Everything you need to know about the next Bitcoin Halving 2024: Economics, Regulations and its impact on BTC price

Once every four years, the supply of Bitcoin get slashed by half, thanks to the bitcoin network that Mr. Satoshi Nakamoto designed. And every time after this time, we see a surge in demand for bitcoin. Both on Google search, and on crypto stock exchanges.?

But this time, it may just be different.

So this week, do a deep dive into the economics of Bitcoin, Understand how bitcoins are mined, What happens when all 21 million bitcoins are mined, the math behind how to price bitcoin, and why its different this time.?

So grab your cup of strong coffee, because this one is going to be detailed!

P.S.: I am now also on substack, and if you want to get the fintech scoop a day earlier, head over here.

Bitcoin Halving April 2024 TL;DR

Not everyone has 15 minutes to read a big mathematical dissection on bitcoin halving. So for those of you in a hurry here are 2 ways you can catch up:

Or, here is the mother of TL;DR all of these things :)

• Once every 4 years the reward for mining new Bitcoin blocks is cut in half, in an event knows as Bitcoin halving
• Previous halving occurred in 2012 (reward dropped from 50 to 25 BTC), 2016 (25 to 12.5 BTC), and 2020 (12.5 to 6.25 BTC)
• A year after the first bitcoin halving in 2012, Bitcoin price surged by 9308% going from $13 to $1,152. 2016 saw a 2861% rise, and 2020, amidst increased regulatory scrutiny witnessed 620% increase, leading to new all time highs?
• This time, bitcoin is at an all time high already, leading to some economist to believe that the impact of the halving is already baked into BTCs price
• The other reason could be due to increasing institutional demand, due to regulatory clarity, with the authorisation of several Bitcoin spot ETFs, development of Bitcoin's Lightning Network and layer-2 scaling solutions
• But the math behind BTC pricing says the price would be around $67,000 to $98,000, meaning a spike of 135% only
• Why we could risk re-centralisatio after all 21 million bitcoins are mined

Brief history of Bitcoin

Bitcoin was developed in 2008 by the pseudonymous Satoshi Nakamoto, who published a white paper describing a peer-to-peer electronic cash system. The first Bitcoin was open sourced in 2009, allowing users to mine and transact bitcoins without a central authority like a bank or government.

The primary purpose behind Bitcoin's creation was

1. Establish a decentralized digital currency that enables secure peer-to-peer transactions without intermediaries.
2. Provide an alternative to traditional fiat currencies controlled by central banks and governments.
3. Solve for the problem of double spending in digital money

Since then, it has been adopted by close to about 65 million wallets holding some Bitcoin, with atleast 1 million of them holding 1 whole bitcoin.

Oh, did I forget to mention, 1 Bitcoin can be split into a 100 million Sats, making it so infinitesimally small, that even Neil Bohr would've been proud of it.

How was it designed to solve for double spending

I was once at a conference, where the speaker was talking about not building technology for techs sake. And the example he gave was that of Bitcoin.?

While I exhibited a lot of self constraint at that event, today, I don't aim to do that. Becuase a big problem that bitcoin was designed to solvve for was that of double spending.?

What do I mean?

First, lets understand double spending. It is the act of spending the same?digital token?more than once in a digital transaction, leading to inflation, currency devaluation, diminishing user trust and circulation of said token.?

Basically, most of what you see going on in the US today.?

Bitcoin made use of a public ledger system aka Blockchain, and updating it would require you to submit your "proof of work".?

Let's zoom in a little more here. And pay close attention, because this is the most vital part of this entire newsletter.?

All Bitcoin transactions are recorded on a public, distributed ledger called the blockchain. This ledger is maintained and updated by a decentralized network of nodes (miners) around the world. When a user wants to send bitcoins, the transaction is broadcast to the entire Bitcoin network. All nodes receive and validate the transaction against their copy of the blockchain to ensure the sender has sufficient funds and has not already spent those coins.

