Bitcoin has the title of being the first cryptocurrency and the most popular one to date. The value of Bitcoin is determined by the law of supply and demand, which is a fundamental principle in economics.
Let us define Bitcoin mining first before we get into Bitcoin halving. Bitcoin transactions take place on its blockchain. These transactions are registered on a block. New blocks are added to the blockchain after each transaction. These transactions are encrypted in nature. Bitcoins are awarded to the miner who decrypts them first and adds a block to the blockchain network. Bitcoins are the incentives for miners to decrypt these transactions.
What is Bitcoin halving?
A Bitcoin halving event happens every four years. The number of bitcoins received by miners for adding a block to the Bitcoin blockchain is halved every four years.
What is the philosophy behind Bitcoin halving? Why is it needed to reduce the supply of Bitcoin? How does this event affect the value of Bitcoin? This article will explore all the aspects of a Bitcoin halving event.
The Stock flow model
The ability to be a good store of value is the hardness of money. The hardness of money is directly linked to its supply. The supply of money has two determinants.
- Stock: Subtract money used from the existing supply of money in circulation. For example, 50 units of gold are produced from the beginning. Ten units of gold have been used. Then the gold stock is 40 units.
- Flow: The number of units added to the existing supply at regular intervals is known as flow. For example, 30 units of gold are produced every year.
The ratio between these two determinants is known as the stock flow ratio. This ratio is a crucial determinant of the price of an asset. A currency is more robust if it has a higher stock-flow ratio.
The value of our fiat currencies constantly rises and drops. Because most of us are preoccupied with our daily lives, we may not have noticed these fluctuations in values. We blame ourselves if we do not make money by not investing at the right time. However, the price of these currencies has constantly declined because of excessive circulation. These fiat currencies do not have the same purchasing power as in the past.
The Yap Islands story
Let us go back in time to understand how a currency declines. We can learn the impact of the stock flow ratio on the value of money.
The federated states of Micronesia included the Yap islands. Rai stones were used as a currency on these islands a long time ago. Rai stones are made from limestones, which are not available on the Yap islands. These stones were brought from neighbouring islands and came in all shapes and sizes. Some of these limestones weighed as much as four tons. These stones were desirable to own because of their beauty and rarity.
The owner of a Rai stone would declare ownership of the stone in front of all the people on the island. Everyone on the island knew who owned a particular stone, so there was no chance of stealing. The owner would also trade the stone in the presence of all the people on the island. The people of the island were notified after the transfer of the ownership of the stone.
Does this currency system sound familiar? This system is exactly how a blockchain works, and people who are familiar with blockchain technology would recognize this system instantly.
Rai stones were an effective form of money for centuries. This status of Rai Stone remained until an explorer, David O’Keefe, was shipwrecked on the shores of Yap Island in 1871. He continued living on the island for a while and saw an opportunity to become wealthy from this island. He decided to start production of coconut oil from the resources on the island. There was a problem, though. The natives would not accept any other form of currency to trade except Rai stones.
He went to the nearby islands to find these stones and brought a huge load of them onto Yap Island. This supply reduced the rarity of the stone. This event led to the banning O’Keefe from doing business with the natives by the village chief. Some locals agreed with the decision, others did not, which eventually led to the downfall of Rai stones as a currency.
The Bitcoin algorithm controls this flow of supply. So the question arises: how many Bitcoins have been mined till now? The total number of Bitcoins to be made is 21 million BTC. The rate at which Bitcoins are produced every year can not be altered. So far, 19 million Bitcoins have been claimed. In the year, 2140, the last Bitcoin will be mined. The stock-flow ratio is higher every four years because of the rate at which the supply of Bitcoins is being reduced and the finite nature of Bitcoin.
Bitcoin halving dates
50 BTC was the reward for mining one block in 2009. This reward was reduced to 25 BTC in 2013 and has been halved every four years. 6.25 BTC is the current reward for adding each block to the Bitcoin blockchain.
When is the next Bitcoin halving?
The next Bitcoin halving is going to occur in 2024. 3.125 BTC is the reward for mining one block in 2024. The number will keep decreasing until the year 2140 when the last Bitcoin will be mined.
The above graph shows there is a positive correlation between the Bitcoin halving event and the price of Bitcoin.
How does the Bitcoin halving affect the blockchain network?
The price of Bitcoin is affected by the Bitcoin halving event. There is a rise in price after every halving event. This price rise happens gradually in the future and does not rise immediately after the halving event. For example, the value of Bitcoin rose from $8821 to $10,943 after the halving event in 2020.
It gets more difficult for miners to own Bitcoins after each halving event, but the price of Bitcoin is higher after this event. This high value encourages miners to compete and be a part of the Bitcoin blockchain network.
Final Thoughts
Bitcoin is based on a robust stock-flow ratio framework, unlike other traditional currencies, which can be printed as needed. There is a high chance that the value of Bitcoin will rise after the next halving event. Irrespective of the price, Bitcoin is a crypto coin driven by strong economics and unaffected by any centralized agency.
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