This post will discuss one of the biggest events of the last four years for Bitcoin in its halving, what exactly this means economically, how this will profoundly affect the whole of the Bitcoin economy and ecosystem and its incentive structures and coupled with the ongoing collapse of the Western Banking System, paving the road to the mass adoption of an sound, honest, benevolent and enriching financial system and rising standards of living for the whole of the Bitcoin economy… This is a very exciting time in history and the end of a 500 year supercycle of history…

The Bitcoin Basics

The Bitcoin protocol went live in 2009 as a decentralized asset ledger and network allowing peer 2 peer transactions and exchange… This electronic ledger unlike any other in human history was decentralized and existed without any middlemen or counter-parties to process and check the network transactions, as this was done by a decentralized pool of computing power that contributed resources to the running of the bitcoin protocol… In exchange for providing this computing power the Bitcoin miners were rewarded with fifty (50) bitcoins every ten minutes in exchange for processing transactional blocks on the blockchain… These mined bitcoins are the ledgers currency or credit and only this currency can be used to account on the Bitcoin blockchain, so to utilize Bitcoin you must earn or purchase bitcoins, solely issued by the miners… Both transaction processing and issue of credit (bitcoins) are carried out by the same decentralized pool of computing power ending the need for both central government (the coming developments in smart contracts and asset registries) and banking (financial and credit system), so blockchain technology and Bitcoin are major steps forward for humanity… The Bitcoin protocol regulates the issuance of bitcoins and has an artificial built in maximum cap of twenty one million units (21,000,000) which cannot be regulated or printed but only mined, and so ending fractional reserve credit and the boom and bust business cycle… Bitcoin in a nutshell is the greatest man made credit instrument ever invented!

Predictable Issuance of Credit

Bitcoin’s killer app over banking in my opinion is its credit issuance… Unlike banking where the ledger is centralized and secretive and can be used by bankers to counterfeit additional currency enriching themselves at the expense of the debasement of everyone else that exchanges in that currency, Bitcoin is a decentralized open source electronic ledger with a cryptographically scarce currency… As I said, in 2009 currency issuance mined was at a pre-determined rate of fifty bitcoins every ten minutes in the hands of miners as their reward for contributing mining resources to the Bitcoin network, with the miners selling or liquidating at least some of those bitcoins through exchanges into the open market so that others could also own bitcoins… As nobody really had an interest or understood just what a mind numbing invention and world changing technology this would be, bitcoins traded for virtually zero at the beginning as it had little utility outside of a nerds hobby or some speculative trading in worthless digital tokens… As Bitcoin matured and attracted more interest, talent and owners (users), bitcoins slowly increased in value albeit with spikes in volatility and wild fluctuations in price (priced in fiat dollars, pounds, euros, yen, etc)… Then on 28th November, 2012 we had our first Bitcoin halving wherein the protocol cut the reward for miners from fifty bitcoins every ten minutes, to twenty five bitcoins (25) every ten minutes… This event was what I would call a quantitative tightening or a halving of the inflationary rate with new issuance of currency cut in half overnight effectively cutting the immediate bitcoin liquidity sold into exchanges by the miners by half, which you would expect would lead to an increase in the demand for and therefore the value of bitcoin (in fiat money paid)… And indeed if you look at the historical chart of the bitcoin unit price (in US dollars), from late November 2012 to the intermediate term top at the beginning of April 2013, one bitcoin soared from $13 to $184, before pulling back and settling at around the hundred dollar level for the next six months… So after the first quantitative tightening, Bitcoin went from around ten dollars to a hundred dollars, ten times higher in the space of months… Which at least gives us some insight to what might happen in the next halvening…

