So There You “Halve” It
OK, so the Third Halving in Bitcoin’s 11-year existence has just passed.
Let history show that it occurred precisely at 3:23 PM EST on May 11,2020.
If you were paying any attention to all the pre-halving talk, you may feel let down. Other than a little extra volatility, nothing seemed to happen.
However…in fact, something BIG and IMPORTANT did indeed occur, the implications of which we will discuss later in this article.
But first, let’s talk about what the Halving actually is…
As built into Bitcoin’s algorithm, the mining block reward is cut in half after each 210,000 blocks are mined. With each block averaging about 10 minutes to produce, these halving events occur every four years.
So why are these “milestones” so important? Why all the hype?
Because they have a direct impact on the miners, who are the backbone of the entire Bitcoin ecosystem.
And the miners’ reward is suddenly HALF of what it was yesterday.
Imagine if your salary got automatically cut 50% every four years!
The only way you would stay in that job was if the value of your earnings doubled to make up for the cut. Your dollars would have to buy twice as much goods and services as they did in the previous four years.
(We all know that doesn’t happen with the U.S.Dollar or ANY fiat currency…Quite the opposite!
Every single government-issued currency has consistently lost value over time, mainly due to inflation but also to the loss of faith in the governments themselves.)
Now back to the miners…
What happens after these halvings is that the inefficient miners become unprofitable and have to temporarily or permanently close shop.
The efficient miners can go on, at least for awhile…
But occasionally the price of Bitcoin stays depressed for a long time, and more miners shut down.
You may think that this would put the Bitcoin network at risk, and you would be correct…
However, the beauty of Bitcoin’s protocol is that it self-adjusts in these situations.
You see, the difficulty level to solve the mathematical puzzle for creating the next block becomes lower, so it takes less computing power and energy to solve.
Hence, the rewards become easier and more profitable.
This brings more miners back into the network, as the profit potential increases.
In turn, the “hash power” (the mining speed and efficiency) of the network increases, which makes the whole system stronger and more secure.
Because of its limited ( and self-limiting) supply, eventually the price of Bitcoin MUST rise in order to allow miners to make a profit and keep the whole ecosystem running and growing.
If you look at the entire history of Bitcoin’s price over those 11 years, it has inevitably trended upward (as it must because of the halvings).
As Philip Swift(Twitter/@PositiveCrypto) has pointed out, Bitcoin’s price has actually been positive in over 95% of its trading days!
No other asset class can claim that!
Every other asset in the world has an annual inflation of its supply. Even gold averages around 2%.
Bitcoin, by contrast, is reducing its new supply by 50% every four years, predictably and without exception.
OK, this is all well and good, but why should we care if we’re not miners?
Well, if history is any guide, Bitcoin’s price has increased tremendously after each previous halving — by greater than 13,000% in 2012 and over 12,000% in 2016!
There are many arguments for and against the Third Halving having a similar effect.
No matter what argument you favor, wouldn’t it be prudent to have at least some small percentage of your portfolio in Bitcoin (and perhaps some other crypto assets)?
Are you OK with the possibility of missing out on astronomical gains because you sat on the sidelines and played it safe?
As an additional insight into the big picture of why Bitcoin is so timely and important, embedded in the final block before this Third Halving was a message:
“NY Times 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”
This was obviously an homage to Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, who included a contemporaneous headline in the first ever (genesis) block of Bitcoin in 2009:
“The Times 03/Jan/2009 Chancellor on brink of second bailout of banks.”
You couldn’t have written a more compelling script for why the world needs Bitcoin!
In summary, as for consideration of Bitcoin as a possible investment, here are the salient points from this discussion:
- An asset that was specifically created during a global financial crisis and made to preserve value
- Scarce, and getting consistently scarcer
- Persistently rising price throughout its history
- Past history of incredible price gains after each previous Halving Event
- The ONLY asset that cannot be inflated
I, for one, am happy to take this asymmetrical bet!
(NOTE: I just published this article today on Medium.)
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