Week of 5.3.20 - Issue #26
Hi friends,
Welcome to the 26th edition of the ₿it Economy! Feedback and suggestions are very welcome, especially from the new folks. Every week I write a blurb about something I learned that's broadly Bitcoin related. If you have thoughts, I'd love to hear from you. My goal is to shed a tidbit of info that I believe will get you thinking about the digital world around you. If you know anyone who would be interested in the topic, please do forward this along, send them to archive, or have them subscribe here.
-Rob
TLDR
To kick it off the new format, this week's topic is the Bitcoin Halving — an event that has historically had a large impact on the growth of Bitcoin. Next, I provide some commentary on a recent billionaire hedge fund manager's move into Bitcoin and Cash App's record-setting quarter. As always, I curated you a list of reads, listens, and shows for your enjoyment. And finally, Project Spotlight — a new section that gives you a sub-one minute bio on a company making strides in the Bitcoin space.
The Bitcoin Halving
Key Takeaways
Bitcoin undergoes quantitative hardening on May 11th, 2020
Bitcoin miners block subsidy reduces by 50% every four years
Each halving creates higher highs and higher lows
Every four years we experience the U.S. Presidential Election, the World Cup, and the Bitcoin halving. The Bitcoin network is kept secure by Bitcoin miners. These individuals or groups verify transactions so they can be processed and added to the blockchain. They all do this job in parallel, competing with one another to receive bitcoin every as a reward for the service. Currently, the number of bitcoin entering circulation every 10 minutes is 12.5 bitcoin.
However, on May 11th, this Bitcoin protocol will reduce this subsidy by half to 6.25 bitcoin per mined block. As a matter of fact, the compensation is slashed by half every 210,000 verified blocks. By design, Bitcoin has a maximum supply cap of 21 million. This means only 21 million bitcoin will ever be minted. That makes Bitcoin a scarce asset and why many see it as a way to hedge against the inflationary pressures fiat currencies can be subject to.
But why does any of this matter in the first place?
First, DTR
Let’s brush up on the previous two halvings for context…
First Halving
2012, the year Nostradamus predicted the end of the world is also home to the first Bitcoin block subsidy reduction. On November 28th, Bitcoin's block subsidy dropped from 50 BTC per block to 25 BTC per block.
- Price of Bitcoin on 2012 Halving Day: $12.35
- Price of Bitcoin 150 Days Later: $127.00
- Price of Bitcoin on 2016 Halving Day Eve: $665.05
- Price Gain: 5,285%
Second Halving
2016, the year friends, family, and the globe were swept by Pokémon Go mania. Bitcoin's second display of quantitative hardening occurred on July 9th where the block subsidy reduced to the current level, a modest 12.5 BTC per block.
Price of Bitcoin on 2016 Halving Day: $650.63
Price of Bitcoin 150 Days Later: $758.81
Price of Bitcoin on 2020 Halving Day Eve: $10,000
Price Gain: 1,437%
Third Halving
This being the third Bitcoin halving in history, one can see there's not too much history we can work with. What I can tell you is the newly minted Bitcoin will fall from levels near 1800 per day to somewhere near 900 per day.
At 12.5 BTC x 6 (six 10-minute cycles per hour) is 75 bitcoins minted per hour x 24 hours per day is 1,800 BTC per day issued. Then, quick math for 2020 halving and beyond to the next for years until 2024, shows it will be 6.25 BTC x 6 equals 37.5 per hour x 24 hours per day is only 900 BTC per day rewarded. At today's prices, that equates to roughly $270 million per month of New Bitcoin or a 50% reduction, effective instantly.
Supply & Demand
Let's time travel back to your college microeconomics class for a brief lesson on supply and demand. The basic insight underlying the law is that any given moment a price that is too high will leave disappointed would-be sellers with unsold goods, while a price that is "too low" will leave disappointed would-be buyers without the goods they wish to buy. In layman terms — there exists the right price, at which all those who wish to buy can find sellers willing to sell and all those who wish to sell can find buyers willing to buy.
Since the inception of the network in 2009, roughly 18 million bitcoin have been mined as the total supply of new bitcoin increases daily. Halving’s make this increase unwind at a gradually decreasing rate, substantially reducing the number of newly minted bitcoins per block every four years. This cycle, shown below, will continue for another 29 times until the plateau of 21 million bitcoin has been reached, somewhere around the year 2140. Satoshi described the process in an email:
“The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase. Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
In the case of Bitcoin, the supply-side centers around Bitcoin miners and the block subsidies they receive. A large part of these minted bitcoin need to be sold for cash on the market by miners to cover their monthly operation costs. Now that the reward for their service is being slashed, some of these miners might not be able to make ends meet, and thus are forced to leave the market. In the short term, this could lead to a price depreciation while the outlook for the medium to long-term is the opposite.
What Does All This Mean?
It does not take an economic savant to apply simple supply and demand consensus mechanisms on the scarcity of supply and rising demand. In the world of analyzing trends, I want you to focus on two about the bitcoin halving — higher highs and higher lows. When the peaks and troughs are ascending on a chart, an uptrend can be seen happening. In that uptrend, prices can be seen as higher highs and higher lows.
It is important to note that after each quantitative hardening event came with ups and downs, but the broad trend has always been up and to the right. Bitcoin’s rapid price volatility has often baffled even the most experienced economists – it is brutal, smiting those who are looking to get rich quick. Yet, despite all the price fluctuation, Bitcoin proves its resilience again and again. In the past 6 weeks, the price has seen a 50% drop to sub $4,000 levels only to bounce back up to $8,500. As you can see from the above chart, through it all, the general trend climbs upward.
