May the Half Be With You

On May 12 the bitcoin mining reward rate will halve. The only guarantee is that turbulence is on its way.

In the crypto universe, no event comes saddled with more unhinged hype, arcane mythology, wild theorising and all-out anxiety than the bitcoin halving. Perhaps bitcoin’s single most defining feature – big call, but bear with me – the halving (or Halvening, if you’re feeling jazzy) is the moment when the number of bitcoins produced every time that miners solve a block gets cut in half. In 2016, the number dropped from 25 to 12.5. This time round, it’s going down to 6.25.

From the outside, such a drop might seem like a banal tic of bitcoin’s internal accounting system. But on May 12, 2020, when block number 630,000 is finally mined, it could mark the beginning of the world’s next gold rush.

All about deflation

In the last newsletter, I talked about the role of inflation in modern fiat currency. (The short, short version: central banks can print money to stabilise the economy, but in doing so they diminish the purchasing power of that currency).

Bitcoin was specifically designed as an antidote to these meddlings. Rather than leaving the question of money-creation to a bunch of unrepresentative human bankers, bitcoin’s rate of emission is forever set in its code. And rather than the amount of money issued always going up – during the Great Depression the US government was printing hundreds of millions to support the economy; now that figure is in the trillions – the rate at which bitcoin is produced goes down over time, in theory producing a steady increase in purchasing power and value.

The known unknowns

I say “in theory”, because the entire system hinges on adoption of bitcoin increasing. It’s Economics 101: without a concurrent uptick in demand, the price will flatline or decrease. For bitcoin this is particularly perilous because if the price doesn’t stay above what it costs to actually mine, it could lead to runaway miner capitulation as inefficient and less resourced miners are forced to shut down and dump their bitcoin en masse.

It’s why the recent collapse in price comes at such an inopportune time. On May 12, the cost of mining each bitcoin will instantly double. Will skittish, risk-averse investors and the newly unemployed masses be able to pump the price enough to keep the miners afloat?

When haz Lambos?

If past history is anything to go by – and I should say that two data points (2012 and 2016) are not a lot to go on – the time around the halvening can be exceedingly turbulent. But when the dust settled (and in both cases it took around six months), they’d set the stage for two of the biggest bull runs that financial markets have ever seen.

We’ll have to wait and see whether history repeats for a third time. But as the global economy teeters and governments print and borrow money with reckless abandon, bitcoin’s reason for being has never been clearer. Now it – and we – just need to seize the opportunity.

Ask CoinJar

So, what happens when the final bitcoin is mined? Does the entire system collapse?

Bitcoin’s blockchain is secured by miners who solve exceedingly complex cryptographic problems in order to verify transactions. As a reward for their efforts, these miners receive a certain amount of bitcoin. But bitcoin has been programmed with a 21 million coin hard cap; basically, when that final coin is mined, no more bitcoin can ever be made. So, what happens to the miners then?

Well, first – this is a long way away. The Endening (trademark pending) is currently predicted to occur in 2140, at a time when the bitcoin mining reward will be 0.00000042 BTC per block, or 42 satoshis. However, by this point actual mining may already be a fringe pursuit, as more and more of that hashing power is directed to receiving transaction fees instead.

Transaction fees function like a tax on the network, a fee you pay to miners for their work in securing the blockchain. While transaction fees are a relatively minor feature right now – it currently costs less than a dollar per block – they scale as demand and price increase. (See December 2017, when the transaction fee rose to more than US$50). So the miners will be less miners than they will be auditors, and we’ll all be slinging them bitcoin for their service.

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