Bitcoin has several unique properties over traditional currencies that, depending on your economic belief system, are either advantages or disadvantages.
Within the next month, we will see one of those unique properties in action: Bitcoin's deflationary nature, embodied in the event known as either the halving or halvening.
In order to understand the halving and what it means for the bitcoin economy, you have to understand what bitcoin is and how it is created. Bitcoin is a purely digital currency, which means it has no physical representation and only exists as code.
The defining factor that makes bitcoin unique is that it has no governing body that issues it, unlike a standard currency such as the US dollar.
All of its transactions - as well as everyone's balance - is recorded on a shared, public ledger that anyone can view.
This, for those who don't know, is called the blockchain and it is the fundamental technology underlying bitcoin and all modern digital currencies.
The blockchain is maintained by people called "miners". Miners solve complex mathematical computations in order to verify that the people sending bitcoin actually own it and haven't already spent it elsewhere.
For this service the miners are awarded newly-created bitcoin, as well as the small fees attached to each transaction. Depending on how much computational power is going towards mining determines how difficult it is for miners to solve these equations, this is called the difficulty rate. Anyone can technically become a miner but it requires very sophisticated and expensive hardware to be cost-effective.
Around 15m bitcoins have been mined to date. Bitcoin has a hard cap of 21m bitcoins, which means that when that last bitcoin is mined, no more will be created and miners will be incentivised by the transaction fees alone.
Transactions aren't confirmed one at a time, but in groups called blocks. A block takes about ten minutes to solve and includes a number of transactions. How many depends on a variety of factors, including network activity and the complexity of a transaction.
The next halving
This is where the halving comes in.
When bitcoin was launched in 2009, 50 bitcoins were created and awarded (along with transaction fees) to the miner who solved the block.
On 28 November 2012, after the 210,000 block was mined, bitcoin hit its first halving event, reducing the number of newly created bitcoin to 25 bitcoin per block. Sometime next month, the 420,000 block is expected to be mined.
At that point, the second halving will occur and all new blocks will create 12.5 new bitcoins. This will continue every 210,000 blocks, or roughly every four years, until sometime next century when all 21 million bitcoins will have been mined - assuming it is still being used.
What this means at the most basic level is that new bitcoins will be produced at a slower rate. In theory, new bitcoins should also be more expensive to create, unless a significant portion of the miners quit.
A simple interpretation of supply and demand principals would indicate that this will increase the price of bitcoins. If the same amount of people want to buy bitcoins and they are now scarcer, it makes logical sense that the price should increase.
However, there are many other factors at play. Much of bitcoin's price is determined by speculative investment, people who buy, sell and hold bitcoin with the intentions of making money. These people have already factored in the halving into their considerations.
They are also concerned about factors like regulation and how that will affect adoption, as well as overhead costs that they must factor in and the need to sell a lot of their bitcoin, regardless of whether they think it will rise in price in the future.
Bitcoin wasn't nearly as popular when the last halving took place, so it is difficult to predict what is going to happen when it does. Litecoin, an alternative digital currency, experienced its first halving back in August 2015. It saw a massive jump in price about a month before, but it wasn't lasting and by the time the halving happened, most of the gains had been wiped out and since then has continued to decline in price.
Bitcoin's situation is different and no one can say for sure how it is going to play out, regardless of what some may claim. The early results are positive, if the current price hike is any indication.