MODERN FINANCE
The Halving
During each halving, the reward for miners solving complex mathematical itcoins halving is a predeterproblems and adding new blocks to the mined event that occurs apblockchain is cut in half. Initially set at 50 proximately every four years, Bitcoins per block, it reduced to 25 in the or 210,000 blocks, reducing the rate at first halving, 12.5 in the second, and 6.25 which new bitcoins are generated by in the most recent one. 50 percent. The impact of halving events on the This process is encoded in the market is widely debated. Some believe it Bitcoin protocol to control its supply can trigger a supply-demand imbalance, and mimic the scarcity of precious potentially leading to an increase in the Philip Dudley metals like gold. Historically, “The value of Bitcoin. Halving” has been a catalyst for the As the rate of new coin creation slows price of Bitcoin as scarcity value increases. down, and if demand remains or grows, the reduced The total supply of Bitcoins is capped at 21 million, supply may drive up prices. with approximately three million having already This phenomenon has historically been observed been lost forever. The continued halving events play in the wake of previous halvings. A traditional a crucial role in managing this limited availability. market is a process wherein supply, demand and The halving mechanism ensures that new bitcoins price are a constant loop, but Bitcoin is only driven enter circulation at a diminishing rate, leading to a by two adjustable factors—demand and price. gradual reduction in the overall supply growth. The supply function is determined by what is called The first Bitcoins halving took place in 2012, the “difficulty adjustment” which aims to maintain followed by subsequent events in 2016 and 2020. 10 minutes for each block found by the miners. This
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By Philip Dudley
inability to increase Bitcoin production vis-a-vis the difficulty adjustment creates an inelastic supply matched only by a few hard assets such as raw land. Halving events are significant milestones for the Bitcoin community and are often accompanied by increased attention and speculation in the cryptocurrency market. However, it’s essential to note that the relationship between halvings and price movements is complex, influenced by various factors, including market sentiment, adoption, and macroeconomic trends. In summary, Bitcoin halving is a fundamental aspect of the cryptocurrency’s design, strategically implemented to regulate its supply and emulate the scarcity found in such things as precious metals. Because each halving occurs approximately every four years, it continues to be a focal point for investors, enthusiasts, and analysts interested in understanding Bitcoin’s long-term economic dynamics. And if you got lost at “difficulty adjustment,” don’t worry, the Securities and Exchange Commission is having a tough time keeping up as well with this new age store of value.
MIDDLEBURG SUSTAINABILITY COMMITTEE| Winter 2024
