Bitcoin’s price has not moved, nor the hash, despite bitcoin’s block reward now reduced to 6.25 BTC from 12.5 bitcoins.
Bitmain’s Antpool mined this halvening block 630,000 and they got nearly 1 BTC in fees for it, worth about $9,000 as of writing.
So considering there has been such a drastic change in new supply, why did nothing happen?
Some might say because it’s been priced-in, but we don’t buy that theory as it assumes perfect information which isn’t quite possible.
Others might say because speculation happened before hand, but then why wasn’t there a sell the news event? So we have our own theory.
We’ve been thinking about this for quite some time, but never found the time to articulate it.
If you look at the algorithmic past halvenings and what followed, it kind of says quite a lot about how inflation in the real world works and how supply and the value of money interact.
Nakamoto could have, for example, gradually increased or decreased the supply but that probably wouldn’t have told us much about the nature of money.
While this sharp 50% reduction is in many ways kind of a mass academic lecture because we have all seen the effects of it so far.
There are three ‘surprises.’ The first one is that there’s no effect at all when supply is cut. Meaning when Fed or ECB moves their interest rate or when gov takes on debt which practically translates to increasing fiat supply, one shouldn’t expect any near term result.
Bitcoin is a relatively small and a fairly isolated monetary system that doesn’t act much as a unit of account. And still everyone quickly forgets about the halvening as nothing happens for months until in suddenly it has boomed in the past in a way that it seemed it will go on forever.
In the fiat system which is much bigger and a bit sticky due to its mass use as a unit of account, any change in interest rates or debt should take much longer than months to have an actual effect with here the process being more kind of every decade, while in bitcoin it’s around half a decade.
So the second surprise is that sudden boom because no one really expects it, except they maybe once thought it might happen but they’ve kind of forgotten about it.
Same in fiat where the experience is far longer with one interesting unpredictable being whether the fact now some expect this second surprise means there won’t be one this time.
Obviously that’s for the future to say but everyone expects a boom and bust in fiat until things are so good they claim no more boom and bust because it’s been so long since the bust that they forgotten about it.
And the bust is the third surprise. 2014, 2018, whether in 2022 also is to be seen but the supply cut that gave this ‘stimulus,’ effectively at some point reaches its limit.
Since bitcoin is still inflationary, albeit at a reduced rate of now 1.8% a year, this new supply starts weighing on the market with a slower reverse process beginning.
If we take 2017-2018, plenty would say $20,000 was madness, but it’s not clear it was at that point in time.
Supply had been cut, demand was constant or increasing, a new balance was found at that $20,000, and that’s the problem.
Because supply is increasing, once demand and supply strike a balance, the value of money should fall, as demand is remaining constant while supply is increasing.
Hence we have the reverse process of the two years bust with bitcoin’s price gradually falling to as much as $3,000 just before 2020 opened.
Again $3,000 probably was the right price at that brief point when a new balance had been struck, with some speculation then kicking in as well as ultimately the cost of production where miners just withdraw supply both to create a floor and out of necessity.
The necessity being that back then in five months their income was to be cut in half, therefore if they wanted to survive they had to put aside some bitcoin savings to smooth out the income reduction, with the cycle then repeating.
What this says and what Nakamoto is saying is that it is changes in monetary supply that create booms and busts, rather than some animal spirit or economic cycles.
He is clearly arguing that a fixed supply is better because presumably in his view money would not interfere with the economy, instead rather than the measurer of value measuring the economy, the economy would measure the measurer of value. That is instead of money pricing goods, production and the economy in general would set the price of money.
The value of money would thus increase if production, population growth and so on, increases, and it would decrease if there’s less production in the economy for whatever reason.
Hence bitcoin’s price fell when Milan was Marshall lawed on Red Monday, March 9th, and has gradually recovered since as the economy has gradually began to open.
We’re now in for a recession when we can see who will measure better the actual production in the economy instead of what arguably could be seen as fake busts.
That makes this fixed money idea pretty interesting but there are different opinions on it as you’d expect and we don’t quite have the data to objectively adjudicate so they can continue having their different opinions.
What is undeniable however is this revelation that booms and busts are created by changes in money supply, and that it is so is not evident because the effects of those changes are felt long after it has been forgotten there has been a change at all.
It is also undeniable that a monetary system with changeable supply interferes in the economy instead of being an objective measurer, say like a ruler can measure the length of a table.
Tables of course come in different sizes, but the measurer is one size – if we ignore anglo saxons and their feet with most so using meters.
Likewise Nakamoto and bitcoin is saying the size of the economy should change, not its measurer, money, which should be fixed.