6 ms·

The Bitcoin Halving, Explained

30 points by abhayaluri 6y ago

While governments around the world are using quantitative easing to print money, Bitcoin is set to undergo quantitative tightening. The Halving reduces the reward that miners receive for confirming transactions on the Bitcoin blockchain, and subsequently, Bitcoin's rate of supply will be cut in half. Here's a deep dive I wrote on what the Halving is, and why it matters: https://medium.com/ryze-crypto-digest/the-bitcoin-halving-explained-d1dd1c7833f0

dang 6y ago
Posts without URLs get penalized, so I made your link be the submission. If you want to say something else about the article, the place to do that is as a comment in the thread.
remmargorp64 6y ago
Essentially, Bitcoin is a Ponzi scheme with deflation built into the algorithm so that scarcity is artificially created over time to maintain the illusion of value.
- abstractbarista 6y ago
  How do you feel about the Dollar in comparison? It appears to me that one constantly devalues the units held, like an invisible tax on the poor, while the other appreciates.
  - wmf 6y ago
    Poor people are supposed to benefit from inflation because their debts can be paid back with money that's worth less. Meanwhile savers are supposed to use investments, not cash.
  - naniwaduni 6y ago
    Keep in mind that the poor hold fewer units; this is almost, only subtly different from, the definition of poor. In fact, the poor often hold negative units, in the form of debt.
  - remmargorp64 6y ago
    The US Dollar can be adjusted as needed, according to the needs of society (such as population growth and economic expansion). It's backed by the force of an entire military, and is also backed by an interconnected mesh of dependencies across an entire global economy. If the US government fails so spectacularly that the US Dollar loses value, do you honestly think that the internet will even be working at that point? And without functioning internet, there won't be anyone mining bitcoin, which means that control of the blockchain will be easily seized by whoever has control of the largest mining pool. This would very quickly result in complete devaluation of Bitcoin (but not before whoever took control would be able to cash in a LOT of money). If we had truly decentralized peer-to-peer internet (think ham radio over mesh with millions of portable devices or something) with truly peer-to-peer DNS and full encryption, and no centralized control, then MAYBE bitcoin might have a chance if the government collapsed. But we don't. So (at least for now), the idea that Bitcoin would function as a viable currency in that scenario is a giant joke. It's true that the US Dollar is inflationary (while Bitcoin is "deflationary"), but that is by design to drive economic growth. Simulations (and history) have shown that with a slightly inflationary economy, people are more likely to spend their money instead of holding onto it. This causes a constant cycle of spending and earning, driving more goods to be created, and causing more people to do more work. Deflationary economies, on the other hand, often result with the economy stagnating (because people are more inclined to just hold onto their money instead of spending it). You could argue that this is better (because people like the idea of their money gaining in value over time), but to make that argument, you would have to prove that economic growth is a bad thing.
    - xur17 6y ago
      Alternatively, perhaps Bitcoin is just another payments system with a different set of tradeoffs. Namely - it has a preset supply schedule that you can easily see, which won't be affected by political whims, or change at a moment's notice.
      - remmargorp64 6y ago
        Sure, and the same could be said about practically every other crypto-currency. As to the idea that it isn't subject to whims or political stability, I would argue that one merely has to look at the history of Bitcoin's price to prove that statement is false. Bitcoin's price is highly reactive to political news and random whims of the market (as well as manipulation by bad actors). I'm not saying that crypto-currency doesn't have its place. I'm just pointing out that a lot of the fundamental principles that people swear by when it comes to Bitcoin are flawed.
- scared2 6y ago
  I wouldn't call it Ponzi scheme. But I totally agree that it is an algorithm built to mimic scarcity and deflation.
  - remmargorp64 6y ago
