The Bitcoin Party: The Morning After the Halving

The Bitcoin Party: The Morning After the Halving

The Bitcoin halving of 2020 on May 11th came and went. For those with Bitcoins, it was New Year’s Eve at Times Square; for others, it was just another Monday. If it was just another Monday for you, I want to invite you to the conversation and give you the rundown of all things Bitcoin, the halving, and other overused buzzwords.

The best way to start is by simplifying Bitcoin and explaining a few key definitions (underlined below).

Bitcoin is online money. But it’s special. Dollars are sometimes said to be backed up by gold, which means that we all agree that you can exchange the piece of paper for a certain amount of gold. (Note: this “gold standard” is a monetary system that was replaced by “fiat money” and only serves as a metaphor). Bitcoins are decentralized, which means it’s outside of the agreement that pieces of paper (or cheques or e-Transfers) have value and banks aren’t relied on to keep records of the balance in our checking accounts. This also means that there are no physical pieces of paper, rather, this system uses a blockchain. But how do I transfer currency to you without the pieces of paper?  One solution can be that we can all keep track of it. But if we all keep track of it, doesn’t that mean that anybody can change it? The honour system is good, but trust issues are greater. Blockchain solves this issue with a math problem (a cryptographic puzzle).

Finn Brunton understands a blockchain as something “you can add data to and not change previous data within it” using a “mechanism for creating consensus between scattered parties.” They “do not need to trust each other but only trust the mechanism by which their consensus as arrived at.” The basic idea is that without the pieces of paper as money, there needs to be some other way of keeping track of how the money is moving. The solution is that you announce the transactions to everyone. All the transactions (me transferring to you, you transferring to a stranger, etc.) are clumped together in a “block” to add to the “chain” of other blocks. To add to the chain, “miners” have to solve the cryptographic puzzle, which takes a lot of computer power. If they arrive at the right solution, they can tell everyone that they have the right answer and everyone can verify it. Solving the problem is hard, but once a solution is announced, it can be easily verified. A new “block” is then added to the “chain” and everybody starts using the new blockchain. For their trouble, the solver gets some bitcoins.

As a form of currency, Bitcoin has to be limited in some way, or else it would be worthless. Thus, halving exists to limit the supply of Bitcoins entering circulation. Halving refers to the number of Bitcoins a miner receives being cut by half. This stops inflation from decreasing the purchasing power of Bitcoins. Prior to May 2020, miners received 12.5 Bitcoins, but after halving, they will only receive 6.25 Bitcoins. Halving is programmed to occur every 210,000 blocks, and since a new block of transactions is completed roughly every 10 minutes, halving occurs roughly every four years. Fewer new Bitcoins means that the supply of Bitcoins will become even more scarce, which might have some interesting implications.

As I write this, two weeks after the 2020 halving, Bitcoin is down over 11%. Historically, it often spikes in price for the next year or two, but it’s not clear if the halving is the cause. We should be careful of correlations and hasty speculations. Word already spread about the Bitcoin gold rush. Inexperienced investors have joined the party and changed the market. What are some things that might affect Bitcoin prices? A safe bet would be a new law affecting Bitcoins. Alternatively, a major economic event, like the current worldwide pandemic, also has the potential to impact Bitcoin prices.  

If you are thinking about investing Bitcoins, do your own research and understand the risks. Be cautious of predatory exchanges that take advantage of amateurs. For my fellow Canadians, take a look at the regulation of cryptocurrency in Canada. Interestingly, Canadian banks aren’t so thrilled about cryptocurrency. For instance, TD bank does not allow the use of its credit card for the purchase of cryptocurrency  

What kind of world will we be in at the next halving? Like the price of Bitcoin, your guess is as good as mine. See you in four years.

Written by Dan Choi, a second year JD Candidate at Osgoode Hall Law School and an IPilogue Contributing Editor.