Opinion: The Halvening is Not Priced In

Halvening Facts

With bitcoin becoming more scarce in the near future, what will the halvening do to bitcoin? Let’s cover the facts. There are 21 million bitcoin, 18.5 million of which are already in circulation. There are currently 1800 ( $13.5 million USD ) new bitcoin entering circulation everyday. After the halvening, there will be 900 new bitcoin entering circulation each day. With the recent resurgence in the value of bitcoin after the COVID crash in March 2020, people are already consuming the current supply for bitcoin. As demand grows, and the supply is cut in half, many believe this is an equation that results in the inevitable explosion in the price of bitcoin. 

The Profitability of Miners

Other speculators believe that bitcoin will meet the same fate as Bitcoin Cash and BitcoinSV. After the halvening took place, nothing significant happened other than an exodus of miners who were no longer profitable. The exodus of miners would not be a good thing for bitcoin, as the diversity and volume of miners is exactly what the security of the network depends on. If less profitable miners leave the bitcoin network, it presents an opportunity for mining activity to centralize among the larger mining conglomerates.

The other scenario that we may see play out, is where the price of bitcoin rises, to make the miners as profitable as they were before. This would essentially be a doubling in value for the price of bitcoin. If there are half as many bitcoins being mined every day, then the bitcoin that is being mined needs to be worth twice as much to be equally as profitable. Personally, this is the scenario that I think is most likely. I simply cannot ignore the perfect inflationary storm that governments have created for themselves. The economic turmoil caused by COVID-19 could not be occurring at a more perfect time when we consider what is happening to the inflation rate of bitcoin.

History Repeats Itself

The bitcoin network has gone through two halvenings to date. The first halvening took place on November 28th, 2012. A halvening event is expected to take place roughly every four years. Since the bitcoin network began on January 3rd, 2009, the first halvening was actually ahead of schedule as a result of the rapid growth of the network. The second halvening, taking place on July 9th, 2016, was also ahead of schedule. The bitcoin network being ahead of schedule is indicative of the popularity of the network. The miners are racing to solve a problem, which on average takes 10 minutes to solve. The network will dynamically adjust the difficulty of the problem so that on average, it always takes 10 minutes to solve. Being ahead of schedule means that more miners are joining the network, faster than the network can adjust the difficulty of the problem.

After the previous two halvenings, analysts were able to identify a very clear pattern of behaviour for the price of bitcoin. They pinpointed a significant increase (bull run), then a subsequent massive downturn (bear market) followed by periods of accumulation and slow growth. However, the previous two halvenings may not tell the future. In my opinion, two previous patterns are not enough for us to say that the pattern will repeat itself a third, (or fourth) time. This is the moment of truth for bitcoin. If the value of bitcoin adheres to the curve predicted by the previous halvenings, then people will have a much easier time believing in the halvening effect for the fourth halvening in 2024.

Digitally Enforced Scarcity

Scarcity is a principle that is limited by the real world. We’re entering a time where scarce commodities could lose their scarcity overnight. Through the mining of asteroids for platinum, or the synthesis of gold in laboratories, we will soon be able to manufacture scarce resources into a state of abundance. This presents a problem for those who believe in precious metals as a long term store of value. They become a lot less valuable when the world supply doubles overnight because Jeff Bezos has mined an asteroid. Scarcity is an important aspect of a healthy economy, as it is a core principle in supply and demand. If supply drastically increases, eventually the demand will not be able to sustain the current price, and the price of the asset will fall. It is because of this reason that precious metals are not really scarce resources. The universe is filled with gold, diamonds, and platinum, they just haven’t been brought to Earth yet.

Cryptocurrencies have brought in the innovation of digital scarcity, or digitally enforced scarcity. It was not possible to have a truly unique digital item pre-bitcoin (2008). Just think of what copy and paste did to the music industry. Copy and paste is the main reason why we were not able to build a global peer to peer money system on the internet until the invention of the blockchain. A money system where I could copy and paste my balance is no better than a cash that can be counterfeited. The blockchain makes copy and pasting (counterfeiting) my balance impossible, ensuring that there will never ever be more than 21 million bitcoin.