12 May 2020 (at the time of writing) will become one of those days in history where those of us who are around on the day will forever cite where we were and what we were doing at the time the halving happened.
Why this halving, not any other one?
The third Bitcoin halving (a hard-coded part of the computer algorithm that controls the supply of new Bitcoin) is not like any other, neither the two that came before it nor all the others that will come after it. This halving, which will happen in 14 days, is the one that changes everything that matters about both the pricing of Bitcoin and the presentation of that Bitcoin pricing. Once the reward for solving a block on the Bitcoin chain falls from the current 12.5 BTC to 6.25 BTC (the halving) the inflation rate in Bitcoin due to new supply falls to 1.8% which is less than the central bank targeted inflation rate (typically in the 2% range) for major fiat currencies around the world. This means that the purchasing value of fiat money will, from this point forward, be falling relative the purchasing value of Bitcoin.
It is all about supply.
Even though the imminent halving is all that is needed to plan for the long-term price appreciation of Bitcoin relative to fiat currency, when it is paired with the concept of permanently locked up Bitcoin (through lost devices, lost keys and hoarding), which is now routinely estimated to be more than the outstanding sum of Bitcoin left to reward block completion, a powerful multiplier emerges when considering what could be usefully termed the unencumbered supply of Bitcoin. For completeness it should also be stated that the concept of fully diluted and unencumbered supply is the correct valuation term for pricing models in market mechanisms and for this the sum of equivalence supply must be identified and included with the unencumbered supply. This is a contentious issue as there have been 45 “hard-forks” (branches) of the Bitcoin main chain that have resulted in alternative active chains. Depending on with whom you talk, the total available supply is Bitcoin plus none, some, or all these other “hard-forks”. For those that believe in equivalence it should be noted that the aggregate pricing function is more complex than just a linear function of supply, computing power and dominance for each added fork.
It should also be stated that this conjecture is not going to result in an overnight one-time positive price shock. There will be a creeping realisation that shows itself in unexpected or even unknowable ways. Whilst price appreciation in the near term can be expected (and is being heavily touted in the media), this appreciating price will be a function of emotional reaction and less than perfect comprehension of what is happening at the operational level and the conceptual level.
Rewards for completing blocks will rise not fall.
It is built into the Bitcoin algorithm that transmission fees will rise as a proportion of the total reward for solving a block because this is the secondary purpose of implementing the halving in the computational code. There are those that worry about the reduced Bitcoin reward after the halving and what that will mean for withdrawing computing power to solve the Bitcoin blockchain. This is perhaps an inverted rationale for the Bitcoin believers and Bitcoin maximalists.
For Bitcoin to have an enduring future there needs to be a significant increase in knowledge about Bitcoin as well as everyday use by people for everyday transactions. This is mass adoption (take up). Adoption at scale brings greater demand for blocks to be solved and more quickly. This can only be done by adding more computing power or by adding better computing power. A necessary secondary effect of this increased demand is increased circulation velocity of the unencumbered Bitcoin supply. There are two main reasons for this: increased use and implicit increased value. This results in more, smaller, transactions being placed more often relative to those that have already happened. Given this, it becomes obvious that transmission fees in the Bitcoin chain, whilst falling inversely and in line with (or indeed faster than) transactions, then take over from new supply as the principal driving element of the reward for solving a block on the Bitcoin chain.
The external conditions present after this halving mean that this inbuilt balance mechanism will be subject to several immediately identifiable multiplier effects. These multiplier effects, which are conceptually like the money multiplier concepts of traditional economic theory, may or may not have been intentional but are now a real prospect for Bitcoin. The net effect of the multipliers will increase the velocity of Bitcoin in circulation. In turn, this should lead to a broader level of usage and within a short time thereafter, greater, and importantly increasing, acceptance. Over time, and with mass adoption, these interlinked effects will settle down to produce an income stream significantly higher than now. An income stream that is inherently more predictable because these effects, in combination, will allow for financial instruments that will enable the precise management of both inputs and outputs on the Bitcoin blockchain: a sustainable and virtuous loop.
How could this manifest itself?
If this turns out to be a credible outcome for Bitcoin, then from here the pathways and opportunities for Bitcoin become much more putative. An argument for measuring successful Bitcoin adoption is when BTC stops being the numerator for expressing its price in fiat terms so instead of 1BTC= USD10,000 the accepted quote becomes 1USD = 0.0001BTC or better still 10,000 Satoshi (the sub denomination of Bitcoin). Along with this change in price quote the price of everyday primary products such as a barrel of oil is then quoted as 0.006BTC (6,000 Satoshi) and invoicing for intermediary goods starts to be settled primarily in BTC. The further extrapolation of this outcome is that financial products become readily available at scale to manage the usage variance and volatility present in Bitcoin while in transition in such a way that final pricing and invoicing in Bitcoin replaces fiat currencies in general because that volatility is nullified.
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