The Bitcoin Halving & The Future

Bitcoin Halving

As Bitcoin Halving search volume rockets and the date nears, our Head of Trading takes a closer look at the implications of the upcoming Halving.

With three weeks to go until the official event, one term that pops up in Google Trends and just recently reached its “all-time high” (to borrow a term from trading): “bitcoin halving”.

Interest in one of Bitcoin’s most discerning monetary features coincides with both an unprecedented political intervention in states’ monetary policy and the anticipated blockchain-related incident: The halving of Bitcoin miner block rewards. This feature differentiates bitcoin from all other currencies because it implements a quasi deflationary policy: Less money gets introduced into the market as time progresses, not more!

To understand why this is important one must at least on the surface understand how bitcoin mining works. In short: Those participants of the network who do all the work to secure the network receive a reward in the form of bitcoin every time a batch of transactions is confirmed. This reward used to be 50 BTC for the first blocks and was hard-coded into the bitcoin protocol to halve every 210.000 blocks.

One block is mined approximately every 10 minutes, so this event is scheduled to take place every four years.

As of today, each block yields 12.5BTC (50BTC / 2 / 2). In just under three weeks, this reward will be slashed to a meagre 6.25 bitcoin entering the economy.

You can see that this is the exact opposite of what’s currently happening in the “real” world. Here, trillions of dollars (and other currencies) are being “minted” or printed in the form of guaranteed loans, tax cuts or deferments and government aid. They are also handed out to citizens in the form of cheques.

In the first bitcoin block, the so-called “Genesis Block”, the creator of Bitcoin imprinted a message that hints to their dismay of monetary politics in regards to bailing out banks. Even though the current massive influx of “free” money doesn’t only benefit banks, the principle stands: Money should be “sound”: Unaffected by the whims (read: “interventions”) of outside forces (read: “central banks”) that could influence supply.

Bitcoin is in this regard often compared to gold, which has a 5000-year history of being both a means of payment and a store of value - since there is no single entity that can grab gold out of thin air, greatly increasing supply and crush value, mankind for long has agreed to make gold a reference for value even though (or maybe because) the actual applications of gold were and are few and far between. The amount of gold needed in electronics and industry accounts for only about 15%. Most gold is used for jewellery, followed by bars and coins - the epitome of the usage as a store of value. Most gold that is discarded is in fact also recycled.

Bitcoin has all the “virtual” characteristics of Gold, most importantly scarcity. The amount of gold mined in the last decades slightly increased to between 2500 and 3000 tons per year. Bitcoin goes the opposite way: The amount of bitcoin introduced to the system will slightlydecreaseover time via the halving mechanism.

What does this mean?

A popular school of thought subscribes to the model named “stock to flow” (“S2F”). This describes the ratio of existing stock (bitcoin already mined in the past) to the amount of incoming stock (flow) and the amount of time it would take to produce what’s already in the markets. Gold traditionally has a very high ratio - it would take very long to mine as much gold as has already been extracted from mines. To project this onto bitcoin, one could assume that with the influx of new coins into the system, bitcoins S2F ratio is destined to greatly surpass that of gold in the near future.

One of the foremost proponents of this model, an anonymous internet contributor tha goes by “PlanB”, has modelled this projection in light of the upcoming halving:

This model has been expanded upon by other researchers on twitter with additional input (such as discounting Satoshi’s 1 million BTC that sit unmoved ever since mined) to project upper and lower bounds to price development:

There are also people who say that “every bitcoin HODL’d is a bitcoin consumed”, steepening the curve even stronger. So given that there will be fewer “unconsumed” bitcoins, slower and smaller influx of bitcoin but more influx of money *should* make this a no-brainer.

Of course, external factors such as (recently) COVID-19 play a role when putting a perspective on price in the short term. Extreme shocks like this always affect the whole financial sector and ripple (heh.) throughout the economy, sometimes with weeks or months delay (for example, some Oil futures running into negative price terrain 5 weeks after the stock crash). Vice versa, positive shocks like the immense input of money into the economy can take a while to manifest themselves. Given the fact that the US stimulus bill alone is worth almost 2 ½ times the maximum total crypto market cap in early 2018 should not spur expectations that bitcoin should “crash to the upside” immediately.

However, at this time some (most) ICO projects that by now have gone away were still valued highly, so they’d have to be discounted for - leaving the mother of cryptocurrencies ready to absorb some of the money being helicopter’d into the world.

Considering all these factors above leads me to believe that Bitcoin’s future is bright. There are largely three reasons for this:

1) People are learning about sound money. They are being educated about what it means to pump massive amounts of “free” money into the markets.
2) The fact that Bitcoin offers an alternative approach to this potentially dangerous approach of inflationary politics by halving the increase rate of money in its economic model. 3) That some of the “excess” free money might overspill into the potentially more healthy monetary model of crypto when more people realize how bad the “real world” problems with money become.

So while we might not see an immediate pump in bitcoin price, securing a stake in this alternative system might be wise, since the perfect storm of halving, an increasing S2F ratio and basically unlimited fiat might prompt a severe shift in value in favour of crypto.

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