    A common theme with Ponzi schemes is that the people at the beginning who created the scheme (or who invested in it earliest) benefit greatly by future people buying into the scheme. Bitcoin started with its value essentially at nothing, and the early "investors" were able to create tons of it out of thin air. Provided they held onto that Bitcoin, the "value" of the "currency" only increased as more and more people bought into the notion that it had value. You can see how this would heavily incentivize early investors/miners/buyers to perpetuate the scheme. Many early "investors" in Bitcoin made millions of dollars off of their gambles. I personally know quite a few of those people. I hate to pull the wool away from your eyes, but that's not a deflationary, stable currency. That's a Ponzi scheme.
    - chemmail 6y ago
      Except the creator(s) have not cashed out even when they hit $20 billion USD. What are they waiting for? $200 billion USD?
      - robjan 6y ago
        We don't even know if the creator is alive
      - remmargorp64 6y ago
        Even though the original creators haven't cashed out, there are many other early adopters who have
    - andirk 6y ago
      "A common theme with Ponzi schemes is that the people at the beginning who created the scheme (or who invested in it earliest) benefit greatly by future people buying into the scheme." You can make this argument for any created product, especially any currency. "out of thin air" Yes. That is currently how most currencies work.
- deleted 6y ago
  [deleted]
- panarky 6y ago
  Are we destined to spend the next 10 years endlessly rehashing the same stale arguments of the last 10 years? First we'll debate if Bitcoin is a Ponzi scam. Next it'll be whether there's any non-criminal use case. Then how it's not "real money". Please, won't some very intelligent dude please educate us all about Dutch tulips?
  - wmf 6y ago
    This is inherent to the structure of HN. Fix the system, fix the discussion.
    - remmargorp64 6y ago
      How would you fix it? I see the constant rehashing as a byproduct of the fact that the same old topics get reposted over and over again as they resurge in relevance. I see this as a byproduct of crowd consciousness. Not everyone is going to see a post before it dips out of sight, so it's bound to pop back up again eventually (if it becomes relevant again), and then new people will see the second/third/fourth postings. As such, the same rebuttals have to be posted over and over again, so that the new audience has contextual information. It's not an easy problem to solve.
      - wmf 6y ago
        Threads don't have to start with a blank page. There should be a way to surface background context.
        remmargorp64 6y ago
        That's not a bad idea, but you would need to have some mechanism to prevent popular (but now irrelevant) information from previous posts from immediately overwhelming the new context.
      - panarky 6y ago
        Perhaps it's a variant of Eternal September https://en.wikipedia.org/wiki/Eternal_September https://en.wikipedia.org/wiki/Eternal_September
nrclark 6y ago
Doesn't Bitcoin need miners in order to continue to exist? Why would it possibly make sense to drive the reward for mining down to 0 asymptotically? At the end of that curve, doesn't Bitcoin cease to exist because it can't be spent?
- xur17 6y ago
  Miners also receive transaction fees.
  - abstractbarista 6y ago
    This is a crucial point. The idea with BTC is that as the block reward decreases over time, transaction volume (and therefore fee collection) would increase. This requires the network to be used more over time, which does appear to be happening.
    - wmf 6y ago
      Given that transaction volume is capped, fees may be very very high in the future.
      - xur17 6y ago
        There are several systems that would allow users to essentially batch settle (ex: lightning network), at which point fees could presumably rise significantly.
Animats 6y ago
Short version: Bitcoin block reward halves every 4 years. Next halving is this May. Much speculation over whether the price will go up or down. Profits to miners decrease 50% if price stays the same.
- lend000 6y ago
  > Profits to miners decrease 50% if price stays the same. Nit: Revenue to miners decreases 50% if price stays the same.
  - Animats 6y ago
    Right. The cost of hardware and power is substantial.
scottmsul 6y ago
I think the stock to flow model is a little silly. S2F and price are both coincidentally exponential, it's like the old pirates vs global warming joke. That being said I do believe there's a chance the halvening isn't fully priced in since this will fundamentally disrupt the amount of sell volume.
lolc 6y ago
