Saturday, May 15, 2021

Demystifying Bitcoin’s Halving

 

source: https://i.blogs.es/d16099/halving/1366_2000.jpg

Bitcoin’s supply issuance is arguably one of the most discussed subjects used to support investment theses in the cryptocurrency. Bitcoiners often cite its halving — through which the amount of Bitcoin issued per block drops by 50% every four years — as a key factor contributing to Bitcoin as “sound money”. More dogmatic proponents of Bitcoin may even go as far as stating that Bitcoin’s supply reduction is Satoshi’s way of programming the asset to accrue value over time, often citing Stock-to-Flow models.


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A year after Bitcoin’s third halving this begs the questions, how has the halving affected Bitcoin so far and what will its future impact be?

This piece aims explain first what exactly the Bitcoin halving is, then we scrutinize the popular stock-to-flow model based on Bitcoin’s issuance, and finally we examine the effect miners and the halving have on the security and demand of Bitcoin.

Bitcoin’s Monetary Policy

Bitcoin’s fixed monetary policy has been applauded by many as an effective way to guarantee its scarcity.


As many will know, the supply is set with a maximum of 21 million Bitcoin to ever be in circulation and with its issuance decreasing by 50% every four years. The so-called Bitcoin Halvening leads to Bitcoin’s rate of inflation to decrease predictably over time.

As Satoshi Nakamoto describes it,

“As computers get faster and the total computing power applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.” — Satoshi Nakamoto

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