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Bitcoin halving. An interpretation of the foundation

May 8, 2020

Define a concept that is as simple as halving Bitcoin. It forces you to go through various ideas and theoretical premises that will later allow you to put together a structured definition of this interesting event that will attract the attention of the crypto ecosystem every 4 years.. Let’s start at the beginning.

The origin

Bitcoin was designed under the premise of be good money. Its creator Satoshi Nakamoto was responsible for understanding a complicated cryptographic puzzle, the parts of which were scattered no less than 30 years ago Contributions from countless research projects by the founding fathers of the Cypherpunk movement.

To guarantee his status as “healthy money”, the enigmatic father of Bitcoin had a challenge eliminate the presence of trusted third partiesHe actually did this when he managed to solve the famous math problem of the Byzantine generals. Satoshi integrated a Disruptive game theory in a network based on a principle of consensus reviewwho have stored information in immutable data blocks marked with time stamps, and Host is an “honest” network member who has received a reward for deciphering a complex math task.

Bitcoin halving. An interpretation of the foundationBitcoin halving. An interpretation of the foundation

But in addition, Nakamoto buscar fulfills the famous triad of money functions that have made Bitcoin a medium of exchange (MoE), a unit of account (UoA) and a value reserve (SoV). For this last function (SoV)It was important to maintain a characteristic that was inherent in the concept of money as an economic good, scarcity.


The University of Orleans states that money “It is an accepted commodity with which you can pay off your debts quickly and easily …“” The same institution now also claims that an economic good must meet the condition: “be scarce … (that is) produced in limited quantities“”

Saifedean Ammoud comments in his book The Bitcoin Pattern:

“”Scarcity is the starting point of every economy, and it is not possible to produce unlimited quantities of all inputs. it is necessary to make concessions “

History has shown us that the current and prevailing debt monetary policy of A system that makes NO concessions has proven to be the perfect trigger for the emergence of countless local and global economic recessions and chaotic social systems, where economic variables like inflation push prices down to perfectly mimic the effervescence of the foam emitted by a freshly shaken bottle of soda.

The words of the teacher Andreas Antonopoulos in his work “The Internet of Money” are much more eloquent when it comes to expressing the nature of money today:

“”… In a debt-based system, one of the two parties will always be the slave

Without addressing specific monetary issues such as the partial reserve system, current money, known as fiat, derives its term from the first word that God mentioned in the Latin version of Genesis: “Fiat lux” (let it be light), based on the divine ability to create something out of nothing and only through the power of the word. In this way, the security function (SoV) of the various national currencies and especially after the abolition of the gold standard in August 1971 by the administration of President Richard Nixon triggered an accelerated depreciation of the money. of the nations.

In contrast, gold, for example, has had a tendency throughout history (since the first records of its use as money in the 7th century BC) Maintaining an intrinsic value precisely because of its scarcity and the effort (work) that the preservation (mining) of the country representsa. The economic principle is very simple and the scholar Edgar Cahn says it:

“”The price (the amount of money a person is willing to pay) is defined by its value and this value is determined by supply and demand.. In other words, when something is scarce, it is worth it, and when it is plentiful, it is cheap. And if it’s really abundant, it’s very cheap or worthless. “

The following graphic clearly shows the consequences of monetary policy where inorganic and proportional paper money printing is NOT in short supply, They cause serious problems for society in terms of loss of purchasing power.

Source: Bloomberg, CFMS-Thirnson Reuters, ICE Benchmark Administration, Metasl Focus, World Gold Council, USA Global Investors

The solution

Nakamoto wrote in a forum for questions about the Bitcoin protocol in December 2009 on Bitcointalk’s public discussion web forum:

“”These coins can never be recovered and the total circulation is lower. Since the effective circulation is reduced, all remaining coins are worth a little more. It is the opposite of that when a government prints money and the value of the money available decreases“”

The creator was aware of the implications of not controlling the issue of coin delivery in an economic system and was based on it It shielded Bitcoin in its lines of code, so that this problem was not only controlled, but was also limited to no more than 21,000,000 units of the BTC token.

However, Satoshi’s true ingenuity was evident in the way such coins would be issued: through a reward process that is “honestly” and “deservedly” granted to a member of the network in a practically random manner, and provides the system with a mechanism that eliminates the central number of utility emissionsThis established one of the cornerstones of game theory proposed in the main body of the white paper of the first cryptocurrency in history (Nakamoto, S. “Bitcoin: A User-to-User Electronic Money System”):

Conventionally, the first transaction in the block is a special transaction that starts a new currency that is owned by the creator of the block. This is an incentive for the nodes to support the network and provides a first way to distribute coins in circulation since there is no authorization to create these coins. This stable addition of a constant amount of new coins is analogous to gold miners spending resources to put gold into circulation. “

The subsidy

With an approximate average of every 10 minutes A new block of the Bitcoin chain is created based on a complicated previous task (proof of work, hereinafter PoW) that is carried out by a network member (miner).. This member has the option, in his own discretion, to propose a list of the transactions processed in the network that have to be stored in a new block. An interesting detail of this process, however, is that the first transaction listed corresponds to the PoW payment made by the miner in a transaction called Coinbase.

