NEW YORK: Bitcoin slid on Monday (May 11) in volatile trading, after it went through a technical adjustment that reduced the rate at which new coins are created, but the outlook remained upbeat as the increase in supply slows down.
Monday's "halving" cuts the rewards given to those who "mine" bitcoin to 6.25 new coins from 12.5. The next halving will be in 2024.
Bitcoin relies on so-called "mining" computers that validate blocks of transactions by competing to solve mathematical puzzles every 10 minutes. In return, the first to solve the puzzle and clear the transaction is rewarded new bitcoins.
In late afternoon trading, bitcoin was last down 1.3 per cent at US$8,620.43 against the dollar on the Bitstamp platform. It briefly turned higher.
"The incentive is less for miners now to mine bitcoin and they will probably switch to more profitable cryptocurrencies. So in the short term, there's going to be pressure for bitcoin," said Edward Moya, senior market analyst at OANDA in New York.
"But longer term, you're probably going to see higher prices. With all the fiscal and monetary stimulus that's being pumped into the global economy, there's renewed interest from institutional traders looking for alternatives to modern government-backed currencies."
Bitcoin has gained more than 20 per cent since the beginning of the year. It touched US$10,000 last week, a roughly three-month high, after Bloomberg reported that hedge fund manager Paul Tudor Jones has backed bitcoin as a hedge against inflation.
Traders said the prospect of bitcoin's halving has fuelled gains in the asset this year.
Bitcoin two earlier "halvings"- one in November 2012 and the other in July 2016 - had signalled the start of bitcoin's most dramatic bull runs over a period of several years, although not before a brief sell-off.
The previous two bitcoin events propelled rallies of about 10,000 per cent from late 2012 to 2014, and roughly 2,500 per cent from mid-2016 to the currency's all-time high just shy of US$20,000 in December 2017, according to traders.
Scott Freeman, co-founder and partner at crypto firm JST Capital, said volatility should subside from its recent highs now that the "halving" has happened.
"Given that the halving happened without any interruption to crypto markets, we expect to see continued growth in the crypto eco-systems, especially with recent increased interest from institutional investors and the continued buying by retail investors," he added.