The impact of Bitcoin "Halving"

Duke of Marmalade

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Apparently the main driver of the bitcoin bounce is the "halving" expected around May 12th. All the usual suspects are running countdown clocks and constantly reminding their gullible patrons of the boost to price from earlier halvings, even going so far as to justify this based on supply and demand arguments. Really can't get my head around that. The new supply is going to fall from 1,800 per day to 900 per day. That is out of a total supply of 17,000,000. Besides we have known about this halving coming for 11 years - the fact that the price ramps up in the few weeks before it actually happens is just another manifestation of the total irrationality of bitcoin pricing.

Edited courtesy of clarification from tecate
 
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Thanks for the update Duke.

Reminds me of the share splits during the dot.com bubble.

A rumour that a company with a share price of $50 was going to issue one new share for every share held would result in a price rise.

And then the split would happen.

Instead of having one share worth $50, you would end up with two shares worth $60.

I remember a guy saying to me in all seriousness about a company he had invested in "One more share split, and I will be a millionaire".

With Bitcoin back at $9,000 maybe it's time to short it again.

Do I sell off some of my buy and hold shares to do so?

If the stock market crashes, will Bitcoin crash? Or as it's "digital gold" maybe it will rise.

I wonder what event will trigger the realisation that it is a bag of hot air?

Brendan
 
Firstly, for anyone reading this and unsure what the bitcoin halving is, here's an explanation.
Apparently the main driver of the bitcoin bounce is the "halving" expected around May 20th.
It's May 12 your dukeness. There was little talk of the halving coming out of the covid conundrum. It was coming back up in any event. Now that the halving is fast approaching, there has been more consideration of it. However, I don't think that's in any way feverish.

On a more organic basis, towards the end of last month, we reached the latest milestone of in excess of 3 million bitcoin wallet addresses with a balance of more than 0.1 BTC.
All the usual suspects are running countdown clocks and constantly reminding their gullible patrons of the boost to price from earlier halvings, even going so far as to justify this based on supply and demand arguments. Really can't get my head around that.
This is a concept you're not used to Dukey - it's called Quantitative Tightening - not this Q.E. unlimited social experiment brought to you by the Fed/ECB/BoJ/BoE, etc. Can you tell me please why anyone had to pay taxes all these years when it seems the ECB could have just printed this off?

The new supply is going to fall from 3,600 per day to 1,800 per day. That is out of a total supply of 17,000,000. Besides we have known about this halving coming for 11 years - the fact that the price ramps up in the few weeks before it actually happens is just another manifestation of the total irrationality of bitcoin pricing.
The notion of an efficient market hypothesis is a fair point. Some believe it's priced in - and some don't. However, you're wrong to single out the bitcoin market for irrationality given what we're seeing right now in the conventional markets. The worst jobs figures ever are released and the market goes up! The conventional markets are the greatest live example of irrationality right now - powered by hopium and magic money.

Brendan Burgess said:
Reminds me of the share splits during the dot.com bubble. A rumour that a company with a share price of $50 was going to issue one new share for every share held would result in a price rise. And then the split would happen. Instead of having one share worth $50, you would end up with two shares worth $60. I remember a guy saying to me in all seriousness about a company he had invested in "One more share split, and I will be a millionaire".
It's an interesting anecdote Brendan but it betrays a misunderstanding of the bitcoin halving. The halving is Quantitative Tightening. Bitcoin miners expend energy and resources in confirming bitcoin transactions. A reward of 12.5 BTC is provided every ten minutes for the confirmation of blocks of transactions. As of block 630000 (expected to be reached on May 12), that reward is cut in half to 6.25 BTC.

It's a case of reduced supply. If we assume the same demand as pre-halving, reduced supply is likely to induce an upward pressure on price (albeit not immediately afterwards). That's the opposite of the analogy that you present with.
 
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Firstly, for anyone reading this and unsure what the bitcoin halving is, here's an explanation.

It's May 12 your dukeness. There was little talk of the halving coming out of the covid conundrum. It was coming back up in any event. Now that the halving is fast approaching, there has been more consideration of it. However, I don't think that's in any way feverish.

