new Bitcoin into the network. Since then, after every four years this reward is reduced by half. The first halving happened in 2012, then 2016 and now,” he told Afcacia.
In 2012, the reward reduced from 50 to 25 Bitcoins, then to 12.5 in 2016. This has been the current state till today when it will halve to 6.25 Bitcoins.
Expounding on why this has been the trend, Mr Arunda attributes that to the plan by Satoshi Nakamoto – the person or group of persons who designed the Bitcoin blockchain – to have, contrary to fiat currency, a limited supply of 21 million Bitcoins.
“Normal currencies have unlimited supply of banknotes affected by the law of supply and demand. Bitcoin is different because it has a constant, fixed supply. For all coins to be mined, Satoshi Nakamoto designed an algorithm to ensure the supply halves every four years till it reaches zero,” he notes.
Halving happens when 210,000 blocks have been mined, and that takes four years, and cracking the Bitcoin hash-code becomes more difficult as the mining progresses.
“After every 10 minutes, a new block is released and that creates certainty of exactly when all blocks will be mined and pave way for halving. Miners know the year, but the month and date can only be approximated few days to halving,” he explains.
With an anticipation in reduction in supply every time Bitcoin halving is about to happen, the demand for the digital coin soars, and that raises its price.
He says it is the same concept used in gold trade where its scarcity pushes its price high, predicting that all Bitcoins could be exhausted in the online mines by the year 2140.
There are currently 18,370,212 Bitcoins in supply. At the time this story was written, the price of one Bitcoin was Sh800,000, up from Sh381,000 in March, the lowest it has plunged in 2020.
The hike in price has also been recorded by altcoins (alternative cryptocurrencies) such as Ethereum, Ripple, Tether and Litecoin.
“All other cryptos follow how Bitcoin, the market leader, behaves because it carries the overall reputation of crypto trade due to its 68 percent market dominance. But other cryptocurrencies don’t undergo halving because they use different consensus protocols,” says the expert.
Altcoins do not use Bitcoin’s proof-of-work concept on which the halving aspect is anchored. All of them have been pre-mined and therefore no coins are introduced into their networks.
So what will happen when block rewards get very small or the mines get depleted?
“In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes. I’m sure that in 20 years there will either be very large transaction volume or no volume,” Nakamoto wrote back in 2009.
That means the cost of transactions may go up over time to keep the network secure, because Bitcoin cannot process huge quantities of transactions on the blockchain network.
Mr David Gitonga, founder of local crypto news site BitcoinKE says an upsurge in the thirst for Bitcoin knowledge has been witnessed in the past few weeks.
“The real effect of halving will be felt by miners who will have to come to terms with their mining rewards being reduced by half. Price volatility will be experienced by crypto traders,” he says, advising them to hold their coins till the past-halving period.
Mining requires sophisticated computer software and electric power, and that has been left to institutional mining groups in developed economies, as the high cost of power in Kenya discourages the activity.
Experts say the more the computing power miners direct towards mining Bitcoins, the harder it becomes for cyber hackers to attack the network since a cyber criminal must have the same processing power or more, called the hashrate, to launch the attack.
But it is through the mining process that Bitcoin transactions are validated, the same way M-Pesa deposits, withdrawals and transfers are authenticated.
Mr Arunda, who has also been a crypto trader for several years says there has been a trend every second year after halving where the price of Bitcoin skyrockets.
The price shot to a high of Sh120,000 in 2013 from a low of Sh1,275 during halving day in November 2012. During the July 9, 2016 halving, the price was Sh70,000 before shooting to an all-time high price of over Sh2.1 million on May 9, 2017.
“We expect the same this time round. It has increased in the weeks heading to halving but it will plunge sometimes in June, and start to climb to the highest ever price in history in 2021,” Mr Arunda forecasts.
Chief executive of Nairobi and Moscow based crypto exchange platform Totalcoin Mr Joshua Mutisya advises crypto enthusiasts to buy now, revealing that 10 Bitcoins are exchanged every day in Kenya on the platform, among 170 traders.
“Right now, we are seeing more people buying altcoins. One trader on our platform buys 21 Bitcoins every day. You may go offline for 30 minutes and when you come back you find five deals awaiting your approval,” he says.
With a rising demand in the use of digital currencies, Bitcoin, according to him, will become the new gold and this will make it a credible store of value.
The return on investment for Bitcoin from 2010 to 2020 stands at 9 million percent, surpassing all assets in global trade. He however, warns newbies who want to jump into the bandwagon without proper research and market study.
“The price sometimes price plummets, so you need a proper understanding first.”
Brian Adams, founder of Nairobi-based blockchain and crypto awareness startup Cryptocurrency Academy, says that scamming traps have spiked during the halving period.
“If you don’t research well or connect to experts in the field, then your vulnerability increases and you will only have false expectations. The lack of awareness could lead you to lose millions worth of investment,” he warns.
According to online Bitcoin marketplace Paxful, which has enabled M-Pesa to Bitcoin and vice versa money conversions, the total number of Bitcoin wallets in Africa stood at 1.35 million as at March 2020 with tremendous growth in trade volumes coming from Kenya, Nigeria, South Africa and Ghana.
Ahead of Monday’s halving, Africa’s Bitcoin trading volumes broke 2017’s record with Nigeria trading Sh763 million in volume, Kenya Sh169 million while Ghana was thrilled with 84 million.
If widely adopted across the globe, Bitcoin could eventually reduce the influence of central banks and governments over financial policies because no central entity can control Bitcoin’s supply outside the set schedule.