The Bitcoin halving – why is this important?
July 9 2016 is being eagerly anticipated by many cryptocurrency enthusiasts, and may have broader implications for how we regulate other currencies as a whole. Why? Because Bitcoin is about to go through its second halving.
What does the Bitcoin ‘halving’ mean?
One of Bitcoin’s unique properties is the halving. The halving is a disinflationary measure that caps how many Bitcoins can be created. To understand why the halving is so important first you have to understand more about how Bitcoin works.
Bitcoin was designed by Satoshi Nakamoto who wanted to create a self-regulating currency with a fixed maximum number of units. Bitcoin is a decentralised digital currency, which means no governing body or individual is in charge. Instead all transactions are recorded on a publicly verified ledger known as the blockchain. Miners create the blockchain about every 10 minutes creating a consensus on which addresses hold which funds. Generating a block involves completing a series of calculations in computationally intensive race to verify the ownership of different bitcoins. Bitcoin is incentivised for its users because each winner of this race receives a number new bitcoins as a reward.
It is this reward which halves every 210,000 blocks – or roughly every 4 years. Bitcoin was launched in early 2009 back then each block provided the miner who found it 50 bitcoins. This halved to 25 bitcoins in November 2012 and is about to halve again on the 9th July 2016 to 12.5 bitcoins per block. This will happen every 210,000 blocks until all 21 million bitcoins have been mined. It is estimated that the next halving will not happen again until 2020.
In the short term it’s expected that the halving may affect the price of Bitcoin as bitcoins will be produced at a slower rate and will be more expensive to create. However longer term the halving has interesting implications for how we manage our currency in a fast-moving digital world.
Could Bitcoin’s biggest weakness actually be its biggest strength?
For many used to traditional currencies the fact that Bitcoin is decentralised and no one is in charge can seem worrying – a weakness at the heart of the currency. But the fact that no government or individual micromanages Bitcoin is what many of its enthusiasts regard as its greatest strength. You can always be certain how many bitcoins you have and what the rules for using those coins are. Inbuilt rules such as the halving means that Bitcoin is self-regulating currency with a predictable algorithm providing a clear schedule for what volume of new currency will be generated and when.“A lot of the media has focused on the negative uses of Bitcoin, which has caused most to dismiss the technology as a headline grabbing fad. What a lot of people don’t realise is that Bitcoin, its protocol and underlying architecture were designed from the outset to last and serve the generations to come“.
– Johnathan Turrall, CEO, MetaLair.org Ltd
So why is Bitcoin relevant?
Contrast this with the current economic crisis in the Eurozone. The UK recently held a referendum on its membership of the EU and opted to leave. Whilst the referendum was specifically about UK’s legal and trade ties to Europe it has broader international implications for the European financial union which is currently in deep trouble.
Uniting the currency union members’ economies with a single currency, the Euro, whilst allowing each to individually manage its own financial affairs was a bad plan to put it mildly. Now there is no way for a country which has mismanaged its finances, such as Greece to hit the reset button, without affecting all the others in the currency union.
So why hold bitcoin when I could put money into an account which pays interest?
This is creating a complicated mess, with the EU centrally trying to mitigate damage and the member countries with problematic economies being torn apart from within by political infighting. The EU’s current economic policy response is complicated, but one key aspect of it is to punish the banks for hoarding money – a process called negative interest rates – in the belief that this will encourage the banks to loan their money out, increasing spending and get the economy jump started again.
Under extreme negative interest rate policies money is deleted from everyone’s bank balance when it’s left in a bank account. Yes, literally the bank deducts some of money from your account each month. In the past this has created situations where people hoard physical cash outside the banks. So the solution to this is to freeze cash withdrawals; people can still receive their monthly salary and pay bills all by electronic transfer, but can’t take their money out as physical cash.
However, some recent evidence shows people try and save even more to make up for the loss; so rather than fixing the problem this policy could be compounding it potentially leading to a downward spiral of negative interest rates.
With Bitcoin because it is decentralised, no one can change the policies governing their movement or deduct money from your balance.“It’s only once other currencies have come crashing down and Bitcoin is left standing that people are going to realise that it has actually been very well designed“.
– Johnathan Turrall, CEO, MetaLair.org
But negative interest rates are a theoretical extreme so we don’t need to worry yet, right?
The EU central bank has set its deposit rate as a negative rate and some counties’ bonds are being offered at negative interest rates. Yes that’s right some investors are buying bonds which cost them money to hold each month.
As of 2016 Denmark, Switzerland and Sweden’s central banks have set negative interest rates on their loans to other banks. One of the largest banks in Norway is calling to stop the use of cash and one bank has already declared that it is phasing it out entirely.
Bank of Japan Governor Haruhiko Kuroda lowered rates to -0.1% for certain deposits on January 29th and sales of safes have doubled.
|Cash in circulation
as % of GDP (2014)
Source: MoneyWeek 12 February 2016.
Bitcoin’s halving in perspective.
Centrally managed currencies seem safe because they are familiar, decentralised currencies seem scary because they are new. But would you want your currency policy managed by someone who may not be at the helm in four years’ time? Or with a method of regulation which is transparent and fixed for the generations to come?
Until next time,
CEO, MetaLair Ltd