On a more organic basis, towards the end of last month, we reached the latest milestone of in excess of 3 million bitcoin wallet addresses with a balance of more than 0.1 BTC.

This is a concept you're not used to Dukey - it's called Quantitative Tightening - not this Q.E. unlimited social experiment brought to you by the Fed/ECB/BoJ/BoE, etc. Can you tell me please why anyone had to pay taxes all these years when it seems the ECB could have just printed this off?


The notion of an efficient market hypothesis is a fair point. Some believe it's priced in - and some don't. However, you're wrong to single out the bitcoin market for irrationality given what we're seeing right now in the conventional markets. The worst jobs figures ever are released and the market goes up! The conventional markets are the greatest live example of irrationality right now - powered by hopium and magic money.


It's an interesting anecdote Brendan but it betrays a misunderstanding of the bitcoin halving. The halving is Quantitative Tightening. Bitcoin miners expend energy and resources in confirming bitcoin transactions. A reward of 12.5 BTC is provided every ten minutes for the confirmation of blocks of transactions. As of block 630000 (expected to be reached on May 12), that reward is cut in half to 6.25 BTC.

It's a case of reduced supply. If we assume the same demand as pre-halving, reduced supply is likely to induce an upward pressure on price (albeit not immediately afterwards). That's the opposite of the analogy that you present with.


Fill yer boots.


Entirely speculative on my part but I suspect that the steaming mess in the conventional markets has not ended - and will play out over the coming weeks/months.


I thought this was ground we'd already covered but apparently not. Bitcoin crashed hard in those market panic conditions only to recover later. Gold crashed in those market panic conditions only to recover later. People have ran the numbers. Over its 11 year history, bitcoin has largely been uncorrelated with the conventional markets. As it stands today, it is once again, the best performing asset class in 2020 - as it was in 2019 and as it has been over the course of the last decade.

In a note to clients on Thursday, Chris Wood - Global Head of Equity Strategy with Jefferies (the world's 9th largest investment bank) - wrote this:

"Investors should own both gold & Bitcoin... [BTC] should be a source of diversification... its decentralized nature... [&] fixed supply, makes it a hedge vs central bank manipulated fiat $."

I guess he and his clients are the latest in a long list of 'greater fools'.:rolleyes:


I ponder a similar question but yet one that is the antithesis of yours => 'How long will it take for yourself and his Dukeness to get to that Eureka! moment? The one that goes along the lines of an understanding that bitcoin is hard digital money which is divisible, censorship resistant and digital gold (or an uncorrelated asset class in it's own right).
Ahh! Nothing to beat a good bitcoin slanging match to pass the time :)
Thanks for the clarification on the Big Date tecate, I have updated my post. I have also corrected the effect of the halving which will be a mere drop of 900 a day in the supply of new bitcoin which the miners dump as soon as they have wiped off the dirt. If that can have a pricing effect when the existing supply is 17,000,000 it is a very strange dynamic indeed. Of course the halving is influencing the price but not because of fundamental supply/demand dynamics but because of all the hype stirred up by the Coindesks of this world.
 
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Tecate

I am trying to get my head around this.

There are 17m Bitcoins in existence.
The limit is set at 21m (?)
1,800 a day are issued at the moment, so the annual number increases by about 700k
From next month, the annual increase will be reduced to 350k.

This is part of a programme set out when Bitcoin was started, so it's not news.

So, if you assume that Bitcoin is worth $9,000 today, how much, if at all, should the halving change its value? I appreciate that there are many other factors affecting its value, but I just want to isolate the impact of the halving, all other things being equal.

Brendan
 
The limit is set at 21m (?)
Brendan, the last bitcoin will be minted on May 7, 2140 - with the controlled limit set at 21 million.

So, if you assume that Bitcoin is worth $9,000 today, how much, if at all, should the halving change its value? I appreciate that there are many other factors affecting its value, but I just want to isolate the impact of the halving, all other things being equal.
Bitcoin's 'monetary policy' is an open book. It's been set out from the genesis block onwards. I assume that your point is that an efficient market hypothesis should apply and that this should be priced in already. Perhaps it is. And perhaps its (comparatively) meager market capitalisation of $163 billion is indicative that most people don't give a stuff about it and have not given it proper consideration (in which case maybe its not).