This movement has led many to debate whether bitcoin is a potential safe-haven asset. Amid the ever-growing global turmoil and uncertainty, Central Banks around the globe are printing more money to increase liquidity, purchasing assets, and thus devaluing the purchasing power of the currency via inflation. What began with a few billion dollars has now morphed into trillions of dollars per month in liquidity injections, quantitative easing, and credit facilities.
Bitcoin reduces inflation, unlike central banks raising it. The halving is an act of quantitative hardening against the loss in purchasing value that contributes to the general upward trend. Each epoch reduces the amount of Bitcoin distributed to the open market, thereby increasing the scarcity of the digital asset. And it appears the masses are beginning to wake up. Google searches for "bitcoin halving have exceeded 300% of the volume seen before the previous 2016 halving event.
There is no doubt that bitcoin benefits from the growing awareness of the global monetary policy. Printing and pumping massive amounts of money into a broken financial system only passes the debt to future generations while exacerbating present-day problems. Bitcoin has brought scarcity and value into the realm of digital goods. As for the halving, some welcome it and some fear it. But if there is one thing that is clear after reading this, you now know that fewer bitcoin will be added to the total supply every day. Therefore, with less supply being made available over time, Bitcoin is designed in a way where it is more likely to increase in value rather than decrease like fiat currencies.
Remember – Higher highs and higher lows.
Enjoy the ride!
News 📰
S1: Paul Tudor Jones Buys Bitcoin to Hedge Against Inflation
What is it? - On Thursday, news broke that legendary hedge fund investor Paul Tudor Jones II will invest part of his ~4B AUM hedge fund, Tudor BVI Global Portfolio LP, on bitcoin, as a hedge against inflation. In a memo detailing his current macro outlook, Jones explained that we are ...
"witnessing The Great Monetary inflation...an unprecedented expansion of every form of money unlike anything the developed world has ever seen".
Why it Matters? - One of the overarching goals in the digital asset space has been to attract institutional investors. With the announcement, PTJ signals that Bitcoin has passed his due diligence process, solidifying that the market is mature enough for institutional investment.
Bonus - Check out a recent report on institutional activity in the digital asset ecosystem.
Final Take - Gradually, then suddenly.
S2: Cash App Shatters Quarterly Bitcoin Sales Volume
What is it? - Square reported $306 million in bitcoin revenue via its Cash App for the first quarter of 2020. The firm’s quarterly filing with the SEC noted that...
“Bitcoin revenue for the three months ended March 31, 2020 increased by $240.6 million or 367%, compared to the three months ended March 31, 2019. The increase was due to growth in the number of active bitcoin customers, as well as growth in customer demand.”
Why It Matters? - Square via its Cash App is proving that established companies can generate significant revenue by adopting bitcoin. Assuming an average purchase price of $8,000, Cash App users bought ~23% of mined bitcoin in Q1. This is a metric to watch out for as the halving will cut the supply in half. For more information on how to set up the Cash App for bitcoin recurring buys check out last week’s edition.
Final Take - Week in and week out more people are dipping their toes into Bitcoin. This is what adoption looks like.
Market Watch 💸
What I'm Reading 📕
-Bitcoin Optech Newsletter #96
-Lightning Network Messaging's Potential Impact on Routing Fees
-21 Million Bitcoins to Rule all Sidechains: The Perpetual One Way Peg
-Five Myths About Bitcoin's Energy Use
-Beware of Lazy Bitcoin Research
-This Version of Warren Buffet
-Bitcoin and the Rise of the Cypherpunks
-Why Isn't the Stock Market Going Down?
-The "Verticalization" of Zoom
What I'm Listening To 🔊
-The Pomp Podcast #288: Keith Rabois
-Monetary Revolution: Innovation in the Age of Financial Repression
-Nouriel Roubini Sees A Bad Recovery, Then Inflation, Then A Depression
-Bitcoin S2FX, S2F, and Evolution From Collectible to Financial Asset
What I'm Watching 📺
-Trader. Paul Tudor Jones and Peter Borish. 1987
-What Just Happened: Bitcoin Mining as a Geopolitical Game
-Jack Dorsey: Square, Cryptocurrency, and Artificial Intelligence
Project Announcements 📢
-Blockstream Releases Satellite 2.0
-Coinkite Announces SEEDPLATE Backup
-Zach Herbert Announces Bitcoin Hardware Company Foundation
-Coldcard Adds Third-Party Firmware Support
Project Spotlight 🔦
Swan Bitcoin
A bitcoin investment service based in Los Angeles that enables customers to sign up for automatic recurring Bitcoin buys. Led by CEO Cory Klippsten and CTO Yan Pritzker, the team sets out to offer the lowest fees in the United States.
Swan links directly to your bank account and automatically withdraws money weekly, monthly, or every paycheck and turns it straight into Bitcoin. You can set up a Bitcoin savings plan in a matter of minutes.
Audience
Everyday users who want to gain exposure to Bitcoin.
Tech
Swan links directly to your bank account and automatically withdraws money weekly, monthly, or every paycheck and turns it straight into Bitcoin. You can set up a Bitcoin savings plan in a matter of minutes.
Media
- Website
- Telegram
Final Quote
Have a great week! See you next Sunday.
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