Halving Your Cake and Eating It Too: How Bitcoin's Economics Redefine Monetary Theory
SPECIAL EDITION
Do you know what was the hardest thing I had to get used to since I’m in crypto? And no, it’s not the volatility of crypto market 😜. It’s the slight hidden sarcasm in people’s voice when they ask me if I’m “still” in bitcoin. Years ago it used to make me uncomfortable, now I take it with a smile and don’t react. I came to peace with the idea that most people, some family, and many of my friends don’t have an idea what I’m doing. And that’s fine, it’s not like if I was an engineer, or some other specialised profession, they would all understand it, they’d just be more familiar with the job title.
This morning (Friday, 19th), after a game of padel tennis, I was asked that same question: are you still in bitcoin? After I confirmed with a simple “yes”, they stated that they don’t get it. I smiled politely and I said: that’s fine, bitcoin is not for everyone. It didn't end there, the conversation continued with questions on what gives value to bitcoin, why, etc. As much as I love talking about it, I don’t try to convince people to believe in bitcoin. I merely aim to educate. Even then, I learnt to sense when someone is not interested in learning, but wants to maybe make a point.
That and my instagram followers that voted on a poll I posted a day back, inspired me to write about bitcoin halving and the economics of it. And what a better moment to explain the economics of BTC: Bitcoin Halving is nearly happening as I type.
What is HALVING? Why is everyone in crypto talking about it? I’ve explained the reward mechanism in more detail in my previous article here.
But what are the principles of bitcoin halving? From an economic perspective, bitcoin's design reflects several key economic principles, including scarcity, supply and demand, incentives, and the problems of centralisation.
The bitcoin block reward halves approximately every four years, which means the reward for mining a block is reduced by half. Here's how it has reduced over the years and how it will continue to do so until the mining reward becomes zero (source: chagpt research):
2009: At bitcoin's inception, the block reward was 50 BTC.
2012: The first halving reduced the reward to 25 BTC.
2016: The second halving brought the reward down to 12.5 BTC.
2020: The third halving reduced it further to 6.25 BTC.
2024: The reward is expected to become approximately 3.125 BTC.
Going forward, the reward will continue to halve approximately every four years:2028: It will halve again to about 1.5625 BTC.
2032: The reward will reduce to approximately 0.78125 BTC.
2036: It becomes about 0.390625 BTC.
2040: Further reduction to approximately 0.1953125 BTC.
2044: Then to about 0.09765625 BTC.
2048: Halving to approximately 0.048828125 BTC.
2052 and so on: Continuing this pattern of halving.
This process will repeat until the block reward becomes so small that it rounds down to zero, which is expected to happen around the year 2140. At that point, all 21 million bitcoins will have been mined, and miners will primarily earn transaction fees rather than block rewards.
Let’s explain it simpler: imagine that bitcoin is like a community garden. Suppose there's a rule that the amount of fruits and vegetables each garden caretaker gets, as a reward for tending to the garden, will halve every four years. This is to ensure the garden's produce lasts a long time and the caretakers remain motivated to take care of the garden even as the direct rewards diminish. Similarly, the bitcoin mining reward halves every four years, ensuring a slow and steady release of coins, which encourages miners to continue maintaining the network for a longer period. Over time, as the reward diminishes, the community garden's caretakers might start charging a small fee(transaction fee) for people to enter the garden or buy fruits and vegetables. This fee then becomes the new incentive for the caretakers to keep doing their job well, even when the direct rewards from the harvest become smaller or stop.
Bitcoin's economic design is a fascinating blend of economic theory, technology, and game theory, all structured to create a decentralised digital currency. These principles are not just theoretical, they’re practically applied through the protocol’s coded rules, offering a distinctive approach to money and monetary policy.
Scarcity and value
Bitcoin has a set limit of 21 million coins that can ever be created, just like there is only so much gold in the world. This limit is what makes bitcoin valuable—because there's only a finite amount, the more people want it, the more valuable it becomes. Just like gold, which is hard to find and mine, bitcoin's fixed supply helps it keep its value and not lose it due to too many being available, which is a problem with regular money that governments can keep printing.
DID YOU KNOW?!
20% of 19 million BTC currently in circulation - that’s approximately 3.8 million bitcoins - are lost and likely unrecoverable due to lost keys, cold storage failure, sending BTC to wrong address, lost or disposed laptops and computers in the early days when bitcoin wasn’t popular or valuable.