We've touched upon this subject in the past i.e. determining the fair value of bitcoin. The fact is that it remains in price discovery mode as its not a mature asset class yet. There are no models that have been developed for bitcoin in determining its fair market value - other than Stock to Flow (which has been used for gold and other commodities) - but that only considers supply side and not the demand dynamic.

Net Positive Demand Required to Maintain BTC Price - Pre & Post Halving
As regards the halving itself, here's a sample calculation showing before and after. For the sake of the example, we are assuming that a price of $9,000/BTC is to be maintained.


Pre-halving: 144 blocks/day × 12.5 BTC/block × $9,000 = $16.2 million
Post-halving: 144 blocks/day x 6.25 BTC/block x $9,000 = $8.1 million

There would need to be net positive demand to the value of $16.2 million/day to maintain a bitcoin price of $9,000. Post halving, there would need to be a net positive demand of $8.1 million/day to maintain a bitcoin price of $9,000.
 
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There would need to be net positive demand to the value of $16.2 million/day to maintain a bitcoin price of $9,000. Post halving, there would need to be a net positive demand of $8.1 million/day to maintain a bitcoin price of $9,000.
IMHO the vast majority of bitcoin supply/demand is speculative. So the whole 17m x $9k constitutes supply/demand. The physical change in supply/demand driven by the halving is about 1 in 20,000 of existing natural supply/demand. That has no implications for price.
But it does have implications for price not because of physical supply/demand considerations but because of the hype generated by those who benefit from enabling and therefore promoting bitcoin speculation. Lock them up!
 
Net Positive Demand Required to Maintain BTC Price - Pre & Post Halving
As regards the halving itself, here's a sample calculation showing before and after. For the sake of the example, we are assuming that a price of $9,000/BTC is to be maintained.


Pre-halving: 144 blocks/day × 12.5 BTC/block × $9,000 = $16.2 million
Post-halving: 144 blocks/day x 6.25 BTC/block x $9,000 = $8.1 million

There would need to be net positive demand to the value of $16.2 million/day to maintain a bitcoin price of $9,000. Post halving, there would need to be a net positive demand of $8.1 million/day to maintain a bitcoin price of $9,000.

That analysis might apply to potatoes or oil. If the supply doubles, the price halves.

But it wouldn't apply to houses. Let's say that there are 1m houses in Ireland and we build 50 every day. If we build 100 per day, the price of houses won't halve.

So if there is a stock of 17m bitcoin and it increases by 864, it is increasing the supply. If the "demand" remains the same, the price should go down.

Brendan
 
IMHO the vast majority of bitcoin supply/demand is speculative. That has no implications for price.
To suggest that supply is speculative is wholly inaccurate. It's all set out in the bitcoin whitepaper. Now the supply of Euro's and dollars - that's completely speculative because from one second to the next, there's no way you can tell me how many €/$ have been printed off and are in circulation.

The physical change in supply/demand driven by the halving is about 1 in 20,000 of existing natural supply/demand. That has no implications for price.
That's either a deliberate misrepresentation or a misunderstanding of bitcoin supply. It's exactly as I set out above. Right now (to continue to support a price of $9,000) - people have to go out onto the market and buy $16.2 million bitcoin each day. That's to support the price standing still at $9,000. As of block 630000 (most likely from May 12) onwards, people need to go out onto the market and buy half that - i.e. $8.1 million of bitcoin each day to support the price standing still at $9,000. You can say what you want about the demand variable but if we were to make the assumption that the demand rate today holds and remains unchanged (neither goes up nor goes down) after the halving, that's likely to have an upward pressure on price.

But it does have implications for price not because of physical supply/demand considerations but because of the hype generated by those who benefit from enabling and therefore promoting bitcoin speculation. Lock them up!
Again this hype narrative. Firstly - insofar as I am aware, it's your good self that brought up the halving here. You have expressed your disgust for the crypto media - so presumably this is something you heard about in the mainstream press or mainstream financial media. Are you accusing them of hyping this (if so, to what end?)? You think it could possibly be that it's a newsworthy event in financial media?

