The bitcoin block reward halving
The crypto school is made to let everyone learn something about the basics of cryptocurrencies for free, with explanations about mining, trading and more!
The Next Bitcoin halving
We are just
Away from the next Block Reward HALVING which will cut the supply of bitcoin in half from 900 to just 450 bitcoin per day.
The bitcoin block reward halving
After every 210.000 Block, Bitcoin goes through a process called ‘halving’. This mechanism was integrated into the protocol by the creator of Bitcoin, Satoshi Nakamoto.
Specifically this means that about every 4 years the supply of Bitcoin will be cut in half. Every time a Bitcoin halving occurs, miners begin receiving 50% less Bitcoins for verifying transactions. This means that the supply will be cut in half while the demand will usually stay about the same. In history this has been a key moment for Bitcoins crazy surges in price.
If you would like to know more about the halving and the effect on the price you can scroll down to check on the Stock-to-Flow model created by Plan B. But first we will give a small explanation about the general meaning of supply and demand.
General Supply and Demand rules
Before we go ahead to the Stock to Flow model, we will give you a brief lesson in Economics 101. One of the most basic principles in microeconomics happens to be ‘supply and demand.
The supply/demand equation states that given all else is equal, in a competitive market, the price of a particular product will vary until it reaches economic equilibrium, wherein the quantity demanded is equal to the quantity supplied.
So this leads to two situations:
- The supply is high and the demand is low, which leads to a decrease in the price of the asset/product.
- The supply is low and the demand is high, which leads to an increase in the price of the asset/product.
If the miners were allowed to indiscriminately mine Bitcoins, it would exponentially increase its circulating supply, crashing its price in the process. This is why the Bitcoin halving mechanism was hard-coded into the protocol to monitor the circulating supply.
Stack to flow model
This model treats Bitcoin as being comparable to commodities such as gold, silver or platinum. These are known as ‘store of value’ commodities because they retain value over long time frames due to their relative scarcity. It is difficult to significantly increase their supply i.e. the process of searching for gold and then mining it is expensive and takes time. Bitcoin is similar because it is also scarce. In fact, it is the first ever scarce digital object to exist. There are a limited number of coins in existence and it will take a lot of electricity and computing effort to mine the 3 million outstanding coins still to be mined, therefore the supply rate is consistently low.
Stock-to-flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year). For store of value (S.O.V) commodities like gold, platinum, or silver, a high ratio indicates that they are mostly not consumed in industrial applications. Instead, the majority is stored as a monetary hedge, thus driving up the stock-to-flow ratio.
A higher ratio indicates that the commodity is increasingly scarce – and therefore more valuable as a store of value.
How to read the chart
On the above chart price is overlaid on top of the stock-to-flow ratio line. We can see that price has continued to follow the stock-to-flow of Bitcoin over time. The theory, therefore, suggests that we can project where price may go by observing the projected stock-to-flow line, which can be calculated as we know the approximate mining schedule of future Bitcoin mining.
The coloured dots on the price line of this chart show the number of days until the next Bitcoin halving (sometimes called ‘halvening’) event. This is an event where the reward for mining new blocks is halved, meaning miners receive 50% fewer bitcoins for verifying transactions. Bitcoin halvings are scheduled to occur every 210,000 blocks – roughly every four years – until the maximum supply of 21 million bitcoins has been generated by the network. That makes stock-to-flow ratio (scarcity) higher so in theory price should go up. This has held true previously in Bitcoin’s history.
The stock-to-flow line on this chart incorporates a 365-day average into the model to smooth out the changes caused in the market by the halving events.