The Halving is Nigh

🌐 The Halving is Nigh

Less new supply, same great taste

This week is the infamous bitcoin halving (or halfing, or halvening).

There’s quite a bit of talk about it, and the potential impact, on social media, mainstream media, and TikTok.

We want you to understand what’s happening so you can prepare, and have whatever conversations you need to have with clients.

What’s happening, how does it impact bitcoin, and why should you care?

What is the Halving?

When Satoshi launched Bitcoin in 2008, and the network started processing transactions in 2009, the network had an associated “currency” called bitcoin. The currency - bitcoin - was used as an incentive to get people to connect their computers and process transactions.

The idea was to create an incentive that would have enough value so the miners would continue to connect their computers, and use their electricity and processing power to move the network forward.

To do this, the white paper sets an issuance policy that will decrease the reward miners receive for processing a block of transactions (called the block reward) every few years. The goal is to eventually have enough transactions such that the transaction fees cover the miners’ costs so they’ll keep processing.

So, about every 4 years, according the Bitcoin code, the block reward gets cut in half. The reward started at 50 BTC per block - meaning 50 new bitcoin were created about every 10 minutes, and given to the miner that won the right to process the block.

That reward dropped to 25, 12.5, and is currently at 6.25 new bitcoin every 10 minutes. As of this Friday, 4/19, the new block reward will be 3.125 bitcoin every 10 minutes.

What are the Implications?

More than just about any asset we’ve seen, the price of bitcoin is driven by actual supply and demand. There are hundreds of exchanges all over the globe trading the same asset.

Now the new supply will be cut in half, meaning we’ll only see 450 new BTC per day. You might think it doesn’t matter, since we know the final tally will be 21 million bitcoin ever in existence.

However, there’s more demand than ever for bitcoin, and many of those in buyers don’t plan to sell anytime soon.

They range from Michael Saylor, to the ETF holders who have allocated 1-5% of their portfolios, and have already shown they’re in for the long haul.

So each new incremental demand for bitcoin must be met by some supply - or someone willing to sell. And as of Friday, there will be 450 fewer new bitcoin in existence to match the incoming demand. In order to match orders, the bid will have to increase.

The approval of the Spot BTC ETFs have added to the demand, and added to appropriate allocation, education, and understanding of the asset. We think this will lead to more demand outside the ETFs - from company treasuries, governments, retirement plans, etc.

From my economics classes, I remember increased demand with lower supply should equal higher prices. Those higher values will lead to more FOMO, more investors, more demand…for less supply.

What’s past may be prologue

You’ll see all sorts of charts, tweets, posts, articles, about how bitcoin price has behaved before and after past halvings. They’ll all show exponential growth shortly afterward.

I’m not going to tell you to expect exactly the same thing, or to not expect it. I don’t know.

I would tell you to understand what is happening (above), and to think through supply and demand (high school), and determine for yourself, your clients, and your allocations, what you want to do regarding investments.

I can tell you that this isn’t usually an event where the price shoots one direction or another at the moment of the halving, so there’s no “sell the news” event.

Ancillary effects

There are several publicly traded bitcoin miners, so it might be good to also understand how this might affect them.

They have thousands of computers, connected to electricity at some fixed or variable cost, and their only product right now is bitcoin.

As of this Friday, those miners will have their production cut in half. They might have to sell more bitcoin to pay their bills, which dumps more bitcoin on the open market. Not a good thing for price, or for the miners.

Many started selling bitcoin at or near highs recently, in an effort to hold cash to pay bills so they won’t have to sell their new bitcoin. Hopefully they have plenty of cash to sustain themselves while they wait for bitcoin price to increase, as it has in the past, following the halving.

To determine what will happen to any miner in particular, best to look at their balance sheets, income statements, and other factors.

(If only we had a way to look at financials in real time)

You can also follow the likes of Quinn Thompson, who will be a webinar guest on April 25.

Let us know your thoughts on the halving!

See you next week!

-Adam