Bitcoin Halving Of 2016

Last Sunday afternoon Bitcoin again underwent a quantitative tightening, as the bitcoin currency supply was again halved from twenty five bitcoins every ten minutes, to twelve and a half (12.5) bitcoins every ten minutes… This happens every 210,000 blocks and approximately every four years (210,000 x 10 minutes), and will happen again in 2020 when the bitcoin supply will be further halved to 6.25 bitcoins every ten minutes… As should be clear the issue of bitcoins follows a predictable and pre-determined path that everyone who looks into it should understand and be able to grasp, and why I liken Bitcoin to digital gold… Like gold is a scarce commodity money that is mined into existence, Bitcoin is a scarce digital money that is mined into existence… Like gold has a stock (the total tonnage of gold mined and stored above or below ground) and a flow (the amount of gold in active circulation as money) Bitcoin has a stock (the twenty one million maximum cap, of which approx fifteen and a half million have currently been mined) and a flow (the amount of bitcoins in active circulation as currency), making both stable scarce monies and the antithesis of the Quantitative Easing and money printing of the current moribund central banking system, and why in time these sound money systems will destroy it… Gold and Bitcoin are both technically inflating monies (the tonnage of gold is continually increasing as is the amount of bitcoins at least until the twenty one million artificial cap is hit) but the flows are stable and scarce (gold and bitcoins released into circulation by miners and savers)… This makes gold and Bitcoin deflationary money and credit (increasing purchasing power over time) and has profound implications for the society that will exchange in them in the future, and the physical and digital backbones of the the future decentralized financial system…

Why The Bitcoin Halving Is Inherently Deflationary

As I have extensively discussed in past posts Bitcoin is a credit system for barter (peer 2 peer trade) and because of its artificial currency cap and its predictable supply, bitcoin will be inherently deflationary or in other words over time the purchasing power of a bitcoin will increase as will the market cap of the Bitcoin ecosystem… In 2009 the price of a bitcoin (in fiat money) was zero as was its market cap, today one bitcoin is worth approximately $650 and its market cap approximately ten billion ($10,000,000,000), so Bitcoin has scaled in a big way… And here is where Bitcoin’s incentive structure becomes apparent, the vast majority of bitcoins and liquidity were mined in the early days and are now out of circulation (either in cold storage lockdown, forgotten or lost) which means that bitcoin liquidity over the years has been dwindling while Bitcoin’s market cap and value of its currency has been increasing… Couple this with further Quantitative Tightening events (Halvenings) when the mined supply of bitcoins is cut in half every four years, then it should be clear that although in principle Bitcoin is an inflationary currency, in practice it is designed to be deflationary… As I said the Halving in 2012 sent a bitcoin’s value soaring tenfold in the next few months, so can we expect the same this time around?

2016 is 2012, On Steroids

For some comparison of where we are compared to four years ago, the market cap of Bitcoin in late 2012 was approximately thirteen million ($13,000,000) with a bitcoin trading at $13, today’s market cap is approximately ten billion ($10,000,000,000) and a bitcoin trades at $650, but this is only scratching the surface of the progress Bitcoin has made… In 2012 there were a small handful of fiat to Bitcoin exchanges dominated by fractional reserve ponzi Mt Gox and barely any venture capital and general interest in the nascent space… Fast forward to today and there are tens if not hundreds of fiat to Bitcoin exchanges all over the world, billions in venture capital funding the best and brightest start ups in diverse applications from remittances to banking, merchants to consumers, smart contracting to asset registries… The Blockchain is now the increasing buzzword in the fields of banking, law, accounting, property, science, healthcare, and is captivating and scaring the shit out of the modernist bureaucratic class in equal measures… The last four years in so many ways has been the making of Bitcoin…