This paragraph neatly sums up the "gold" myths of Bitcoin: > This means that things that are hard to create, and whose creation can’t be faked, have value. Bitcoin, like gold and other precious metals, has both of these properties. Mining Bitcoin requires large amounts of electricity and computational power. In fact, the Bitcoin network uses a similar amount of energy every year as the entire country of Venezuela. Actually a distributed ledger is not the same as a rare metal: 1. Unlike gold, Bitcoin can cease to exist. If nobody keeps the blockchain alive, it doesn't exist any more. Try to make gold disappear from the ground! 2. Unlike gold, the operators can decide to increase supply. Or reduce it. By orders of magnitude. It's a code change. Try that with gold. 3. Forks are abundant. Good luck trying to invent a new element. 4. The economical benefit of Bitcoins is much too small to explain the energy use. It can't even keep up with the transaction count of a small town. The energy expenses can only be justified by expected future return. This is actually where Bitcoin is somewhat comparable to gold as a valuable. It's just that gold actually has real-world uses besides acting as currency. So we know the price for gold won't go to zero. Unless of course we find ways to defy our current physics!
- deweller 6y ago
  I'll provide counter arguments to these statements. > 1. Unlike gold, Bitcoin can cease to exist. If nobody keeps the blockchain alive, it doesn't exist any more. Try to make gold disappear from the ground! To kill the blockchain, one would have to destroy every single copy. Try finding all of the thousands of copies of the blockchain archives around the world and make them disappear. > 2. Unlike gold, the operators can decide to increase supply. Or reduce it. By orders of magnitude. It's a code change. Try that with gold. The "operators" cannot arbitrarily decide to increase supply. It would require a coordinated effort by developers, miners, exchanges and other node operators. As past attempts to hardfork the bitcoin blockchain have shown, this is extraordinarily difficult. The value of gold can theoretically be decreased by orders of magnitude which is effectively the same thing as increasing supply. Through a coordinated effort by buyers and sellers the value of gold could decrease 10x tomorrow. This is also extraordinarily difficult. > 3. Forks are abundant. Good luck trying to invent a new element. Yes. Bitcoin is different than gold in this respect. I would argue this is one of the advantages that digital currency has over a physical currency. Forks encourage innovation. A fork of Bitcoin does not affect the main chain. > 4. The economical benefit of Bitcoins is much too small to explain the energy use. It can't even keep up with the transaction count of a small town. The energy expenses can only be justified by expected future return. This is actually where Bitcoin is somewhat comparable to gold as a valuable. It's just that gold actually has real-world uses besides acting as currency. So we know the price for gold won't go to zero. Unless of course we find ways to defy our current physics! The market disagrees with your first statement. If there is no real economic benefit to Bitcoin, then the market has been operating irrationally for many years. While this is possible, it is becoming increasingly difficult to justify a conclusion that the market is irrational. Bitcoin also has "real-world" uses besides currency. There are timestamping functions and tokenization protocols that provide a benefit beyond currency. These are all digital uses, but very real.
tromp 6y ago
> Like gold, Bitcoin has a fixed supply. Gold may have a finite supply, but it's been mined for millenia and has slowly increased its supply rate over time, and will likely continue to do so in our lifetime. In contrast, Bitcoin's emission which ranges from 2009 through 2140 is heavily tilted to the first few years. Its final century from 2040 through 2140 accounts for only about 0.5% of emission. The only point of the halvings is to be able to claim "finite supply". A constant reward would still have the yearly supply inflation rate (stock to flow ratio) going to 0, albeit more slowly. So crucially, supply would still be scarce, would be more predictable (time independent), more fair to late adopters, and be much closer to Gold's emission over our lifetime. It would also avoid the inherent instability [1] of mining rewards dominated by transaction fees. If we further consider the fact that coins inevitably get lost, then even a constant reward will yield a softcap of supply, where yearly emission merely serves to balance the yearly losses. Unfortunately, practically all cryptocurrencies subscribe to the notion that early miners must receive greater rewards, even when they often already enjoy lower difficulty. [1] https://www.cs.princeton.edu/~arvindn/publications/mining_CCS.pdf https://www.cs.princeton.edu/~arvindn/publications/mining_CC...

