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Cryptocurrency - Simply explained: The most important answers to Bitcoin halving

Bitcoin is by far the world's leading cryptocurrency, also known as cyber currency. In contrast to centralized cyber currency projects such as Facebook's Libra, Bitcoin is not linked to a so-called fiat currency such as the dollar. In addition, the Bitcoin is organized decentrally. This means that no single instance and no single server has control over the currency.

Rather, Bitcoin is based on a decentralized network in which all data and transactions are encrypted and stored - not just on one server, but on thousands at the same time. This makes the system practically forgery-proof. This system - simplified - is called blockchain.

How is a Bitcoin created?

Bitcoin is created through what is known as mining. This is the so-called mining of Bitcoin, i.e. its production. But while printing presses or coin presses are used for the production of fiat hard money such as the Swiss franc, something else is needed to "mint" Bitcoin: computing power. A lot of it.

Of course, the miner does not mine Bitcoin in the literal sense. Rather, it makes a contribution to expanding the Bitcoin infrastructure with its computing power - namely by using its computing power to create new so-called blocks within the block grove.

This requires expensive high-performance computers that work exclusively for this one purpose. The problem: Such computing power causes extremely high costs, since it consumes huge amounts of energy and has to be continuously cooled because of the heat generation.

So that there is still an incentive to create these new blocks, the miner is compensated for his effort - with Bitcoin. But how much Bitcoin does the miner receive as a reward? More on that in a moment.

What exactly happens when halving?

It is still not known who exactly is behind the development of Bitcoin. The only thing that is certain is that the inventor has acquired the pseudonym Satoshi Nakamoto. This person determined right at the beginning of 2009 that the maximum number of available Bitcoin should be just under 21,000,000.

This upper limit should mean that the value of Bitcoin can increase in the long term. But there is a second important factor that influences the value of Bitcoin: The reward of the miners is reduced at regular intervals. At the very beginning of Bitcoin, miners still received 50 Bitcoin for each block they created. The first so-called halving took place in November 2012. Means: The reward for the miners was halved and fell from 50 to 25 Bitcoin per block.

After the reward was again halved to 12.5 Bitcoin in July 2016 in the second halving, the third halving is now due this week. From Tuesday, miners will only be compensated with 6.25 Bitcoin per block.

How many Bitcoin have already been mined?

As of now, 18,368,600 Bitcoin have been produced. That corresponds to about 88 percent of the maximum. But it will be a while before the last 12 percent are mined. According to plan, the last Bitcoin is to be fetched from the virtual coin press in May 2140. This can be predicted so precisely because a new block can only be generated about every 10 minutes, for which Bitcoin is paid out as a reward.

Will the halving lead to the hoped-for price explosion of Bitcoin?

No one can predict how Bitcoin will react to the halving that will take place this week in the next few weeks and months. What can be said for sure: The last two halvings in 2012 and 2016 did indeed lead to rising prices - albeit with a delay.

There was more or less a sideways movement towards the previous halvings. But a few months after the halving, a bitcoin rally of sorts started in both 2012 and 2016. At the second halving in 2016, this rally culminated in the historic Bitcoin hype of 2017/2018. At that time, the price shot up to almost $ 20,000 - an all-time high to this day.

This time, Bitcoin reacts differently than in 2012 and 2016, at least in advance. The price has been rising continuously for two months. The last few weeks in particular can be described as a Bitcoin rally. Investors are apparently aware of the rising prices in the last Halvings and are buying in anticipation of a longer-lasting Bitcoin rally.

How will the Bitcoin price develop in the long term?

Even predicting share prices - i.e. the performance of company shares - is not an easy, and often even impossible, undertaking. And this despite the fact that far more fundamental data can be used in a stock valuation. What do the company's market prospects look like, how competent is the management to be assessed, which products does the company have in the pipeline?

With Bitcoin, it is more difficult to make a prediction - due to the lack of measurable fundamental data. It has been observed in the past that halving can have a positive influence on the course. But nobody knows for sure whether that will happen again this time, let alone how strong a possible rally will be.

That doesn't stop well-known Bitcoin bulls from calling the Bitcoin bull market. The US venture capital investor Tim Draper predicts a price of $ 250,000 by 2024. Bobby Lee, CEO of the Bitcoin wallet provider Ballet, predicts a price of $ 500,000 in 2028.

Is Bitcoin a good investment?

Despite its still high volatility and its development in value that is difficult to predict, Bitcoin has gained acceptance as part of the portfolio among more and more investment houses. It is increasingly recommended to keep at least a small part in Bitcoin in the interests of diversification.

In addition, it is repeatedly discussed whether the cryptocurrency could serve as a kind of safe haven in uncertain times. The corona crisis has refuted this thesis for the time being. Patterns of price developments - such as with gold - have not yet been conclusively identified. Even if the swings are nowhere near as high as they were a few years ago, an investment in Bitcoin remains speculative for the time being.

You can find out more about Bitcoin halving and the latest industry trends in the Handelszeitung's "HZ Insights" podcast.

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