Quantifying The Tightening

Due to the open source, cryptographic and mathematical nature of the Bitcoin blockchain, it makes it possible to quantify how much this tightening of halving the flow of credit into the Bitcoin ecosystem and give us figures for calculating how profound an event this will be… We know that the bitcoin currency will half from twenty five to twelve and a half (12.5) every ten minutes and we also know the approximate value of a bitcoin ($650) so we can quantify in the tightening in fiat dollars… At twenty five bitcoins per ten minutes a days supply of bitcoins would be 3,600 multiplied by $650.00 would be $ 2,340,000.00 or close to two point four million dollars of daily bitcoin liquidity, or to put this another way for the bitcoin price to stay stable at $650 a fresh amount of capital worth nearly $2,400,000 per day would be needed to be invested and added to Bitcoin from outside the ecosystem… With the halvening this supply drops to twelve and a half every ten minutes or 1,800 bitcoins per day and at $650 would only take $ 1,170,000.00 in fresh capital and wealth creation per day to maintain the bitcoin price… What I’m trying to say here is that this is a material tightening of liquidity, and that when liquidity tightens and demand remains constant or increases, then marginal units of currency (bitcoins) become scarcer in turn increasing the price for these marginal units… Economics 101… The one thing that should be clear is that this is deflationary, which is de facto bullish on the purchasing power of a single bitcoin, indeed in the last few months leading up to this halvening the bitcoin price has nearly doubled and to some extent in my opinion due to the anticipation of the liquidity tightening event… While there might be some short term weakness and volatility during and in the aftermath of the halvening (this is an exceptional event after all), the next few months should see bitcoin continue to soar higher… This deflationary spiral of increasing value and purchasing power of bitcoins itself creates an incentive structure and feedback loop for increasing adoption which will dramatically accelerate into mass adoption with the acceleration of the collapse of the Western and Eastern banking and financial systems… Lest we forget, the Bitcoin phenomenon is global…

To give a detailed explanation of how the quantitative tightening of the Bitcoin halving will affect the Bitcoin ecosystem I will split the ecosystem into its component members dealing with each individually, and within broader terms…

Deflation And The Miners

As every bitcoin that has ever existed has been mined it is only fitting that we discuss the miners first, and I would argue that the halving affects the miners far more than any other group and really to the benefit of all other groups… The halvening is a big deal for Bitcoin mining! When the currency supply is cut in half, then the mining reward is also cut by half… The tremendous amount of computing resources that it takes to contribute to running the Bitcoin ledger will now get half the reward that they got only yesterday, and naturally this will lead to some short term turbulence for the Bitcoin miners… This tightening will in the short run force some of the less efficient and more costly Bitcoin miners out of business as their costs will now outweigh the reward that they get in exchange, and so the mining community will have to consolidate and entrench maybe for the next few months… Also because of the anticipation of the halving, I would suspect that many miners may have hoarded bitcoins and not sold them into exchanges as they would know there would be a dearth of liquidity in the aftermath and that could also be partly responsible for the recent appreciation of the bitcoin price… However the halvening does not spell the death of the mining industry for the simple reason that miners do not exist in a vacuum and as I have explained bitcoin is a deflationary currency and so will naturally appreciate in value over time, so with a quantitative tightening say were the bitcoin price to double from $650 to $1300 in the next six months, then the financial reward for miners in fiat money (given most of their running costs for energy, hardware etc would be in national fiat currency) would be unchanged… A supply of twenty five bitcoins per ten minutes (3600 bitcoins per day) at $650 (pre-halvening) would be the same financial reward as twelve and a half bitcoins per ten minutes (1800 bitcoins per day) at $1300 (post-halvening), the approximately two point four million dollars I calculated in the above example… So outside of short term turbulence and uncertainty I think the mining industry will thrive as the increasing value over time of the bitcoins they mine will outstrip their costs and overheads thus being able to generate profit and save further capital to invest in what is a critical component industry of the success of Bitcoin… China is and has been for a while leading the mining effort for securing the Bitcoin blockchain and the global population should be very thankful for their contribution of the network, and for further thoughts on the future decentralization of Bitcoin mining I would advise you to check out this excellent recent talk by Andreas Antonopoulos…

Deflation And Consumers

Consumers in this instance I regard as producers who have already earned or purchased bitcoins for future consumption (spending)… When you work to earn bitcoins or purchase bitcoins you are converting production either directly (earning) or indirectly (earning then selling fiat) and choosing to buy and save in bitcoin… You take bitcoins and liquidity out of circulation and sit on them for weeks or months or even years in the expectation that your purchasing power will increase over time, but to be clear you only do this in order to eventually purchase or consume… We only produce and save in bitcoins in order to one day at least spend a portion of it… If you take fiat money as the proxy value for all other goods and services (all other goods and services are exchanged and priced in fiat money) then with a rising price for a bitcoin priced in fiat money, it de facto means that the cost of other goods and services are coming down priced in bitcoins… If the bitcoin price in dollars doubles, then the cost of goods and services priced in bitcoin halves… The incentive structure here should be clear, over time purchasing power and standards of living will rise for those who invest in bitcoin, which itself creates a feedback loop as rising purchasing power attracts more capital and producers and savers looking to invest in a scarce and deflationary currency which necessarily takes further bitcoins out of circulation reducing liquidity further driving up the value of bitcoins, and so on, in a virtuous spiral of increasing prosperity… Even though I still consider the Bitcoin ecosystem to be in the currency speculation stage, the ultimate use of Bitcoin will be as a trade settlement vehicle for bartered goods and services, and this is where the next component of the Bitcoin ecosystem comes in, merchants and sellers…