Challenging traditional monetary theory
In most countries, the money system is controlled by central banks and big financial institutions. These authorities decide how much money is in circulation, when to print new money, set interest rates, and try to manage the economy’s overall health by adjusting these figures. However, bitcoin works differently. It operates on a decentralised system that spreads control across a network of users worldwide, rather than being in the hands of a single entity. This means no one person or group can dictate how bitcoin operates, which challenges the traditional way banks and governments manage money. This approach shows there's another way to handle money that doesn’t rely on a central authority but instead on the consensus of its users.
Coding economic policy
Bitcoin's rules, such as how many bitcoins exist, how often new ones are made, halving events, and how mining difficulty adjusts, are all built into its programming. This means everyone can see and rely on these rules, which cannot be easily changed or manipulated. This is different from how regular money works, where governments and banks can change rules or influence the economy, sometimes leading to issues like inflation, recession, etc.
Alignment with the Austrian School of Economics
Bitcoin reflects ideas from the Austrian School of Economics, which is critical of too much government control over money. This school argues that money should be something solid and not easily manipulated by policy changes—what they call "hard money." Bitcoin fits this idea because its supply is fixed, making it difficult to devalue through overproduction.
Impact and discussions on the future of money
Bitcoin’s approach is making people—economists, policymakers, and tech experts—rethink how money should work. It questions old theories and practices, suggesting that the future of money might rely more on technology and less on centralised control. This digital currency's growing popularity is pushing for discussions on how economies should adapt in an age where digital transactions are becoming the norm. By offering a decentralised and transparent monetary system, bitcoin is not just an alternative financial instrument but a challenge to the established framework, encouraging a reevaluation of how money could and should function in a globally connected digital world.
Bitcoin's price patterns around halving events
Every time bitcoin goes through a halving event, where the rewards for mining new blocks are cut in half, its price tends to increase. However, each time this happens, the price increase is less dramatic than the last, and it takes a bit longer for the price to hit its peak.
Here’s a quick look at what happened in each cycle:
2012 Halving: halving took place on November 28, 2012. Price movement started at around $12 and skyrocketed to about $1,150 within a year. Roughly a 90x increase. This first halving occurred when bitcoin was still relatively new and not widely known or adopted.
2016 Halving: on July 9, bitcoin price began at approximately $650, climbing to about $19,800 over the next 1.5 years. That’s about 30x increase.By the second halving, bitcoin was more established, with a larger market capitalisation and greater public awareness. The multiplier effect was smaller compared to 2012, and it took longer to reach the cycle peak. This reflects a more mature market with slower, albeit substantial, price movements.
2020 Halving: May 11 was the halving and price kicked off at around $8,600 and reached up to $64,800 in about 11 months. The third halving showed a further decrease in the multiplier effect (only 8x) and a shorter duration to peak compared to 2016. This pattern could indicate that the market is becoming more rational and less speculative, or it may reflect broader economic conditions and increasing institutional participation.
2024 Halving is now complete 🥳
There’s a lot of speculation on the direction bitcoin price will take. Some say a supply shock is possible and this will drive price up. If demand significantly outweighs supply, the price of bitcoin could surge as buyers compete for a limited number of bitcoins available on the market. This price increase can be abrupt and substantial, depending on how severe the mismatch between supply and demand is.
Others are saying miners will need to sell more of their bitcoin reserves to pay for their operational costs, and this will flood the market with BTC, driving the price down. If the market suddenly has more bitcoin available than there are willing buyers, the price will likely drop. This is a basic economic principle where excess supply, without corresponding demand, leads to price decreases. Whether miners sell large amounts of bitcoin right after a halving depends on a combination of their individual financial needs, their expectations for future bitcoin prices, and overall market conditions. There isn't a uniform trend that applies to all miners, and their impact on the market post-halving can vary based on a multitude of factors.
In each of these scenarios, the common factor affecting bitcoin’s price is the change in perceived value and available supply. While the price surges associated with halving are often the most visible effects, the event's significance deeply influences bitcoin's foundational philosophy and its operational framework.
Bitcoin halving is a multifaceted event with implications that ripple through technological, economic, and social layers, reinforcing bitcoin’s position not just as a cryptocurrency but as a transformative financial technology with the potential to impact how value is stored and transferred in the digital age.
It’s way past midnight so I’ll take your leave until next time. Thank you for reading, and goodbye for now!
PS: I realize this is the second email you've received from me this week—thank you for your understanding as this special edition just couldn't wait! I'm eager to hear your thoughts on it and whether you found the additional content helpful.