30 points by abhayaluri 6y ago

dang 6y ago

Posts without URLs get penalized, so I made your link be the submission. If you want to say something else about the article, the place to do that is as a comment in the thread.

remmargorp64 6y ago

Essentially, Bitcoin is a Ponzi scheme with deflation built into the algorithm so that scarcity is artificially created over time to maintain the illusion of value.

abstractbarista 6y ago
How do you feel about the Dollar in comparison? It appears to me that one constantly devalues the units held, like an invisible tax on the poor, while the other appreciates.
- wmf 6y ago
  Poor people are supposed to benefit from inflation because their debts can be paid back with money that's worth less. Meanwhile savers are supposed to use investments, not cash.
- naniwaduni 6y ago
  Keep in mind that the poor hold fewer units; this is almost, only subtly different from, the definition of poor. In fact, the poor often hold negative units, in the form of debt.
- remmargorp64 6y ago
  The US Dollar can be adjusted as needed, according to the needs of society (such as population growth and economic expansion). It's backed by the force of an entire military, and is also backed by an interconnected mesh of dependencies across an entire global economy. If the US government fails so spectacularly that the US Dollar loses value, do you honestly think that the internet will even be working at that point? And without functioning internet, there won't be anyone mining bitcoin, which means that control of the blockchain will be easily seized by whoever has control of the largest mining pool. This would very quickly result in complete devaluation of Bitcoin (but not before whoever took control would be able to cash in a LOT of money). If we had truly decentralized peer-to-peer internet (think ham radio over mesh with millions of portable devices or something) with truly peer-to-peer DNS and full encryption, and no centralized control, then MAYBE bitcoin might have a chance if the government collapsed. But we don't. So (at least for now), the idea that Bitcoin would function as a viable currency in that scenario is a giant joke. It's true that the US Dollar is inflationary (while Bitcoin is "deflationary"), but that is by design to drive economic growth. Simulations (and history) have shown that with a slightly inflationary economy, people are more likely to spend their money instead of holding onto it. This causes a constant cycle of spending and earning, driving more goods to be created, and causing more people to do more work. Deflationary economies, on the other hand, often result with the economy stagnating (because people are more inclined to just hold onto their money instead of spending it). You could argue that this is better (because people like the idea of their money gaining in value over time), but to make that argument, you would have to prove that economic growth is a bad thing.
  - xur17 6y ago
    Alternatively, perhaps Bitcoin is just another payments system with a different set of tradeoffs. Namely - it has a preset supply schedule that you can easily see, which won't be affected by political whims, or change at a moment's notice.
    - remmargorp64 6y ago
      Sure, and the same could be said about practically every other crypto-currency. As to the idea that it isn't subject to whims or political stability, I would argue that one merely has to look at the history of Bitcoin's price to prove that statement is false. Bitcoin's price is highly reactive to political news and random whims of the market (as well as manipulation by bad actors). I'm not saying that crypto-currency doesn't have its place. I'm just pointing out that a lot of the fundamental principles that people swear by when it comes to Bitcoin are flawed.
scared2 6y ago
I wouldn't call it Ponzi scheme. But I totally agree that it is an algorithm built to mimic scarcity and deflation.
- remmargorp64 6y ago
  A common theme with Ponzi schemes is that the people at the beginning who created the scheme (or who invested in it earliest) benefit greatly by future people buying into the scheme. Bitcoin started with its value essentially at nothing, and the early "investors" were able to create tons of it out of thin air. Provided they held onto that Bitcoin, the "value" of the "currency" only increased as more and more people bought into the notion that it had value. You can see how this would heavily incentivize early investors/miners/buyers to perpetuate the scheme. Many early "investors" in Bitcoin made millions of dollars off of their gambles. I personally know quite a few of those people. I hate to pull the wool away from your eyes, but that's not a deflationary, stable currency. That's a Ponzi scheme.
  - chemmail 6y ago
    Except the creator(s) have not cashed out even when they hit $20 billion USD. What are they waiting for? $200 billion USD?
    - robjan 6y ago
      We don't even know if the creator is alive
    - remmargorp64 6y ago
      Even though the original creators haven't cashed out, there are many other early adopters who have
  - andirk 6y ago
    "A common theme with Ponzi schemes is that the people at the beginning who created the scheme (or who invested in it earliest) benefit greatly by future people buying into the scheme." You can make this argument for any created product, especially any currency. "out of thin air" Yes. That is currently how most currencies work.
deleted 6y ago
[deleted]
panarky 6y ago
Are we destined to spend the next 10 years endlessly rehashing the same stale arguments of the last 10 years? First we'll debate if Bitcoin is a Ponzi scam. Next it'll be whether there's any non-criminal use case. Then how it's not "real money". Please, won't some very intelligent dude please educate us all about Dutch tulips?
- wmf 6y ago
  This is inherent to the structure of HN. Fix the system, fix the discussion.
  - remmargorp64 6y ago
    How would you fix it? I see the constant rehashing as a byproduct of the fact that the same old topics get reposted over and over again as they resurge in relevance. I see this as a byproduct of crowd consciousness. Not everyone is going to see a post before it dips out of sight, so it's bound to pop back up again eventually (if it becomes relevant again), and then new people will see the second/third/fourth postings. As such, the same rebuttals have to be posted over and over again, so that the new audience has contextual information. It's not an easy problem to solve.
    - wmf 6y ago
      Threads don't have to start with a blank page. There should be a way to surface background context.
      - remmargorp64 6y ago
        That's not a bad idea, but you would need to have some mechanism to prevent popular (but now irrelevant) information from previous posts from immediately overwhelming the new context.
    - panarky 6y ago
      Perhaps it's a variant of Eternal September https://en.wikipedia.org/wiki/Eternal_September https://en.wikipedia.org/wiki/Eternal_September

nrclark 6y ago

Doesn't Bitcoin need miners in order to continue to exist? Why would it possibly make sense to drive the reward for mining down to 0 asymptotically? At the end of that curve, doesn't Bitcoin cease to exist because it can't be spent?

