Issue 14: The big deal about the halving
This issue of the newsletter focuses on the bitcoin halving and why its so important and how the halving could affect hashrate.
This week’s main attraction was the Bitcoin halving.
It’s such a big deal that it’s also the focus of this week’s newsletter. We’ll jump into why the halving matters (sliced two ways) in a minute.
Price-wise, there was a massive dump across the entire market, the dump lasted most of the week, and sent the usual corners of the internet into a frenzy.
Some of the dump was expected as miners and investors made moves pre-halving and a correction seemed likely following the recent run to a new all-time high.
The move to the downside was especially brutal for assets deeper on the market cap bench. Not surprisingly, memecoins as a category faced an aggressive correction.
Although there are always exceptions: Cat in a Dogs World (MEW) was up 49% on the weekly chart despite the broader plunging market.
The market turbulence will likely continue post-halving as Bitcoin miners make adjustments to the new supply dynamics. Following precedent, Bitcoin sentiment and performance generally sets the table for the rest of the crypto market.
The Bitcoin halving explained
The thing about crypto and digital assets is that there are a lot of funny names for things or names that feel overly complicated or like jargon.
Non-fungible token (NFT) is a great example. Blobs is another. It’s not that these names are terrible, it’s just that they are not immediately understood by people who are not thinking about or working on crypto all day, which is a lot of people.
One of the best aspects of the halving is that it is immediately comprehensible based on the name alone. Sure there are details to dive into, but the basic gist is that the new supply of bitcoin gets cut in half.
Read up on the halving
New bitcoin enters the market every time a new block is confirmed in the Bitcoin network. The new issuance is called the block reward or the block subsidy.
The reward system is designed to accomplish two things at the same time. It incentivizes miners who contribute computing power to the network to confirm transactions in the hopes of winning the block reward. The reward also provides a way to have a measured and predictable way of adding new currency to the system and cleanly managing the supply dynamics.
Every four years the block reward gets cut in half. The cut, or the halving, has a lot of downstream effects, especially on miners, but the result, based on what’s happened after previous halvings, is an increase in scarcity.
As the new levels of scarcity meet a growing demand, historically, the price of bitcoin has moved up and to the right. The halving is one of the fundamental dynamics that explain bitcoin’s record-setting growth since the asset was first created in early 2009.
The Bitcoin halving and hashrate
One of the hardest leaps for people to make when first learning about Bitcoin is understanding how networks are valued.
You’ve probably heard this frequently, “But what is Bitcoin backed by?” or “It’s just money made up on the internet.” Or something along those lines.
In reality, what makes Bitcoin so interesting and so valuable is that it is the first time an internet-scale network is combined with the attributes of a currency such as the ability to send, receive, and store value via software without the need for any kind of intermediary.
A foundational element driving Bitcoin and the whole computer-network-as-money idea is the interplay between distributed computing power to maintain the network and compensating network participants (in this case, Bitcoin miners) by issuing them new currency in exchange for their computing contributions.
A deeper dive into hashrate and why it matters
The hashrate is the measure of computing power applied to the Bitcoin network to confirm new transactions and maintain the underlying functioning of the blockchain.
For obvious reasons, hashrate plays a big role in the overall functioning and health of the Bitcoin network.
The movement in price is what everyone focuses on. It’s like the outward indicator of network health and performance.
Hashrate, on the other hand, is more like an internal metric (to be clear, hashrate is measured and reported publically, it’s just that not that many people pay attention to fluctuations in hashrate, but they do pay attention to fluctuations in price).
The point here is that hashrate is an important indicator of overall health and has impacts on bitcoin price fluctuations — and the halving will impact hashrate.
The takeaway
The Bitcoin halving is a big deal.
It’s a great reminder that bitcoin the asset is code-based money that is managed by Bitcoin the network, which is decentralized and is running as designed across a global system of distributed nodes that are well-coordinated and organized enough to carry out a massive system change.
At some point, whether or not people are invested in bitcoin or see the overall utility of a global financial network that functions independently of any kind of government or corporate control, there has to be an acknowledgment that if nothing else, the Bitcoin network is a massive feat of engineering.
Surely in the next few weeks and months, we’ll see the impacts of this halving as miners adjust to a decreased supply. But while we wait, it’s enough to just marvel at the fact that the network works with such precision.