In this transaction The miner writes a fixed amount determined by the protocol (currently and until May 11th, corresponding to 12.5 BTC). A variable amount corresponding to the fees paid by each network user is added to this amount, the product of the payment of transfer fees. The above fixed amount is called block reward and is the way new coins are entered into the system through complex work (PoW) where a valid block is suggested and at the same time found in an accelerated iterative process a random number called “nonce” which, if contained in this block, fulfills the condition of the current difficulty of the blockchain network.

Well then In order to fulfill the offer reduction and thus to be able to meet the maximum condition of 21,000,000 coins to be mined, the block reward is repeatedly reduced in the protocol, which occurs every 210,000 blocks or approximately every four years. It is this last condition known as halving (“reduce or halve”).

Subsidy structure in the Genesis block and Halving block of BTC

Source: Own draft with data from,


From the above, the halving can easily be defined as: L.The programmed reduction of half (50%) of the subsidy or reward granted to mining nodes for solving the work certificate for creating (mining) a block in the chain.

With this simple premise of dividing BTC’s offer in half for a fixed number of blocks in half, Nakamoto managed to turn Bitcoin into a scarce asset, creating a condition that allowed him to perform the function of SoV . Saifadean Ammoud reviewed it in “The Bitcoin Pattern”:

“”Nakamoto invented the “digital scarcity”. Bitcoin is the first example of a digital asset that is scarce and cannot be reproduced indefinitely“”

The first halving took place in 2012, dividing the reward from 50 to 25 BTC. The second opportunity arose in 2016 and placed the grant at the current value of 12.5 BTC. Y. If the condition for the number of blocks required is met, the next event will take place at block 630,000 (approximately next May 11)., Reduction of the mining premium to a value of 6.25 BTCThe following graphic shows the development of the Bitcoin offer and the effect of reducing the reward achieved after each halving, depending on the time.

Source: Own draft

Well-known Bitcoin educator Jimmy Song recently said: “Bitcoin is the first money in the world where everyone can check not only their current shortage but also their future shortage. Bitcoin is accurate in a world of uncertainty“”

The next block

From committed enthusiasts to developed Bitcoiners to beginners of the Bitcoin ecosystem and even curious investors, the phenomenon of halving has always raised great expectations since it first appeared in November 2012. The reason is obvious: testify and “exploit” the effects of a predictable monetary policy that today’s society has never seen. However, the effects of halving are not entirely instantaneous and have an important quantitative “consequence”..

The daily reduction in the supply of new currencies for the ecosystem, causes a reduction in the supply of cryptoactive, which would be proportional to the increase in its price (Think of Cahn’s concept as a function of supply and demand). Despite the fact that historically the previous halving They have shown that the price actually does tend to rise after the reward reduction phenomenon, the estimated time for a “significant” reassessment, has averaged around 18 months of response, as shown by the data provider graphic, Mint M.etrics.

Source: Coin Metrics Data Pro

For market traders with a long-term vision An earlier look at the price increase will only take shape under the condition of higher demand (or failed maintenance) compared to this third halving. All of this without taking into account the potential possibility that robust position operators (Hodler) will make the decision to close their positions and start the natural process of making a profit on their investments in Bitcoin at a certain price that is above the current one.

On the other hand, for shorter-term traders and with a little technical analysis, the potential scenarios that will arise given the upcoming halving at the time of writing this article are the weekly chart of Bitcoin prices in its BTC / USD pair in The North American Börse Coinbase shows an obvious upward trend, probably largely due to the strong fundamental effect of halving. However, this trend has two important elements: First, face the solid psychological resistance of $ 10,000 that will try to act as a solid retaining wall for the current rally. And secondly This trend is not accompanied by a significantly significant volumeAn element that prevents the maintenance of buying interest from being predicted that Bitcoin received after the sudden drop in March due to the global impact of COVID-19 for that date.

Preparation: own

The current volume-price divergence and entry into an overbought zone (as the Williams% R strength indicator shows) allow for a sharp correction.This is all the more true since the current Japanese candle formation has not suffered a setback in the past 7 weeks. In this way, the operational strategy focuses on adjusting risk management (SL) of the positions currently active in the market.

The end?

What is true is that the countdown of the third bitcoin halving continues its unstoppable execution course for this second week of May 2020. After all eyes of the crypto space are focused on this very important event and such a reduction has been carried out, a new stopwatch is started. So, pNow repaired to meet again in 4 years and refresh the theoretical concepts of monetary policy of humanity’s most important computerized financial protocol.

#We’ll continue hashndo

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