People that engage with bitcoin have an interest in it - because despite your tantrum - it's a significant event. However, having followed this space over many years, I can tell you that the hot steaming mess in the conventional markets and the fallout from markets that were already overpriced (covid is just the trigger - not the actual problem) is what everyone in crypto circles is truly looking at.
- The 'hype machine' consists of governments and central banks of a whole host of countries - take your pick but the current hotspots - Lebanon, Iran, Venezuela, Zimbabwe, Argentina, Turkey, Sudan, etc. - who've evaporated the life savings of ordinary people via hyper-inflation (through mismanagement or corruption).
- The 'hype machine' consists of those governments and banks that steal from people's savings through bail-ins - eg. Greece, Cyprus, etc.
- The 'hype machine' consists of the inequity that's brought about by QE - which disproportionately favours the wealthy. We saw it in 2008 and we're seeing it again right now.
There is no central office to pimp bitcoin. Once people understand the proposition, it doesn't need any pimping.

That analysis might apply to potatoes or oil. If the supply doubles, the price halves.
I don't think you're grasping this Brendan. Supply is not doubling. Supply is being cut in half as of block 630000/May 12.

But it wouldn't apply to houses. Let's say that there are 1m houses in Ireland and we build 50 every day. If we build 100 per day, the price of houses won't halve.
Once again, supply is being cut in half - not increased by 100%.

So if there is a stock of 17m bitcoin and it increases by 864, it is increasing the supply. If the "demand" remains the same, the price should go down.
If a net positive $16.2 million is spent right now each day on newly minted bitcoin and that $16.2 million is spent each day AFTER the halving (when 50% less new bitcoin is being issued), it's likely to induce an upward price movement as a scarce asset becomes scarcer still.
 
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To suggest that supply is speculative is wholly inaccurate. It's all set out in the bitcoin whitepaper. Now the supply of Euro's and dollars - that's completely speculative because from one second to the next, there's no way you can tell me how many €/$ have been printed off and are in circulation.


That's either a deliberate misrepresentation or a misunderstanding of bitcoin supply. It's exactly as I set out above. Right now (to continue to support a price of $9,000) - people have to go out onto the market and buy $16.2 million bitcoin each day. That's to support the price standing still at $9,000. As of block 630000 (most likely from May 12) onwards, people need to go out onto the market and buy half that - i.e. $8.1 million of bitcoin each day to support the price standing still at $9,000. You can say what you want about the demand variable but if we were to make the assumption that the demand rate today holds and remains unchanged (neither goes up nor goes down) after the halving, that's likely to have an upward pressure on price.


Again this hype narrative. Firstly - insofar as I am aware, it's your good self that brought up the halving here. You have expressed your disgust for the crypto media - so presumably this is something you heard about in the mainstream press or mainstream financial media. People that engage with bitcoin have an interest in it - because despite what your tantrum - it's a significant event. However, having followed this space over many years, I can tell you that the hot steaming mess in the conventional markets and the fallout from covid is what everyone in crypto circles is truly looking at.


I don't think you're grasping this Brendan. Supply is not doubling. Supply is being cut in half as of block 630000/May 12.


Once again, supply is being cut in half - not increased by 100%.


If a net positive $16.2 million is spent right now each day on newly minted bitcoin and that $16.2 million is spent each day AFTER the halving (when 50% less new bitcoin is being issued), it's likely to induce an upward price movement as a scarce asset becomes scarcer still.
This is Alice in Wonderland stuff. The supply of bitcoin is increasing daily. That rate of increase halves on May 12. It is still increasing.
 
This is Alice in Wonderland stuff. The supply of bitcoin is increasing daily. That rate of increase halves on May 12. It is still increasing.
You're misrepresenting this. We're talking about the active ongoing supply of newly minted bitcoin onto the market. The rate of supply reduces by 50% on May 12. This is bitcoin minted by bitcoin miners - who expend resources each and every day to confirm transactions on the bitcoin blockchain. They need to cover substantial costs and make a profit. Ergo, all of this bitcoin finds its way onto the market on an ongoing basis. That supply to the market will be cut in half come May 12. As of May 12, there will be a supply shock to the market.

