March 27th, 2024
Picture the market for Bitcoin as if it’s a giant lake. Buyers take water out, and sellers dump water in. But there’s also a river constantly flowing into the lake. In this analogy, the river is a steady flow of newly mined coins entering the market.
The price of Bitcoin is where supply meets demand. The price is a balance of how much sellers want for their coins, and how much buyers are willing to pay to get ’em. The supply includes that river of new coins created every ten minutes by the block reward which eventually the market when miners sell.
Dam up a river and the level of the lake it feeds into will eventually drop. But it takes a while for the effect to be noticed, because the effect of the dam is tiny at first but it builds up over time.
Once every four years, the Halving cuts the flow of that river of new coins in half. This means that, over time, even if demand for Bitcoin stays flat, there won’t be enough coins for sale to meet that same level of demand.
The current block reward is 6.25 BTC. The halving will cut the block reward in half, to 3.125 BTC. A block reward occurs every ten minutes, and this is the only way new Bitcoin is created.
At first, cutting the block reward from 6.25 BTC to 3.125 BTC is such a small change that it makes no difference. But do the math on how many coins per day the halving takes away from the incoming supply of new coins.
3.125 less Bitcoin every ten minutes. That’s 18.75 less Bitcoin every hour. That means 450 less Bitcoin every day. Over six months, that means 82,350 less Bitcoin entering the supply, compared to before the halving.
Over time, the supply of coins for sale drops because fewer Bitcoin are being created since the block reward was cut in half. At first, the halving has no effect on the market, except for hype and misguided news stories. But after a while, the effect of cutting the block reward in half builds up.
There won’t be enough coins for sale to meet demand even if demand stays flat. Thus, the price will rise, even if demand doesn’t.
This is known as a Supply Shock. It’s why the halving of the block reward doesn’t have an immediate effect on the price of Bitcoin. Instead, the halving causes the price to rise five or six months later.
In May 2020, most newcomers were expecting the price to rise as soon as the halving happened, but that’s not how the halving works. Much was written about how the halving doesn’t affect the price anymore… but you probably already know what happened next.
By November 2020, right on schedule, the decrease in the amount of new coins being created every ten minutes led to a shortage of coins for sale, and the price was climbing fast. Then hype kicked in, driving the price higher. And because fewer new coins were being created & added to the supply of coins for sale, it was easier for increasing demand to push prices higher than the same amount of increased demand would have, before the halving.
The same thing will happen this year - but the effect to be more dramatic this time, because ETFs have dramatically increased access for buyers, and because institutional investment in Bitcoin is starting to ramp up. This will mean more competition to acquire a smaller number of available coins.
This will mean significantly higher prices.
This is why I HODL.