Bitcoin halving season with a preview from the forks

Monetary policy matters. The Bitcoin network has a built-in monetary policy dictated by the Halving rules that cannot be changed. The upcoming automated monetary policy intervention (Bitcoin halving) is on May 11, 2020.

Bitcoin, the first peer-to-peer Electronic cash system, developed by Satoshi Nakamoto, opened up the possibility for Money becoming purely Data that is not controlled by the State or any other single entity.

`Data is like Oil` has become a cliché[1] but I bring it up in this context because it can work as a reminder of the risks of centralization, oligopolies, and cartels. During this crisis triggered by the COVID-19 epidemic, the oil-producing countries were unable initially to reach a consensus around reducing oil production. The supply of oil has always been decided (controlled or even manipulated in some circumstances) by those involved in the extraction and production of oil.

The supply of money has always been controlled by Central Banks.

Bitcoin, one of the first kinds of programmable money, has a built-in design that Does Not allow for those involved in the production of new Bitcoins, to decide the Supply of Bitcoins.

In the world of Programmable Money, producers of New Money do not decide the Supply of Money

In the case of Bitcoin, the way new money enters into circulation is determined mainly by The Halving rules of Bitcoin that were built-in from the start and cannot be changed (for good or for bad). The total supply of Bitcoins is capped at 21 million Bitcoins. Bitcoin halving creates a schedule that lowers inflation (the rate at which new Bitcoins can be mined).

The first Bitcoins entered into circulation in 2009 were mined easily[2]. The Bitcoin network attracted miners, who were rewarded for keeping the network safe by verifying transactions and adding them to blocks. Miners get rewarded for the proof of Work they perform that requires them to spend computational power[3]. The reward is on a per-block basis.

Starting in 2009, the reward per block was 50BTC. In other words, 50 new Bitcoins could enter into circulation for every new block added to the blockchain. Think of it as the new money that trickles down into the economy every time a block is approved and added to the blockchain (new blocks are added every 10 minutes roughly).

The Halving rules of Bitcoin reduce every 4 years the reward, by half

The reward is the mechanism for new Bitcoin creation. In 2012 the reward per block became 25BTC, in 2016 it was cut to 12.5BTC, and on May 11th which is the estimated time of the 2020 halving, the reward will drop to 6.25BTC.

Halving will continue and it is estimated that by 2140, the entire supply of the 21 million Bitcoins will have been mined. Currently, we have approximately 85% of the total supply, already in circulation.

Halving results in a drop in the inflation rate of Bitcoins. In the first 4yr period, inflation was very high. At the first halving in 2012, it was around 34%. In 2016, it had already gone down 8+% and just after that second halving to 4+%. These days Bitcoin inflation is around 3.5 %.

The May 2020 halving will bring the Bitcoin inflation rate down to below 2% which is the level that most Central banks aim for and is even lower than the inflation rate of Gold.

The effect of the May Halving

To understand how to think about the impact of the May halving, we need to look at both the supply and demand side of Bitcoin.

The supply side of Bitcoin is mostly a function of the halving rules we described above. At first sight, it looks like miners may become dis-incentivized to mine[4] Bitcoin as the reward drops. The breakeven cost for mining, however, varies. On the one hand, upgrading mining hardware and software is a sunk cost that can make mining more efficient and profitable. Electricity costs vary by region and miners may shift computational power to lower-cost regions after halving. Small miners may have to drop out of the competition as rewards drop. On the other hand, the timing of the halving event is known and therefore, miners could have prepared so that they are not faced with liquidity issues.

As with any asset, it is unclear whether the upcoming event is priced in already or not.

The other consideration that needs to be taken into account, is that even though 2020 started with a healthy (volume and hash rate[5]) bull run for Bitcoin, the recent meltdown in the markets affected Bitcoin too. March was a month that a major liquidity squeeze took place and even though it now seems to be normalizing, it brought the price of Bitcoin down even below $4k, a 60% drop from its January highs ($10+k).

It is also possible that demand for Bitcoin (as of the week of April 20th around $7k) increases as trillions of dollars of fiat currencies are being created and the US debt is reaching $24 trillion. More people feel it is reasonable to allocate to `different` assets that are not connected to the inflationary fiat monetary system, like Gold, Silver, and Bitcoin.

The current estimated date for the Bitcoin halving is May 11th.

Two of the largest Bitcoin forks, Bitcoin Cash (BCH) and Bitcoin SV (BSV) are going through their own halving before the original Bitcoin network - BCH halving was on April 8 and the BSV halving on April 10 halving. Around their respective halving dates, both prices peaked and have since dropped 14% and 10% respectively. Admittedly, this is a short time frame to make any meaningful conclusions. And also these networks have considerably smaller market capitalization[6] and their miners might be incentivized to move over to the larger Bitcoin network.

Efi Pylarinou is a global Fintech & Blockchain influencer — №1 Woman influencer in the finance sector by Refinitiv Global Social Media 2019.

[1] The phrase has been so over-used that it has been contested by many.

[2] It is said that Satoshi (still not identified) may have mined hundreds of thousands, anywhere from 300 to 900 thousand Bitcoins.

[3] Mining requires dedicated mining hardware and software. As the industry has evolved, there is a need to upgrade mining equipment to keep up with the increased requirements of the network and the competition. Cost of electricity is another important factor in mining.

[4] This can put the security of the network at risk.

[5] The hash rate of Bitcoin measures the computational power that Bitcoin miners need to deploy to confirm transactions on the blockchain. An increase in hash rate represents higher security in the network and therefore, the Bitcoin hash rate is accepted as a measure of the heath of the network.

[6] The market capitalization of Bitcoin Cash and SV together is around $8 billion compared to Bitcoin`s market cap which is just over $130 billion which is x16 times more.

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