As of the morning of May 14, 2020 Bitcoin is at $9,685.
The third Bitcoin halving has come and gone. While there was much speculation and fanfare about the day of the event, the actual halving went unnoticed as the software made changes to the rewards system. So why should you care?
You were able to witness the third instance of a fully automated monetary policy system in action.
Bitcoin is a cryptocurrency first discussed in a 2009 whitepaper by a person or persons known as Satoshi Nakamoto. Bitcoin is the first and most widely used blockchain network by market capitalization. In this instance the blockchain and the token are inseparable. The Bitcoin blockchain performs only six basic operations (send, receive, balance, global balance etc.).
Bitcoin uses a decentralized model to validate transactions on the chain. The people who run the computer nodes are called miners. Miners have an economic incentive, in the form of bitcoins for for validating and recording the transactions on a block (block on the chain). In 2009 the rewards started at 50 bitcoin per block mined and as of today are at 6.25 per block. That’s worth about $61,000 at current prices.
By design the system enforces scarcity and will continue to produce new bitcoins until a total of 21,000,000 are created. Rewards are reduced by half after every 210,000 blocks are produced. No more bitcoin can be created; nor can any be destroyed. The miners do not control the method by which blocks are created; nor can they set or propose policies. Miners are getting paid for providing the processing power to validate and record transactions. Simply stated, they’re getting paid for accounting.
The halving is monetary policy in action
Monetary policy is the demand side of economic policy. Demand side refers to growth created by building increasing demand. Traditionally it refers to direct actions undertaken by the people and policies of a nation-state's central bank. They control the money supply to achieve some macroeconomic goals. During the Coronavirus monetary policy is nominally being used as economic stimulus. Generally, countries want to promote healthy economic stimulus. In my opinion, and others it’s unhealthy and the sign of an unhealthy addiction to bail outs. For a deeper dive, listen to fellow fund manager Anthony “Pomp” Poliano’s
Quantitative Easing Is The Ultimate Drug And America Is Addicted To Getting High
Enforcing scarcity would be one way of generating demand, assuming anyone wants to hold bitcoins. Given that value of bitcoin has maintained gains in value, holding or hodling (in cryptocurrency speak) seems like a good idea. Buying on the “dips” is a popular strategy.
Bitcoin’s monetary policy is the one thing that truly sets it apart from centralized government/banking. It is 100% predictable and without human oversight/whims/intervention. New money cannot be printed or created unlike what is happening in the US. US monetary policy is being driven by legislator’s desires for re-election, personal motivations (any and all), and more all in response to the Coronavirus pandemic.
The dispassionate nature of the monetary policy is in stark contrast to the reactive nature of current regulators. History will judge on which created better value for the people and each country. Bitcoin is objective so it cannot react to market conditions. This is also making it a non-correlated asset. Meaning there is other asset or market trend, including other cryptocurrencies that have an effect on its price. An example of a correlated asset is when retail grocery stocks go down because one grocery store has had a major data breach. When the markets are good, many investors follow a “rising tide lifts all boats” mentality.
What can Bitcoin teach us about the current pandemic?
- Decentralization has been successful but it’s not a panacea
- Working from home is more than just viable. Many companies with knowledge workers are shifting their in-office strategy
- #DeFi (Distributed Finance) is a peer-to-peer model that is growing. States are helping states
- De-densification is another New Normal. Companies and cities will have populations move to the next outer ring. Fully centralized control has had its day
- Collectable assets fare well in a crisis (Gold, silver, and art have appreciated too)
- Value is value. It works across borders and doesn’t different between social status. Internal value comes from self-sufficiency whether it is at a personal, city or state level. Those states that had good practices are opening sooner. Time will tell as to how it aids in the recovery of their economies.
- Adapt to new platforms
- The New Normal is adaptability. Restaurants and other experience-oriented venues cannot operate profitably at 25 or 50% of their capacity. Adding extended delivery and grocery services, video conferencing for entertainment venues (e.g., concerts) and other fundamental shifts support the hardy survivors.
- A quote from science fiction writers Jerry Pournelle and Larry Niven, is, “Think of it as evolution in action.”
- Bitcoin emerged during the last global financial crisis. Banks were early adopters after they violated trust.
- Sunlight is the best disinfectant (ok it’s a stretch)
- Transparency creates trust
- Inspection of a problem enables a root cause analysis of where systems are failing
Older models are no longer sufficient. It’s time to explore new ones.
Recap
Unless you count the exuberance of bitcoin maximalists the halving would be a non-event. Bitcoin investments have done well. The digital and steady hand of Satoshi Nakamoto on the wheel has provided a safe haven and a new model for banking.
Look for bitcoin to hit $12,000 by end of May 2020. My prediction for $9,000 by end of April 2020 was on target.
What your thoughts on the matter? Does a fully digital currency appeal to you? Final thought. It's been a good run thus far. For it to truly become every day, digital currencies need a liquid circulating economy. Bitcoin and other digital currencies/cryptocurrencies need to be as common as credit cards are grocery stores.
Onward.
And please, #NeverInvestMoreThanYouCanAffordToLose
