Hello itâs May 14th, 2020, and today I am going to talk about bitcoin in particular the halving or halvening that took place a couple of days ago Bitcoin was born in reaction to the bailouts of 2008
When the first digital coins were mined, a headline quotation from The Times that day was left embedded in the genesis block âChancellor on brink of second bailout for banksâ Bitcoinâs creator, Satoshi Nakamoto, resented the iniquities of a fiat money system, in which certain favoured bodies (governments and banks) have the ability to create money at no cost (Are you watching Rishi Sunak?) I doubt it âEscape the arbitrary inflation risk of centrally managed currencies,â he later declared With Covid-19 money printing at full throttle, the case for bitcoin has got even stronger
When Satoshi Nakamoto first designed bitcoin, one of his key ideas was that money should have a cost of production to it Whatâs more, the supply of money should be finite Unlike fiat money which is pretty much infinite – the supply of money keeps on growing – Nakamoto wanted a system whereby nobody should have the power to create more of this money when it suits them Money should have value, because of its scarcity Unlike fiat money, which is inherently inflationary, Satoshi wanted to create a deflationary system, the purchasing power of which increases over time
Satoshiâs plan was for a maximum of 21 million coins But he couldnât create those 21 million coins all at once It had to be gradual So how to create coins? How to disseminate them? And how to maintain the system? Satoshiâs ingenious solution to it all was what he called mining Just as gold and silver cost money to mine, so do bitcoins
However, you donât mine bitcoins with picks, shovels and drills, but with computers You can set up a gold mining company and start drilling â in your back garden if you like â but there is no guarantee youâll find anything So with bitcoin can you rig up some computers and start bitcoin mining, but there is no guarantee you will get some coins out of it But there is a chance you will strike gold â or successfully mine coins The better your gold or bitcoin mining operation â the more powerful your drills, or you geological mapping, or your computers â the better the chance youâll strike gold or bitcoin
And the potential reward is such that people take the risk Every 10 minutes a block of new bitcoins is mined And thousands of bitcoin mining operations around the world â thousands of powerful computers â compete with each other to mine the block and get the bitcoin reward It is the combined power of all these computers that processes all the transactions and maintains the network So, the dynamic is that people are acting out of their own self-interest (the potential reward of coins), but the result of that self-interest is that the system is maintained
Early bitcoins were easy to mine There was not much competition, the network was small But as bitcoin evolved, so did the mining process grow more intense The more intense the mining process, the more resilient bitcoin becomes Again we see this digital replication of the gold mining process
Surface gold is easy to mine, but as the mine goes deeper underground, it gets more expensive and labour intensive Just as precious metals miners sell their produce soon after they mine it in order to fund future mining â that is their business model â so bitcoin miners sell their coins soon after production Thus do coins get disseminated So what is this âbitcoin halvingâ stuff about? Satoshi coded a production or inflation rate into the design âCoins have to get initially distributed somehow,â he said, âand a constant rate seems like the best formula
â Initially, coins were produced at a rate of 300 per hour Between bitcoinâs inception in 2009 and November 2012 a total of 105m bitcoins were created â half the eventual supply But then the first scheduled âhalvingâ took place, and the production rate fell from 300 to 150 per hour Four years later in July 2016, we saw the second scheduled âhalvingâ and, with almost 16m coins now in circulation, the production rate fell from 150 to 75 per hour
Yesterday, now with 18m bitcoins in circulation, we saw the third halving and production rate has come down to 39 per hour (so not quite a halving) This process will continue every four years until some time around 2140, when the 21millionth coin is mined What does this mean for the value of bitcoin? In theory, if you reduce the inflation rate of money by half, the value of that money should rise The same applies to a commodity â reduce the supply by 50% and the price should go up And the evidence of the two previous halvings is that bull markets of the change-your-life variety have followed
In November 2012 bitcoin was trading below $10 One year later it was north of $1,000 In July 2016 bitcoin was around $500 â 18 months later it was at $20,000 So let's take a look at the chart This is a log chart of bitcoin that goes all the way back to September 2011
Bitcoin was $2 back here It's not even shown on the chart but believe me it as $2 back then This is a log chart byt he way so it shows percentage gains Otherwise bitcoin charts just go vertical and you can't study them And here is the point of the first halving in November 2012 and bitcoin was about $9 then
And you see it went off on one heck of a bull market ending at $1,200 here And then we went intot the first crypto winter Bitcoin came all the way back to about $200 And here was the second halving July 2016 at about $500 And that basically halved the inflation rate and it set off another big launch that ended December-January 2017-8 at $20,000
And we've been int he second crypto winter And then here we are in May 2020 wththe thrid bitcoin halving Are we going to get another one of these amazing runs? Let's hope so But that story has been baked into this halving for many months If you âve been following me for any amount of time, if you've read my book, or you watch these videos, you should by now own some bitcoin In which case my advice would be âenjoy the rideâ
If you donât own any, I cannot advocate enough, as I have said so many times, that you should: first, familiarise yourself with the tech; and second, own some, even at todayâs price of $9,000 and something The potential of the thing is too huge not to have a position Only speculate with money you can afford to lose All that stuff What is that potential? Iâm not one of those that argue that bitcoin will replace the US dollar
But I do suggest it has the potential to become the default cash system of the internet That gives it a scalability that fiat currencies do not have A national currency is limited by its borders No such limitation exists with bitcoin Iâm not saying bitcoin will become the default cash system of the internet (and I choose the word âcashâ carefully)
There are all sorts of reasons why it could happen, and as many why it wonât But, wherever you stand on this divisive subject, you cannot deny that the potential is there And when something has that extraordinary potential, why would you not take a position? And, of course, with all the money-printing that is going on to bail out economies in the wake of Covid, the case for non-government money is all the stronger But that is an argument for another day Thanks very much for watching
Please subscribe to my channel Iâll be back with another video probably some time next week Until then, Sayanora