New transactions are organized into blocks, and Bitcoin miners? compete to crack a computationally intense cryptographic puzzle (also known as proof-of-work) in order to add the next block to the blockchain. The miner who successfully cracks the puzzle first and broadcasts the new block to the network is given newly minted bitcoins as a reward. (this again depends on the Bitcoin halving, like after April 2024 it will 6.25 Bitcoins per new block)

If two miners crack the proof-of-work puzzle at the same time, the network will follow the longest chain of blocks as the legitimate one. This creates a significant challenge for any potential attacker looking to double-spend coins, as they would require more than 51% of the network's computing power to consistently beat honest miners.

As more blocks are added on top of a transaction, it becomes increasingly difficult and computationally expensive to reverse or double-spend those coins. Most services and wallets require a certain number of confirmations (e.g., 6 blocks) before considering a transaction as final and irreversible.

Why are there only 21 Million Bitcoins?

In? my opinion, there are really 2 answers to this question. One is purely for the joy of a mathematics lover, the other is more economics oriented.?

And because its my newsletter, it has to be the math explanation that triumphs.?

First, is the geometrics progression that is the block rewards:

total rewards = 50+25+12.5+6.25+3.125........

Which sums up to 100. Remember your geometric progression classes from class 9th ?

Next, after ever 210,000 blocks are added the block rewards half. So the bitcoins mined to date till the next halving in April 2024 would be=

?(210,000 50) + (210,000 25) + (210,000 12.5) + (210,000 6.25) + (Current Blocks Mined * 3.125)

roughly 19,687,500 bitcoins.

But, if we had to write an integral function for this it would look some like:

∫(210000 50 ? (0.5)^n

where n varies from 0 to ∞. Bringing the total value to = 21 Million!?

But why did Satoshi nakamoto fix it at 210,000 blocks? He could've made it 420,000 blocks, then we would have had yet another deeply profound question answer at a 42 (million, unlike the Hitchhiker's Galaxy)

This is where the economics of it comes in my opinion.?

You see, back in 2008, when Satoshi San was toying with this idea, there were about 4 trillion USD in circulation gloablly, and a straight line projection to the next 50 years pegs it at 21000 trillion USD in circulation.?

And that is roughly how many Sats there would be then.?

Proof of work and role played by Bitcoin Miners

So, now that we have gone through that entire lecture, this question? must be pretty self explanatory right? Still, lets break down the function of miners into 3 categories:

1. Network Security: By expending significant computational resources to mine new blocks, miners secure the Bitcoin network against potential attacks or attempts to rewrite the blockchain history.
2. Transaction Validation: Miners collect pending transactions that have been broadcast to the Bitcoin network and verify them against the consensus rules.
3. Block Creation and adding to the Blockchain: After validating a set of transactions, miners compete against each other to solve a computationally intensive cryptographic puzzle, known as the "proof-of-work" problem.

What happens during a Bitcoin Halving?

Now, one of the questions that kept nagging me since 2020 was what happens to miners after a halving?

Theoretically, the rewards for you effort have halved, while the computational power required doubled. So small miners would ostensibly be losing out, because they'd no longer be able to submit their proof of work results as fast.?

I found some anecdotal evidence that small miners, after the 2016 halving were forced to move out, becuase they were no longer able to recoup their operational costs.?

But, an interesting phenomena starting playing out in 2020, where small miners started forming pools, and then these pools would form a node large enough to try competing against mining farms!?

What if we mine all 21 million bitcoins?

So once we mine all bitcoins, the network will collapse right? Because miners will no longer be incentivized to verify transactions? That's what I would think to, until I realised that there is also a transactional fee component associated with verifying transactions.?

So, the mining farms, thanks to their size will stay put. But small miners?

I already see a lot of miners retrofitting their equipments, to help with training large language model.? And to me that is a high risk scenario, because that could result in the concentration of power in the hands of few. Meaning, re-centralisation.?