Deflation and Producers

Producers in this instance are people who have produced goods or services and are looking to accept bitcoin in exchange, or merchants or sellers… It would seem the most disappointing aspect of Bitcoin of the last few years was the lack of merchant adoption and people willing to sell their goods and services for bitcoin, but I would posit a few reasons for this and why in my opinion this is about to change… The backdrop of a lack of merchant adoption has been in my opinion the last two years of the declining bitcoin price… Within this seven year secular bull market for Bitcoin and its currency was the manic currency speculation mania of late 2013, the collapse of Mt Gox and a two year secular bear market for the bitcoin currency which collapsed from its all time high of over $1,100 to under $200 and stayed there for months before surging in November 2015 and re-establishing the bull market… Merchants would be quite right to ask what would be the point of accepting a currency as volatile as bitcoin especially one that would keep stripping you of the purchasing power of your savings… The loss of purchasing power of Bitcoin against the relative stability of declining fiat currencies would give absolutely no incentive for anyone to accept bitcoin either alongside or in lieu of fiat money, so that would be my reason for the last two years stagnation in merchant adoption… However the times they are a changing… Bitcoin has tripled in value in the last nine months and a deflationary currency will give an added incentive for sellers and merchants to accept bitcoin as they can now clearly see the benefit of accepting and saving in a deflationary currency… As much as the Bitcoin halvening will be a catalyst for accelerating bitcoin merchant adoption, I believe the far bigger catalyst will be the epic collapse of fiat money and central banking system worldwide, which I have extensively discussed in past posts in the context of death, rebirth, overview, gold, banking, property and law, barter and exchange, credit and currency, and technology… The rapid loss of purchasing power in fiat currencies will translate and perfectly mirror the spiraling increasing purchasing power of bitcoins that will incentivize early adopters and savers to consume and for sellers and merchants to start accepting bitcoin for goods and services for future consumption that will take us from the currency speculation stage to the mass adoption and scaling of the Bitcoin blockchain as a platform for barter of goods and services and that is when you will really see the price start to rocket…

Deflation and Network Development

By network development I mean the general talent, development, coding, programming, venture capital and investment in the bitcoin space, and I while I do believe that investment will still come from the legacy fiat money world as Bitcoin and blockchain’s test uses and utility in various real world applications will increase in the near future, I am talking exclusively here about the bitcoin space… We are talking the very early investors and the first class of bitcoin millionaires and billionaires who have used their new found wealth to fund start up ventures and have contributed a lot of bitcoin capital to further network development fully knowing that the success of bitcoin makes them richer and able to contribute more, and so on… Many of the young very talented people who are funded by bitcoin include core development, coding, programming and employment at many potential applications of this mind bending technology… These will most likely be paid mostly in bitcoin and will save in bitcoin dreaming of becoming the next class of bitcoin millionaires and billionaires so they can devote more capital to building the success that also makes them richer, and so on… It should be clear that the rising value of bitcoin is beneficial for the development of the Bitcoin network and critically funding this network, which will inevitably be catalysed by the Bitcoin halving…

Life In Deflation

Unlike the Central Banking system which is an inflationary system that robs you of purchasing power and leisure and life, Bitcoin is a deflationary system that increases your purchasing power and leisure and life… Deflation contrary to the mainstream “experts” is not evil or impoverishing, but benevolent and enriching and is a completely different mindset for most people to fathom… In a deflationary system you are incentivized to produce and save but when you do decide to consume your purchasing power will be all the higher to do so, which results in higher standards of material living… For a quick example a three per cent deflation per annum (deflation under Bitcoin will be far higher IMO) over a decade would be a thirty percent deflation, in other words your purchasing power would increase by a third in ten years which means you would have to work a third less in a decade to maintain your standard of living… Essential living items that we all require such as food, water, a home and electricity become cheaper over time instead of more expensive… The fact that property values would drop over time make homes and real estate affordable for the young and investments, effectively prohibiting speculation and housing and asset bubbles because you no longer need to speculate, you just have to sit on your money… This is a sound money system of incentivizing life over work, entrepreneurship over bureaucracy, and enrichment over impoverishment…

