Bitcoin prices to explode in 2016 as new supply halves

The actual reason for the forecast is that Bitcoins price is likely to be driven in large part by similar factors to a traditional fiat currency, following the age-old principles of supply and demand, Reuters reports. Instead of being controlled by a central bank, 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 thereby clear the transactions is currently rewarded with 25 new Bitcoins, worth around USD 11,000. But. when it was invented in 2008, the Bitcoin program was designed so that the reward be halved roughly every four years, in order to keep a lid on inflation. The next time that is due to happen is July 2016.

Bitcoin was also designed to emulate a commodity by having a finite supply of 21 million Bitcoins, which will be reached in around 125 years, up from around 15 million today. Hence, also, the use of the term mining. Daniel Masters, co-founder of Jersey-based Global Advisors Bitcoin hedge fund, started his career as an oil trader at Shell in the mid-1980s and spent 30 years trading commodities before crossing over to Bitcoin.

Now he reckons the price of bitcoin could test its 2013 highs of above USD 1,100 in 2016 and then pick up speed to rise to USD 4,400 by the end of 2017. That would be due to a number of factors, Masters said, including an increased acceptance of payments in Bitcoin by big companies and authorities, rapidly growing interest and investment in the blockchain technology that underpins Bitcoin transactions, and also more demand from China as its currency weakens and the economy slows, the source cites.

But taken in isolation, the halving of the mining reward will increase the price of Bitcoin by around 50% from where it is now, Masters reckons. That is despite the fact that the halving of the reward has always been inevitable - a factor that would already have been accounted for in pretty much every other market.

Bitcoins price has already almost doubled since September, 2015. It hit USD 500 in November, 2015 for the first time since August, 2014, with Chinese demand for a pyramid scheme set up by a Russian fraudster cited as a reason for the price surge.

The mining reward has already been halved once before, in November 2012, from 50 to 25 Bitcoins. The stakes were much lower then, with one Bitcoin worth around USD 12, but nevertheless the price increased by about 150% in the preceding seven months - roughly the time left before the next halving.

It (the halving) dampens supply so, all other things being equal, that puts upwards pressure on price, said Jeremy Millar, partner at London-based financial technology specialists Magister Advisors, who expects demand to continue to increase, the source cites.