Does the Bitcoin halving really matter?
Much has been made of the fact that the next Bitcoin (BTC) halving will happen in May next year. The rewards for completing a block will drop from the present 6.25 BTC to 3.125 BTC, and – in terms of classical economics – that should mean the price will go up.
Some 92% of all possible BTC have already been mined, leaving only around 8% to be handed out over the next 100-plus years. If we ignore those that have been lost – at a guess, around four million – that leaves about 15 million in circulation with another 1.5 million still to be mined.
Historically, each halving has been followed by an increase in the value of BTC, and many will believe the same will happen again. Far be it for me to trash the perceived wisdom, but will BTC increase massively because the rewards will drop?
There is the point, of course, that miners will need to get an economic return on their investment, and it could be that in the future the rewards might not cover these costs. That in itself would mean the fees charged by miners to validate a transaction would have to rise to make up the difference. Once all the BTC is mined, it will only be transaction fees that will be paid to the miners.
Therefore, there is no inherent reason why the price of BTC should rise, just because the rewards are dropping. The so-called scarcity of rewards from next year will have no effect on the quite large numbers that are already available.
What would make a difference is if uptake, adoption, and transactions all took off. Again, as in classical economics, increased demand for unchanged supply – sort of – over time equals higher prices.
So, this is why everyone is very excited about ETFs. These are Exchange Traded Funds and it is estimated that quite literally trillions of dollars of investment would flow into them – and they would have to buy BTC to cover the liabilities and give effect to how ETFs work.
The Securities and Exchange Commission (SEC) is very cautious about Bitcoin ETFs – even though it has, in effect, already allowed a forward ETF. But the regulator really doesn’t like the prospect of spot ETFs, which is what Blackrock for example wants to achieve.
The problem is ETFs are supposed to have a spread of investments to reduce volatility and if the only holding is BTC, where is the spread? And the price of BTC goes up and down a lot when it is in the mood.
The other point is that, right now, BTC trading is at the lowest ever level relative to the amount of BTC available.
There are other ways trading volumes could increase, of course – for example, if a car company or two said they would take BTC. But the inherent problem that most people have is that they need to sell dollars to acquire BTC – and if you have to do that, unless there is a discount for paying in BTC, there is little or no point.
The reality is that for BTC to go on a tear again, there simply needs to be an increase in buying, not matched by quick selling. Arguably, that is what is happening at the moment with traders buying and selling and scalping some gains – and losses – here and there.
If the SEC approved Bitcoin ETFs, there would almost certainly be lots of money poured into them with a concomitant increase in the price of BTC to match demand, as there would be little selling to offset these purchases.
The other thing that is holding back whatever the future may bring is the continuing huge drop in money supply worldwide, just at the time governments are doing their best to hoover up as much of people’s wealth as they can.
Larry Fink, CEO of BlackRock and previously one of BTC’s most ardent critics, said a couple of weeks ago: “Instead of investing in gold as a hedge against inflation, a hedge against the onerous problems of any one country, or the devaluation of your currency whatever country you’re in — let’s be clear, Bitcoin is an international asset, it’s not based on any one currency and so it can represent an asset that people can play as an alternative.”
His words are a massive vote in favour of BTC, and a different way of looking at it. He is now one of the people trying to get an ETF past the SEC.
We are very much on the edge of something. But, while some are getting excited about the next halving in around nine months’ time, it is other developments that are likely to be the catalysts for the next BTC bull run.
Temple Melville, CEO of The Scotcoin Project Community Interest Company (CIC)