Deflation Is Decentralizing

The increasing global uproar against the 1% and spiraling inequality is the predictable consequence of Central Bank Quantitative Easing, where those that control the fiat currency printing presses print money enriching themselves at the expense of everyone else… Creating trillions in liquidity to pump up asset values and stock markets works only for those who own these assets and stocks, and doesn’t benefit anyone who doesn’t have them (the 99%), which has been the last seven year cycle in a nutshell… With Bitcoin on the other hand the rising market cap and value of the currency enriches all owners and hodlers of bitcoins equally, today in the thousands and tens of thousands but tomorrow hopefully in the millions and eventually billions… The rising purchasing power of bitcoin will provide and added incentive for savers to more quickly start consuming some of those bitcoins to take advantage of the rapidly increasing purchasing power… They will spend some of their bitcoins and they will pass to those producers who want to sell and save in bitcoins, thus distributing bitcoin ownership and reducing bitcoin inequality… The higher the purchasing power of bitcoin rises the more bitcoin ownership and use becomes decentralized because once you have spent your bitcoins the only way to get some more is by producing and saving them… Rising purchasing power will increase money velocity and contribute to the decentralization of bitcoin ownership and the reduction of bitcoin inequality, which means the enrichment of more holders of currency and the distribution of the ownership of currency… The market at work…

Scaing The Bitcoin Deflation

To give an idea of how Bitcoin could scale I will elaborate with a quote from a previous post, and I quote,

“So let’s do a quick thought experiment; let’s imagine the world population tomorrow switched from using national fiat currencies, to using Bitcoin… The Gross Domestic Product (total value of goods and services exchanged) of the globe today in U.S dollar terms is approximately $70 Trillion ($70,000,000,000,000), so convert that into a potential figure for the Bitcoin ecosystem… There are and can only ever be 21 million (21,000,000) Bitcoins (units of currency), so let’s take that maximum cap and divide 21 million by $70 Trillion… The figure you will get is $3, 333,333.33, three and a third million dollars each, per Bitcoin… Do I need to repeat that? That is one year’s Gross Domestic Product, add another year and a Bitcoin trading today for just over two hundred dollars would be worth six and a half million dollars, with Bitcoin trading at a hundred and forty trillion market cap ($140,000,000,000,000)… That would translate to an annual one hundred percent deflation, otherwise stated your purchasing power DOUBLED in one year… Another year’s GDP sending the Bitcoin market cap to two hundred and ten trillion dollars would mean a single bitcoin trading at ten million dollars would increase your purchasing power by another THIRD, and so on… This does not include any other property, only goods and services exchanged in Bitcoin… Just think about that…

In analogy, think of currency (money) as a bucket into which you pour water and think of this water as the goods and services of a productive economy… The water (goods and services) will always be the same, flowing maybe slower or faster (depending on how despotic the rule), but still flowing into the bucket as any and all Human Action is the creation of wealth… This bucket would over time fill as the standards of living increased for everybody, in other words use of scarce stable money (gold) creating deflation for all… Now here come the central bankers and drill a big hole in the bottom of the bucket covertly, from whence the water is siphoned off by counterfeiting Elites to fund Wars, Welfare and the Centrally Planned corrupted distorted destruction of society; by using Fiat currency you are really funding your own destruction… The water in the bucket drops as more is siphoned off and as society gets ever poorer, until there is no more water, and at that point when the bucket is empty, we collapse; you cannot consume what has not been produced… The Bitcoin bucket has no hole… The more water you pour in, the more the water rises in the bucket as standards of living increase, until that bucket overfloweth for everyone… An intrinsically scarce currency, whether physical OR digital, will increase the living standards of the whole of society, which means less time working and more time at home with the ones you love, which is what life should be about…” End Quote…

