* 'Halving,' expected in May, to cut new bitcoin supply by50%

* Arcane rule written into underlying code by SatoshiNakamoto

* Occurs every four years, previous two preceded sharp pricegains

* Crypto market players see higher volatility, look to cashin

By Tom Wilson

LONDON, Dec 19 (Reuters) - If you're not a bitcoinenthusiast, you probably haven't heard what's happening nextyear: It's called the "halving", and it will cut production ofthe cryptocurrency by 50%.

No one's in control of this process. It's a rule writteninto bitcoin's underlying code by its pseudonymous creatorSatoshi Nakamoto more than a decade ago.

The event, expected in May 2020, slashes by half the numberof new coins awarded to bitcoin miners who provide global supplyof the cryptocurrency by solving complex maths puzzles.

That's a big change in a market worth about $120 billionwhere bitcoin worth several billions dollars are created everyyear.

Players in the know are preparing for the sharp price gainsand volatility that have accompanied previous halvings, whichhappen roughly every four years and act to both ensure thescarcity of bitcoin and keep a cap on price inflation.

There are likely to be winners and losers. So marketparticipants, from bitcoin miners and traders, are trying tofathom how the next halving might play out to gain an edge.

"This is the biggest question right now for most of theindustry," said Eyal Avramovich, chief executive of MineBest, aWarsaw-based company that mines bitcoin.

The fracture to the production of bitcoin provides areminder of one reason why the decentralised digital currencyhas confounded regulation and acceptance by mainstream finance:Its fate remains tied to arcane technological factors.

In theory, if supply is cut and demand stays constant,prices rise. This time around, seven crypto traders and minersinterviewed by Reuters said the May halving would probably leadto greater volatility and trading volumes. However the cut tosupply is liked to be more priced in than previously, they said,with many traders already geared up for the upcoming event.

MAKING MONEY FROM SWINGS

Bitcoin miners use high-spec computers to compete againstother machines in the crypto network, racing to add new "blocks"to the blockchain ledger that underpins the cryptocurrency.

They are rewarded with a set number of bitcoin, currently12.5. At current rates of block creation, the next halving willtake place in May, when the number will drop to 6.25.

In the one-year periods after the two previous halvings, inNovember 2012 and July 2016, bitcoin rose around by 80 times andfour times respectively. It is not clear how much of these pricegains was down to the halving, versus with other factors.

This time around, bitcoin derivatives markets - stillnascent - point to higher volatility around the time of thehalving, said Jeff Dorman of Arca, a U.S. crypto investmentfirm.

Such volatility in bitcoin markets tends to benefitquantitative hedge funds and high-frequency traders that seek tomake money from swinging crypto prices.

"For us, the event will be positive because it causeactivity in the market," said Ha Duong of Cambrial, ancryptocurrency investor in Berlin.

But for miners that hold large inventories of bitcoin,volatility can also be a hindrance. For them, stability of pricegives greater predictability for investment in new gear.

While bitcoin futures contracts allow miners to hedge therisk of their inventories, there are currently few tools forthem to properly hedge against volatility, said Ricky Li,co-founder of crypto trader Altonomy.

"If you want to long volatility, the options contractsavailable for the market right now really do not have the tenor(length)," he said.

"Right now all you can do is to just make sure your holdingsrisk, your inventory risk, is hedged."

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^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Tom Wilson; Editing by Pravin Char) ((T.Wilson@thomsonreuters.com; 44-20-7542-4531; ReutersMessaging: t.wilson.thomsonreuters.com@reuters.net))