By halving the rewards, mining becomes less profitable and in turn, slows the production of new Bitcoin. It’s all about keeping Bitcoin scarce. Just like gold, if there’s less of it, each piece becomes more precious.
Unlike fiat currency, the total supply of Bitcoin is fixed and immutable, there will only ever be 21 million Bitcoin. The combination of a capped supply with the precoded halving means Bitcoin not only emulates the scarcity of precious assets like gold, but its scarcity actually increases over time irrespective of demand. The halving event is a deliberate mechanism designed to slow supply growth of Bitcoin, further reinforcing its scarcity and hypothetically resulting in increased buying power over time.
The halving happens roughly every four years, but if we really wanted to break it down, blocks take an average of 9.66 minutes to mine, which would take about 1409 days to mine the 210,000 blocks. So in real time, that means the fourth Bitcoin halving is likely due later this month.
Bitcoin bull run
Historically, each halving event has corresponded with notable Bitcoin price surges and the year following a halving has typically been associated with bull market conditions. Couple this with the significant institutional investment the market has seen in early 2023 and a record-breaking price prior to the halving and you have an event highly anticipated by not only those in the crypto space but by many investors.
Inflation hedge
When I was first introduced to the world of cryptocurrency, one of the things that caught my attention was how it differed from traditional fiat currencies and one of the key differences Bitcoin offers is as a potential inflation hedge.
Bitcoin’s supply inflation rate is set to halve again at the next Bitcoin halving - a stark contrast to the recent years of rampant fiat currency inflation globally (and right here in New Zealand) where successive years of money printing have seen the purchasing strength of the New Zealand dollar drop by more than 19 per cent (source) according to some since 2018. This has made Bitcoin a poster boy for critics of quantitative easing.
For institutional investors, they are increasingly recognising Bitcoin as an emerging asset class for diversification. Given the volatility of Bitcoin, there are undeniably speculators hoping for short-term gains - and it is important that retail investors recognise the risk.
What is also undeniable, is that Bitcoin continues to capture headlines here and around the world - and I’m willing to attribute it to the innovative halving algorithm and capped supply. For now, you will probably continue to hear the crypto-heads yap on about the fluctuating price of Bitcoin as they try and predict market movements to get ahead of the trends. I am also accepting of that.
Finally, while everything I’ve laid out is a well-documented synopsis of how Bitcoin operates and the movements around previous halving events, none of this is financial advice. Bitcoin’s price, although upward in trajectory, is volatile and past results (you know where this is going) do not guarantee future performance.
- Ben Rose is the Binance General Manager for Australia and New Zealand