Winners And Losers

If Bitcoin scales anywhere near to where I have described above then the people who bought bitcoins in the hundreds today will be the millionaires and billionaires of the next decade, so it should be clear who the winners will be… So who will be the losers? The losers will be those that are outside the Bitcoin ecosystem at least for now, because this is how a deflationary system will destroy an inflationary system, or Bitcoin kills Banking, because of the differing incentive structures… If you look at the world currently then banks and governments are in meltdown everywhere, from Chinese Yuan Devaluation to Japanese Helicopter Money, to the ongoing death of Deutsche Bank and the Italian banks in Europe, to a rapidly collapsing U.S. government, population, and Empire, not to mention South America and Africa… Chaos is all around you, with central bank debt going from zero into negative in a disinflationary wave engulfing the West… To counter debt and deflation central banks are utilizing the only tool they’ve ever known which is to print moar money (Quantitative Easing) and to rob and debase the purchasing power of everyone else’s money… The only way that the colossal debts built up during the inflationary 20th century of Central Banking, War and Welfare can be extinguished is by devaluing production and saving, that is fiat currency devaluations and defaults, which will impact most on people that have savings and pensions and inflated real estate and asset values, so the baby boomers (born post 1945) are about to take a huge hit, along with the extinguishing of the debts of the millennial generation, will force society into a deflationary system… You wake up when your savings have been bailed in or stocks crash and wipe out your pension and this will be an extremely painful time for society in general, but it will force them to seek alternatives to protect their dwindling purchasing power and wealth… This wealth will seek the safety of alternative currencies like gold, silver, and Bitcoin, as we are currently seeing with the Chinese Yuan devaluation that has set a light under the bitcoin price since Christmas, and with banks so inter-connected and inter-dependent in this centralized credit system, this is just the beginning… As the inflationary banking system debases more the more the incentive to move to deflationary systems like Bitcoin creates a positive feedback loop whereas the dropping value of fiat translates into rising bitcoin values, further incentivizing ditching inflationary impoverishment for deflationary enrichment… Strap in, the next months will be a wild ride!

Conclusion

The last four years I have watched Bitcoin and its development as its protocol evolved, its user base slowly increased, watching the applications and the exchanges and the merchants and the trade that is increasingly underpinning this fledgling technology, and the increasing media attention initially in the alternative space but increasingly being witnessed in the mainstream media regarding many diverse applications and crossovers with the legacy world of banks and bureaucratic governments, I was told that the price didn’t matter… All the experts tell me that the price of bitcoin is the least important aspect of this astounding and mind blowing marvel of modern distributed technology, and until recently I would have agreed… But the last few months and the ramp up in dying fiat of the value of bitcoin in anticipating of the halving has brought the currency and its value to centre stage in my mind… The halving is a material tightening and this happens only every four years, so this is a big moment in the evolution of Bitcoin… The deflationary and predictably tightening scarce currency is the centrepiece of Satoshi’s brainchild and must be among the greatest inventions in human history, and it has a lot further up to travel… Deflation because of its nature will destroy inflation, banking and ponzi financing so as the currency increases so does the purchasing power of those that are involved in bitcoin, from miners to savers to consumers to merchants to network development and capital investment in so many diverse applications… The purchasing power of bitcoin in short is the mirror image of the purchasing power of fiat national currencies, and Bitcoin isn’t half as easy to manipulate as the fractional reserve ponzi dressed as the precious metals markets! Bitcoin is a canary in the coal mine, and will continue to sing out loud as our current banking system breaks… The world has never been on a fiat money standard before in human history with no link to precious metals and for the last forty five years of inflationary insanity that has destroyed individual, family and society, but that system is now imploding… This is also the first time in history we have had a decentralized open source ledger and sound currency that can do the banks and governments job without the force or the wars or the social engineering or the impoverishment, and will do it virtually for FREE and will also make you richer, more independent and freer over time! The weakness and implosion of the old system is the strength and explosion of the new system, and the world needs Bitcoin sooo much right now… Paving the road to mass adoption begins with the price… We need a higher bitcoin price… Watch China and the Yuan…

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