Bitcoin price volatile as reduction in supply looms

Bitcoin is experiencing price volatility with just over two weeks remaining before the digital asset is expected to undergo its "halving" event.

Bitcoin halving means the reward for mining bitcoin is cut in half. Halvings reduce the rate at which new coins are created and therefore lower the available amount of new supply. Bitcoin (BTC-USD) last halved on May 11, 2020, resulting in a block reward of 6.25 BTC. The next halving will bring the block reward down to 3.125 BTC.

Frantic trading in the lead up to the event has driven up the price of bitcoin, with volatility over the past 24 hours causing the digital asset to fall to $65,000 (£51,340), before subsequently recovering to currently trade slightly above $66,000 (£52,130).

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Although the forthcoming bitcoin halving is expected to decrease the supply of bitcoin, potentially resulting in price appreciation, recent market trends indicate that investors may be cashing in on profits ahead of the event. This was evidenced by a significant drop in bitcoin's price at the beginning of the week, plummeting from nearly $70,000 (£55,290) to slightly above the $65,000 threshold.

Increased price volatility

Price swings in the past 24 hours have caused over $42m in liquidations of leveraged bitcoin positions on cryptocurrency exchanges, according to Coinglass data. Of these liquidations, the majority, around $26m, consisted of long positions.

CoinGlass data shows that in the overall cryptocurrency market there have been over $120m in long positions in the past 24 hours. This contributed to a total of $175m in total liquidations across major cryptocurrency exchanges.

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Liquidations tend to occur during volatile price swings, when prices rise or fall sharply. During these market conditions, there is either a rush to buy or sell.

The majority of liquidations in the past 24 hours were long positions held by traders who were anticipating the cryptocurrency's value to rise. However, due to the sudden market decline, they were forced to sell at a loss to minimise further losses.

The global cryptocurrency market today stands at $2.63tn, an increase of 0.3% in the past 24 hours. Bitcoin makes up 49.6% the overall cryptocurrency market, whilst the second largest currency, ether, (ETH-USD) accounts for 15.2%, according to CoinGecko data.

Ether has under-performed bitcoin in the past week, falling by 7% compared to bitcoin's 6% decrease. Ether is facing challenges stemming from uncertainty surrounding the potential approval of a spot ETF by the US Securities and Exchange Commission (SEC) before a May deadline.

Another major altcoin, Solana (SOL-USD), has also drifted downwards, falling by a more muted 1% in the past week.

The bitcoin halving event

The halving event is expected to take place mid-April. This will reduce the rate at which new bitcoins are produced and ultimately limiting the total supply of bitcoin, which may potentially increase its scarcity and influence its value.

This will be bitcoin's fourth halving, and according to Coinbase (COIN), it will happen sometime between 16 April and 22 April.

Read more: Bitcoin success with SEC fuels anticipation for ether spot ETF

The halving mechanism operates by reducing the rate at which new bitcoins enter circulation. During the halving, the block reward of the bitcoin network will decrease from 6.25 bitcoin to 3.125 bitcoin.

Bitcoin has a capped supply of 21 million tokens. To date, approximately 19 million tokens have been released and according to CoinGecko, the present bitcoin circulating supply is 19,672,875 BTC.

Following the last halving on 11 May, 2020, bitcoin's price surged by approximately 12% in the subsequent week. Later in the year, bitcoin experienced a sharp rally, with various explanations offered, including loose monetary policy and retail investors spending excess cash on cryptocurrencies while staying at home.

However, there was no concrete evidence suggesting that the halving was the primary catalyst for this, or any previous price increase.

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