Its halving day aka Quantitative Hardening III. Like leap year, it comes once every four years and I’m kind of giddy about it. Much has already been written about the halving and most of it by actual smart people. I have a slightly different take on it though. Since I’m neither inclined nor, and more importantly, qualified to write about the halving from a code standpoint, I thought I would write something about the politics of the halving, or lack thereof. If you think peaceful transition of power in democracies is novel, the halving will really blow your mind. Before discussing the politics of the halving, let’s spend a little bit of time on the intentionally programmed scarcity of Bitcoin since it underpins Bitcoin’s economics and is a core element of the protocol itself.
Bitcoin mining is the computational process by which transactions are validated and new Bitcoin is generated. In any given newly mined block there is a collection of validated transactions between peers (wallets) and there are new coins generated as a reward for the expenditure of processing power to validate the transactions which is called the “coinbase.” The miner accrues these coins as well as the transaction fees charged by the network. When Bitcoin mining first started the block reward was 50 BTC per block. At the time, this ranged from being worth pennies to a few hundred dollars depending on the price when the coins were mined. It was also much easier to mine Bitcoin in the earlier days because the mining difficulty (aka the complexity of finding the nonce or “solution” to a block) was much lower and people could mine Bitcoin from their home computers. Today mining is mainly done by large pools of miners or highly organized commercial operations and the total combined processing power of the Bitcoin network as of today is around 120 Exahash, or to spell it out, it means the network can process 120,000,000,000,000,000,000 possible block solutions per second. As a comparison point, a “supercomputer” like the Summit at Oak Ridge Labs has processing power still calculated in “Petas” which is a full order of magnitude less than “Exa”. That being said, it’s not a fair comparison since something like Summit performs varied and complex functions while Bitcoin hash power is “application specific” in that it’s very good at crunching SHA256 and little to nothing else.
It’s reasonable to think that since Bitcoin mining is getting more difficult, the block rewards would get larger, but the reality is that every 210,000 blocks, (approximately 4 years at one block per every 10 minutes), the mining reward is reduced by 50% aka the “halving”. The halving is the process that mathematically caps the total number of Bitcoin ever to be mined at 21 million. This is very simply accomplished by halving the original 50 coin reward every 4 years until the year 2136 when the block reward reaches 1 Satoshi which is the smallest denomination available in the Bitcoin protocol (1 BTC = 100,000,000 Satoshi). The final halving, thus, occurs four years later in 2140 when the block reward can no longer be reduced by half and it becomes fixed at zero. Interestingly, by 2088 there will only be a total one full Bitcoin left to mine. As of today, a full 87% (ish) of all Bitcoin has already been mined. Something to think about if we believe that Bitcoin has long-term value.
Why does this matter? It matters because the halving is perhaps the only example of the reduction of money issuance that not only doesn’t come with political turmoil but is generally welcomed by its community. I say generally because miners are immediately impacted by the reduced reward and are thus on the front lines of the issuance contraction. Everyone who understands and follows Bitcoin is aware of the halving and has equal access to issuance data though. We all have time to plan for it, whether that means loading up longs or hedging OPEX, the point is that there’s no debate about the halving. It will happen and we’ve been given notice. It’s not a central bank whim or reaction to market conditions. It’s hard coded into the protocol.
Let’s compare the certainty of the halving to what is going on economically and politically in the world right now. Nearly every central bank on the planet is busy debasing its currency. The U.S. is printing money at levels that put everyone else to shame though. When you add up the CARES Act, SBA lending and Fed emergency lending facilities rolled out since COVID-19 kicked off you start approaching $3 trillion in new money supply. By way of comparison, the nominal GDP for all of Africa in 2019 was $2.58 trillion. So, we just printed the economy of Africa in April. And because the dollar is the global reserve currency, it’s actually stronger after printing all that money, not weaker. I bet Nicolás Maduro and every other world leader is super envious of the Fed’s US dollar seigniorage. And they should be, the US has incredible privilege as the domain masters of the global reserve currency.
Let’s consider a quick thought experiment made possible by the timing of the halving against the backdrop of COVID-19. Imagine if the Fed’s response to the COVID-19 induced economic crisis was to reduce the issuance of new dollars. It would be pandemonium. Dollar hegemony relies, in part, on being inflation based since everyone needs it and demand is actually higher outside of the US than it is domestically, much to the chagrin of our near peer adversaries. It’s the same reason that it’s difficult to have the global reserve currency without a trade deficit. Other countries need dollars and one of the ways they get them is by selling things to the US market. We print money, but a lot of it flows out of the country blunting the inflationary impact and amortizing it globally, for now.
One thing we have learned in 2020 is that the Fed will print money at rates previously thought unimaginable. The Fed, in an inflation sense, got away with historic bailouts like TARP (a modest $700bn) during the Great Recession and has decided to escalate its stress testing of modern monetary theory principals with trillions as opposed to billions in relief during the current crisis. The problem is, we don’t know what the longer term or 2nd/3rd order effects of unfettered money printing will be. Lewis Carroll said, “If you don’t know where you are going, any road will do.” Sounds a lot like current monetary policy.
Bitcoin is doing the opposite. Bitcoin is on one road and never veers. Imbued in dispassionate consensus, new blocks later on today will cease to offer 12.5 BTC as a reward. Over the course of about ten minutes, the time it will take to mine the first post halving block, new issuance will reduce to 6.25 BTC per block. No one will riot, no politics are involved, no debate required. The naysayers will comment on hard forks as evidence of the dilution of Bitcoin supply but its’s a false equivalence for a host of reasons. I can’t recall where I heard it, but my favorite analogy is to language. I’m an English speaker living in the US, and if I wanted to start my own language, I’m free to do so. English is an open protocol. But the idea that I, or even a group of people with a lot of money and influence, could propose, promulgate and popularize a new form of English is laughable. Bitcoin is the English of the cryptocurrency world. You can try to fork it and start your own coin, but there’s a political and economic price for everyone to switch. In fact, every attempt to replace Bitcoin further cements its anti-fragility. (Fun aside, “Monero” is Esperanto for “money”)
Given the state of discord, uncertainty, and tribalism in our central institutions it’s refreshing to see a successful example of agreement through decentrality. From what we watch on TV, to what we eat to the kind of music we listen to, everything is political. Picture someone eating a Beyond Burger, watching Saturday Night Live, with a Dixie Chicks t-shirt on next to someone eating a steak, watching Duck Dynasty with a Toby Keith t-shirt and tell me that politics isn’t everything. Worse, the Cambridge Anayltica scandal proved that beyond the obvious caricatures above, our likes really can be parsed into political preference. Bitcoin operates above the petty fray. That’s not to say that the Bitcoin community is apolitical, its not. The slow, methodical, plodding protocol that churns in the background of what we think of as “Bitcoin,” however, is open to everyone, requires no permission, no litmus test, no fealty. It is the big tent. As Bitcoin increasingly enters the public consciousness, we should hope that instead of bringing more humanity to Bitcoin, we bring more Bitcoin to humanity. But not more supply, obviously.
In closing, I’ll just paste Francis Pouliot’s excellent tweet from this week on all the accomplishments since the last halving. Hard not to be impressed, or optimistic.