After The Bitcoin Halving 2020: Finding Real Value With Digital Currenciesbr>
In normal times, the “halving” events of the three competing Bitcoin blockchains – all scheduled to take place roughly within a month of each other this year – would be big news in and of itself – but perhaps not so much this time given world attention on the COVID-19 pandemic.
The “halving” of course refers to the scheduled reduction of the number of fresh Bitcoin awarded to the miner winning each block – 50 coins at Bitcoin’s beginning, then 25, most recently 12.5, and now with the current halving – a reduction to 6.25 coins. Each of these “fresh” coins are distributed from Bitcoin’s fixed 21 million supply; a way Bitcoin creator Satoshi Nakamoto designed to subsidize the network in its early days – while gradually decreasing the number awarded as the network matures, with the block reward subsidy eventually halving to exhaustion.
In the past, we’ve seen bullish-runs on the price of Bitcoin before halvings as a result of investor misunderstanding and pumped-up media in its run-up. But for a multitude of reasons, the 2020 halving event comes during a particularly difficult period, fueling further speculation and discourse around how this will affect the price of Bitcoin.
At present, we are witness to governments the world-abound deploying a swathe of fiscal tools in an effort to avert the financial damage of the COVID-19 pandemic, as global economies struggle to deal with – and prepare for – the ongoing market fallout. Like all other asset classes, digital currencies took a significant hit to their prices across the board as a result – and while we have seen an approximate 50% rebound in price since the lows hit by the three competing Bitcoin chains in March, how the coming months play out in light of the pandemic remains to be seen.
This brings an additional factor into play which makes 2020’s halving unique: this is the first time a halving occurs when there are multiple competing Bitcoin networks. When the two prior halvings occurred (2012 and 2016), there was only one Bitcoin network – Bitcoin Core (BTC). Due to scaling debates and protocol disagreements, the blockchain has now split into three competing chains. For this halving, we have Bitcoin SV (BSV) and Bitcoin Cash (BCH), along with Bitcoin Core.
The price of Bitcoin also dropped in-line with the recent crash of global financial markets. Now more than ever, it is difficult to believe the oft-repeated narrative from BTC supporters that Bitcoin is a store of value immune to the pressures of traditional financial markets. Bitcoin did not act as a safe haven in this time of great financial distress, and certainly did not act as a superior store of value.
So if investors cannot depend on Bitcoin as a store of value, they should consider what other – if any – utility a digital currency provides to justify its price and investment outlook. This is where Satoshi Nakamoto’s economic design for Bitcoin becomes particularly important.
When he created Bitcoin, Satoshi intentionally set a schedule for the block reward subsidy amount to decrease over time. This served a dual-purpose: controlling inflation in the long-run by establishing a fixed supply (21 million) of coins from the outset; and incentivizing mining nodes to sustain the network in its early days by distributing “fresh” coins from that fixed 21-milion supply allocated as the subsidy amount in each block reward. But Satoshi did not intend for the system to subsidize mining nodes forever; that is why the block reward subsidy amount periodically halves and will eventually be exhausted. Rather, Satoshi’s design implies that mining nodes must become less reliant over time on this subsidy portion of the block reward, and earn more revenue from the other portion of the block reward: transaction fees. IN essence, this means that nodes must eventually rely less on “mining” fresh coins out of the 21 million supply, and focus more on being “transaction processors” who earn fees by processing transactions on the network.
For miners to stay profitable, Satoshi’s design requires massive scaling of the blockchain to support both higher transaction volume and more-varied data transactions – generating higher transaction fees to replace the diminishing block reward subsidy – as the network matured. However, for Bitcoin Core and Bitcoin Cash, their failure to scale their networks and increase their block size make’s Satoshi’s economic design unviable.
At the Bitcoin Association, we believe that the only solution to solving the diminishing block reward subsidy/miner profitability paradigm emerging is to massively scale the blockchain. Bigger blocks enable more data capacity and throughput speed. Scaling enables more payments to be included with each block, while also diversifying the types of transactions and amount of data that can be written to the blockchain. This supports more utility for global enterprise applications, rather than relegating Bitcoin to use by hobbyists. Ultimately, scaling allows miners to earn more transaction fees – an integral part of the “Satoshi Vision” for Bitcoin and a core reason behind why we fought to protect Bitcoin’s original design in Bitcoin SV.
BTC and BCH are clearly taking a different approach by keeping block size limits small (1-2MB on BTC and 32MB on BCH). In contrast, Bitcoin SV is showing that Bitcoin can in fact scale as Satoshi envisioned. Its “Quasar” protocol upgrade last July raised the default block size cap to 2GB (over 2000 MBs), far higher than BTC and BCH. Just this February, the “Genesis” hard fork restored most of the original Bitcoin protocol and completely removed any default cap on the block size. Block size on the Bitcoin SV network is now unbounded and can grow to meet whatever market forces demand.
On Bitcoin SV, daily transaction volume now consistently surpasses what is seen on the BTC network, and far outpaces BCH. This is because businesses and developers are finding creative ways to use the Bitcoin SV blockchain for a variety of data applications, in addition to its utility for payments and transactions.
Transaction volumes on BSV are increasing at a critical time as the impact of the block reward subsidy will begin to be felt by miners. This year’s halving event illuminates why Satoshi designed the Bitcoin system to be sustained long-term by transaction fees. It also represents a fork in the road for miners and investors alike to carefully examine which of the competing Bitcoin chains has the economic model and technical capability to sustain a profitable future for its network.
In times like these, investors of all classes – from regular retail traders to institutional investors – are forced to reconsider their investment outlook. When evaluating strategy for investing in digital currencies, I strongly advocate for an approach rooted in a search for genuine utility instead of speculative value. That is the true Satoshi Vision.