The simplest explanation for everyone
Blockchain has been a hype word for several years now, especially in Dec 2017, when the price surged to around $20,000. As a non-technical person, blockchain technology itself takes a bit of reading for me to understand, not even to mention the new halving event. This is not apparent to me, and that’s why I decided to do some research and lay it out in simple words for you. If you wonder what is bitcoin halving, which happened on the 11th May for the third time in its whole history, keep on reading.
First of all, you need to know what is bitcoin before understanding what is bitcoin halving, right? Check out this documentary <Bitcoin — The End of Money>.
Another concept you need to know is Mining. Mining is the process of configuring the puzzles on blockchain and process the blockchain transactions. This costs computer power to do so and incurs electricity, hardware, and software costs. As we know that blockchain transaction is peer-2-peer, and it has to be validated by multiple miners so that the transaction is complete. To reward the work of miners, newly generated bitcoins are distributed to miners who processed the transactions in this block. Bitcoin halving has a great impact on the reward to miners. As it started to be 25 bitcoins for 1 block, to 12.5 and now 6.25. The halving event has happened 3 times in the past: Nov 2012, Jul 2016, and May 2020.
After understanding the mining and reward, you might wonder why we need halving in the first place. Bitcoin is not like currencies, where there is an entity to control the supply. For example, U.S Federal Reserve controls money supply of the US. During a crisis, U.S Federal Reserve can inject more US dollars into the market by printing money ‘out of air.’ By doing so, the Fed can buy treasury bonds issued by the Treasury. It is like Treasury borrows money from the Fed with a promise to return it. Fed prints money to lend to Treasury. And this money will be used to help businesses, households, local governments and so on. As Ray Dalio mentions, for policymakers, “Printing and Devaluing Money Is the Easiest Way out of a Debt Crisis.” Injecting more money into the market will devaluate the currency. When money supply growth outpaced economic growth, it causes inflation. In other words, money worths less. To buy the same amount of products, you need more money than before. U.S Federal Reserve targets a 2% inflation rate and using monetary policies to influence it. However, there is no such ‘Federal Reserve’ for Bitcoin. There might be too much bitcoins in circulation. So the supply is more than the demand. As a result, bitcoin will lose value in the ‘inflation’ situation. In the absence of a ‘Federal Reserve’ and ‘Monetary Policy,’ bitcoin is programmed in a way that less and less newly mined bitcoins to be injected into the circulation through the halving. Instead of having 12.5 new bitcoins for one completed blockchain, now is 6.25 new bitcoins. In the bitcoin programs, supply of new BTC awarded to miners is halved every 210,000 blocks, or roughly every four years, as set by the inventor — — Satoshi Nakamoto. With the deflation nature of bitcoin, many people consider bitcoin is a store of value.
As fewer new bitcoins are injected in the market, there could be an increase in bitcoin prices. As we can see from the historical trend in the graph below.
We don’t have enough timeframe to see the impact of halving on current price, as for now, it has not changed much. Let’s see where will it go this year.
The most direct impact of halving is the reward to miners. As rewards go down, cost of mining remains the same, ROI decreased. It might discourage many miners from continuing mining bitcoins. Those who have access to cheaper electricity and gained scale of the economy could have a more competitive advantage in this situation. As of today, the biggest bitcoin mining pools are:
If you are mining bitcoin as a hobby or side hustle, how does it impact you?
Interestingly, according to Cointelegraph article <Bitcoin Halving Means Miners Will No Longer Be Biggest Sellers of BTC>, miners cease to be the biggest bitcoin sellers, instead, crypto exchanges are. Crypto exchanges collect trading fees through bitcoins, with the trading volume increase over the years and more people started to buy bitcoins, exchanges are collecting large amount of bitcoin. And they sell them for fiat. But according to the comment in the article, crypto exchanges are already selling the bitcoins for cash, it is unlikely that they will have an impact on the bitcoin price after halving, even though miners receive less bitcoins now.
For a long time, bitcoin price has been extremely volatile. A daily change of 5% to 10% is not uncommon. If you want to learn more about bitcoin volatility, you can check out this site. On the other hand, stock market trading halts when 3 wall street indexes dropped by 12% in February this year, during the so-called ‘2020 stock market crash’.
So where will the bitcoin price go in the future? I don’t know. As the famous Benjamin Graham wrote in his book <Intelligent Investor>, intelligent investors should invest no more than 10% of the total asset in speculative investment. That is the advice I will follow.
Apart from the price speculation, I believe bitcoin has played an important role in raising the awareness of decentralized ledger technology. From my experiences in crypto valley and other parts of the world, I have seen so many creative ideas and new business models which are not possible without DLT. I am looking forward to more developments in the space.
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Books I have read and would recommend on the topic of blockchain technology, economics and finance:
Principles:Life and Work by Ray Dalio
Big Debt Crises by Ray Dalio
Intelligent Investor by Benjamin Graham
MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins
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