Leaving all other factors aside, the rate of supply of bitcoin is a fundamental part of bitcoin price discovery right now. It's a significant component in how the current price has been arrived at. All other factors being equal, cut that supply in half and its likely to have an upward pressure on price.
 
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You're misrepresenting this. We're talking about the active ongoing supply of newly minted bitcoin onto the market. The rate of supply reduces by 50% on May 12. This is bitcoin minted by bitcoin miners - who expend resources each and every day to confirm transactions on the bitcoin blockchain. They need to cover substantial costs and make a profit. Ergo, all of this bitcoin finds its way onto the market on an ongoing basis. That supply to the market will be cut in half come May 12. As of May 12, there will be a supply shock to the market.

Leaving all other factors aside, the rate of supply of bitcoin is a fundamental part of bitcoin price discovery right now. It's a significant component in how the current price has been arrived at. All other factors being equal, cut that supply in half and its likely to have an upward pressure on price.
That’s were we differ. To me the supply of bitcoin to the price dynamic is the whole stock of existing bitcoin especially as most of it was purchased for speculative purposes. To you the supply is just what is mined.
 
That’s were we differ. To me the supply of bitcoin to the price dynamic is the whole stock of existing bitcoin especially as most of it was purchased for speculative purposes. To you the supply is just what is mined.
Your dukeness, YOU brought up the halving - and the halving is all about the ongoing supply of bitcoin onto the market from miners. You can scream blue bloody murder (as you have been for over 2 years now) about what the price of bitcoin should be. The fact of the matter is that it's around $9,000 today - and the ongoing daily supply of newly minted coins onto the market is a very important constituent in that price formation. If 50% less bitcoin is being dumped onto the market each day, that affects the supply dynamic....which in turn (leaving any other factors aside)...is likely to have the effect of upward pressure on price.

I can't clarify it any plainer than that.
 
Am I missing something? Whatever’s happening is common knowledge and should therefore be reflected in the price.
It may very well be. However, that's not a given. Markets are not 100% efficient - in the same way the conventional markets don't in any way reflect current economic conditions today. We're talking about a piddly little market with a market capitalisation of $163 billion that most as of yet are not paying full attention to. It's a market that's years off maturation yet. You say it's priced in. I say that we'll find out over the course of the next 12 months.
 
Hi tecate

Your analysis makes absolutely no sense to me.

You seem to be distinguishing between newly mined BTC and existing ones? But are they not the same thing?

If I buy a BTC today, it won't matter to me whether it was one of the original ones mined 10 years ago or a new one mined yesterday.

There were 17m yesterday. Today, there are 17m and 864. That is an increase and not a decrease.

Brendan
 
If a net positive $16.2 million is spent right now each day on newly minted bitcoin and that $16.2 million is spent each day AFTER the halving (when 50% less new bitcoin is being issued), it's likely to induce an upward price movement as a scarce asset becomes scarcer still.

But I can buy any of the 17,000,864 and not just the freshly mined ones? I am not limited to the ones mined yesterday.

What you are saying is the equivalent of "If you want to buy a house in Ireland, you can only buy a house built yesterday".

So there were 100 houses built yesterday and with 10,000 eager buyers, the price would be quite high.
If they announce that on May 12th, there will be only 50 houses built every day, the price should rise as the demand won't change.

But if we knew about that for the last ten years, then house prices should be very high today in anticipation of the reduced supply from 12th May.

Brendan
 
tecate

Try pressing the reset button.

If you could look at your arguments as a third party with no preconceptions, you would see how bizarre they really are.

Or at least, document your arguments in your diary. It will be very instructive for you to look back at them in a few years and you will wonder how you couldn't see through them.

Brendan
 
I have looked for some independent analysis of this.

The Independent quotes only Bitcoin fanatics.

Forbes have two articles, but I can't access them:

Prominent Investor Says Halving won't have a big impact...
How the Halving will impact Bitcoin's Price and production.

Bloomberg explains it well but reaches no conclusion

Tecate - have you found any sceptical analysis of the price impact?

Brendan
 
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