How can we price bitcoin?

And though theoretically then it is feasible that the node collude to increase the number of bitcoin supply, I do not believe any one would be incentivised to do so. Becuase of the pricing power that being anti inflationary brings to bitcoin.

And there were 3 good ways I understood to price bitcoin fundamentally.

Laws of Demand and Supply

now, 2 things are happening. With Bitcoin ETFs instituitional demand which was zero thus far, ahs increased. And with the halving supply of new bitcoin will halve.

Resulting in price rise ? But by how much ? lets look at Metcalfe's law for that quantitative answer

Metcalfe law of Bitcoin price

Metcalfe's law states that the value of a network is proportional to the square of the number of nodes (users) in the network.

V = k * n^2

where K is a constant factor.?

And for bitcoin basis past price action and miners int he network it comes out to be:

Market Cap of bitcoin = 1.51 * (Number of Active Addresses)^1.69

So, going by similar growth trajectories of active crypto wallets with bitcoin in them post a halving event, I'd peg the value to be around $97,000 by the year end.?

But what is the downside to the price?

Price to create one bitcoin

Yet another way would be the bottom up pricing model, that most manufacturers use.

Price = cost to produce the goods * markup?

Now, Cambridge university had a very interesting study on this. Where they found that in a year, Bitcoin miners consumed 89 Tera watts of electricity.?

We already know that 1 block is added roughly every 10 minutes, and that current block rewards is 6.25 blocks. So, 6.25 bitcoin per 10 minutes, equates to 1 Bitcoin in 1.6 minutes, or 96 seconds.?

Now how many 96 seconds are there in a year ? 328,500 such 96 seconds. Or 328,500 bitcoins.?

1 KW hour of electrictiy costs, $0.15. So, roughly one bitcoin costs $42,000 to produce. And this is just the variable costs alone.

Adding even a 50% markup, makes it around $63,000 which is the price it is trading at today.?

Impact of Halving on Bitcoin Price

The halving would possibly result in large bitcoin farming mines consuming twice as much power. But a lot of small miners will wrap up.?

And large farms have been moving to scandinavian countries where the environment is naturally cool, allowing for lesser energy consumed.?

First halving and BTC price movement

However, what most bitcoin experts will tell you, is that even at the same demand levels bitcoin price will double, becuase supply has halved.

While the first halving in 2012, that is what happened, where within the first 2 months of the halving price of bitcoin doubled, and by year end it was 2861% more. (Remember the famous bitcoin pizza day ?)?

?2024 Bitcoin Halving is different

But this time is very different.?

One because of institutional demand through Bitcoin ETFs, and regulatory clarity, the price of bitcoin has already reached it all time high.? Also, I am sure analysts in this Grayscale and Fidelity and the likes, I feel the halving price has already been baked in. I mean what else explains the price being close to the Prodcution Cost+markup of bitcoin ? So, yes just basis demand, I don't feel bitcoin price will go up after halving.

But there is another factor to take into consideration.

Lightning network and Bitcoin Adoption

The Lightning Network is a layer 2 solution for the Bitcoin blockchain with the main goal of resolving scalability problems. Additionally, it enables quicker and more cost-effective transactions by enabling off-chain payments through a system of payment channels. By moving a significant portion of transactions off-chain, the Lightning Network helps alleviate congestion on the Bitcoin blockchain, reducing overall transaction fees and wait times, which can further boost adoption.

This, coupled with Bitcoin Ordinals, Means that there is a, economics backed use case for Bitcoin beyond just the currency of the internet, and store of value argument. Bu how this impacts price, at this point is more art than science!

Price Prediction for the April 2024 Bitcoin Halving

So, there you have it. As per The Fintech Chronicler's back of the envelope math, the price of bitcoin will range from $48,000 to $97,000 this year. And the next halving of 2028 will see it go up to $276,000.? Next week we shall cover the latest Fintech report, which pegs the marketcap at ~$400 billion by 2029.?