The Bitcoin Halving Event – Part 1
Listen up and listen well!
Do you know what my real job is? It’s to be the voice of reason in a confused sea of opinions. I’m the guy who goes and finds the golden thread of truth amongst all the clutter. I’m the guy you turn to when you need an objective opinion, but everyone you know is running around like a headless chicken.
The chickens are running!
And squawking. Loudly. (Which is no mean feat for a chicken which has no head!)
All of the chickens are squawking the same thing:
“BITCOIN HALVING”
It seems as if halving is as misunderstood as what it is popular. Everyone is talking about it, yet nobody knows about it.
Sure: we all know the basics – a 50 BTC initial block reward, a 600 second (theoretical) block time, a halving event every 210 000 blocks which reduces the block reward by a factor of two – that’s all common knowledge. What we don’t all know are the implications of those halving events.
But of course that doesn’t stop us from giving our opinions on it! No sir! Opinions on halving are a dime a dozen. All of those opinions, every single one which I have read in the last month or so, are wrong.
So what we now have is rampant speculation. We have a lot of halving discussions – completely devoid of facts – which are generating a lot of halving hype. Because nobody knows what the effect of halving will be, even though they speculate wildly on that subject, a serious amount of halving FUD is creeping into the market.
Great. Now we have Hype-FUD. And we have only ourselves to blame.
What halving really means to us
“But Bit Brain – I read a really good article on halving. The author was a crypto-economist who knew his stuff. He explained how the cycles work and what the effects would be at various times.”
Utter rubbish. I’ve read those articles too!
Pay attention! Didn’t I just say:
“All of those opinions, every single one which I have read in the last month or so, are wrong.” ?
If there is one thing that crypto teaches us, it is that people do not learn. Goldfish have better memories than crypto investors.
Do you want to know what really happens at halving events, this is what happens: https://www.coindesk.com/bitcoin-halving-event-boring-vindication-software. That was written just after the last halving event. It shows that the same thing happened then as we are seeing now: uninformed speculation causing headless chicken syndrome. It also shows that the halving itself was a non-event. But that was three years ago, so it’s already been forgotten.
REAL EFFECTS:
Probably the single biggest effect of halving events is the creation of short to medium-term volatility. That volatility is caused by the Hype-FUD mentioned previously. People don’t know what to expect of the price, they just have the vague notion that it should be doing something. This results in price oscillating up and down more than what it otherwise would.
Apart from that, the effect is this:
Nil.
Quote me on this: halving has very little effect on long-term BTC price.
WHY?
For some reason the crypto community seems loath to crunch numbers. Perhaps this is because crypto use is generally being ushered in by the Millennial generation, which has a notoriously poor work ethic. Whatever the reason, I often find that crypto investors fail to do a few simple calculations as part of their due diligence (especially true for those who invest in the many MLM/pyramid/”affiliate marketing” scams). Take my hand Millennials, I’ll walk you through it:
A 12.5 BTC reward is paid to miners per block mined (current reward value). Block time is designed to be 10 minutes. So every hour, 75 new Bitcoins enter circulation – a total of 1800 BTC per day. Let’s assume that ALL the BTC mined in a day is sold straight away (worst case scenario). According to CoinMarketCap, 2 431 829 BTC has been traded within the last 24 hours (at time of writing). What does that mean? It means that of all the BTC sold within the last 24 hours, only 0.074% of it was from mining. Enough to make even a slight difference to price? Not a chance!
Even if we integrate a very bad wash trading scenario into our calculations (assume that 90% of BTC trading is wash trading), the answer is still that the sale of coins mined within the last 24 hours can’t even account for 1% of the entire volume.
Let’s look at things another way:
If 1800 BTC is mined per day, then 657 000 BTC is mined per year. We already have about 17 738 300 BTC in circulation as I write this. So looking at things from an annual perspective: 657000 / 17738300 = 0.037. This means that the current inflation rate of BTC is 3.7% per year. This implies that the price of BTC should be dropping by 3.7 every year! But it isn’t. BTC price is rising year on year, and rising fast – clearly something else is influencing the crypto economy…
The reality is that 3.7% is NOTHING in crypto. BTC can easily bounce upwards or downwards by twice that figure in one day! In fact it frequently does.
What does this show us?
It shows us that newly mined BTC entering the supply has very little effect on the price of BTC.
Perhaps now you start to see why halving has almost no effect… but wait, I’m not done yet!
Halving is a reduction in the percentage of BTC being added to the total supply – that much even a very poor analyst can tell you. So what if I told you that every time a new BTC block reward is paid, the percentage of BTC added to the supply is reduced? It’s true. Today there is 17 738 300 BTC in circulation. We saw that the current annual inflation rate is 3.7%. But what was it a year ago? There hasn’t been a halving event in the last year, so has the inflation rate changed? Has the percentage of coins being added to the total supply every day decreased?
Yes, it has.
You see: one year ago (3 June 2018) there were only 17 073 025 coins in circulation. (Feel free to check here: https://coinmarketcap.com/historical/20180603/.) The total daily block reward was also 1800 BTC, or 657 000 BTC per year. 657000 / 17073025 = 3.85%.
Without any halving event, and in the space of only one year, inflation has automatically decreased from 3.85% to 3.7%, a 0.15% difference. 0.15% may not sound like much, but that’s 4% of the current 3.7% figure. Inflation is thus reducing all the time – not very suddenly, but it IS happening (and nobody panics about it).
At the halving event, inflation will immediately drop from around 3.6% to just below 1.8%. Miners will lose half of their block reward. But will this matter?
No. Sure, it may become unprofitable for some miners to carry on mining, but there will be no fundamental change to the blockchain or its economic system. The BTC difficulty adjustment algorithm will adjust the difficulty to the reduced amount of hashpower within 2016 blocks (the difficulty adjustment period of BTC). Mining will still carry on as before.
We already know for a fact that a 50% reduction in block reward gets handled automatically by the mining community and will sort itself out. How do we know this? Well for starters, we’ve already had two halving events. Neither of them caused any lasting fundamental changes to process of BTC mining. But we have an even better example: Between December 2017 and December 2018 the price of BTC fell from about $19900 to $3100. That an 84% drop in price, or to put it another way: an 84% reduction in mining rewards! While the drop itself had a big effect on the crypto community, nobody ever spoke about the effect of the reduced mining rewards – other than to say that mining was unprofitable and that hashpower dropped – which is normal and had no lasting effect on the fundamentals of BTC. You could argue that the 84% drop took place over a year, and then my counter argument would be that the initial drop took place within less than two months and was a 70% drop. Yes, the price oscillated after that, but nobody was blaming the market cycle on mining rewards – nor should they have.
By now you must at least start to suspect that a reduction in block reward does not alter the price of BTC. But hang on, I have more for you:
TO BE CONCLUDED TOMORROW…..
Yours in crypto
Bit Brain
"The secret to success: find out where people are going and get there first"
~ Mark Twain
"Crypto does not require institutional investment to succeed; institutions require crypto investments to remain successful"
~ Bit Brain
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I also read that this 1.8% inflation rate is even below that of hold production! That is an interesting perspective given the value of gold in the Markets!
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That's interesting, I hadn't thought of that. Of course gold is similarly limited in availability and has a finite maximum amount - at least on this planet. Despite efforts on both sides to deny it, BTC and Gold share strong similarities.
But Gold has already saturated the market and BtC hasn't, so in term of ROI, BTC should be a far better long-term store of value.