xur17 6y ago
Miners also receive transaction fees.
- abstractbarista 6y ago
  This is a crucial point. The idea with BTC is that as the block reward decreases over time, transaction volume (and therefore fee collection) would increase. This requires the network to be used more over time, which does appear to be happening.
  - wmf 6y ago
    Given that transaction volume is capped, fees may be very very high in the future.
    - xur17 6y ago
      There are several systems that would allow users to essentially batch settle (ex: lightning network), at which point fees could presumably rise significantly.

Animats 6y ago

Short version: Bitcoin block reward halves every 4 years. Next halving is this May. Much speculation over whether the price will go up or down. Profits to miners decrease 50% if price stays the same.

lend000 6y ago
> Profits to miners decrease 50% if price stays the same. Nit: Revenue to miners decreases 50% if price stays the same.
- Animats 6y ago
  Right. The cost of hardware and power is substantial.

scottmsul 6y ago

I think the stock to flow model is a little silly. S2F and price are both coincidentally exponential, it's like the old pirates vs global warming joke. That being said I do believe there's a chance the halvening isn't fully priced in since this will fundamentally disrupt the amount of sell volume.

lolc 6y ago

This paragraph neatly sums up the "gold" myths of Bitcoin: > This means that things that are hard to create, and whose creation can’t be faked, have value. Bitcoin, like gold and other precious metals, has both of these properties. Mining Bitcoin requires large amounts of electricity and computational power. In fact, the Bitcoin network uses a similar amount of energy every year as the entire country of Venezuela. Actually a distributed ledger is not the same as a rare metal: 1. Unlike gold, Bitcoin can cease to exist. If nobody keeps the blockchain alive, it doesn't exist any more. Try to make gold disappear from the ground! 2. Unlike gold, the operators can decide to increase supply. Or reduce it. By orders of magnitude. It's a code change. Try that with gold. 3. Forks are abundant. Good luck trying to invent a new element. 4. The economical benefit of Bitcoins is much too small to explain the energy use. It can't even keep up with the transaction count of a small town. The energy expenses can only be justified by expected future return. This is actually where Bitcoin is somewhat comparable to gold as a valuable. It's just that gold actually has real-world uses besides acting as currency. So we know the price for gold won't go to zero. Unless of course we find ways to defy our current physics!

deweller 6y ago
I'll provide counter arguments to these statements. > 1. Unlike gold, Bitcoin can cease to exist. If nobody keeps the blockchain alive, it doesn't exist any more. Try to make gold disappear from the ground! To kill the blockchain, one would have to destroy every single copy. Try finding all of the thousands of copies of the blockchain archives around the world and make them disappear. > 2. Unlike gold, the operators can decide to increase supply. Or reduce it. By orders of magnitude. It's a code change. Try that with gold. The "operators" cannot arbitrarily decide to increase supply. It would require a coordinated effort by developers, miners, exchanges and other node operators. As past attempts to hardfork the bitcoin blockchain have shown, this is extraordinarily difficult. The value of gold can theoretically be decreased by orders of magnitude which is effectively the same thing as increasing supply. Through a coordinated effort by buyers and sellers the value of gold could decrease 10x tomorrow. This is also extraordinarily difficult. > 3. Forks are abundant. Good luck trying to invent a new element. Yes. Bitcoin is different than gold in this respect. I would argue this is one of the advantages that digital currency has over a physical currency. Forks encourage innovation. A fork of Bitcoin does not affect the main chain. > 4. The economical benefit of Bitcoins is much too small to explain the energy use. It can't even keep up with the transaction count of a small town. The energy expenses can only be justified by expected future return. This is actually where Bitcoin is somewhat comparable to gold as a valuable. It's just that gold actually has real-world uses besides acting as currency. So we know the price for gold won't go to zero. Unless of course we find ways to defy our current physics! The market disagrees with your first statement. If there is no real economic benefit to Bitcoin, then the market has been operating irrationally for many years. While this is possible, it is becoming increasingly difficult to justify a conclusion that the market is irrational. Bitcoin also has "real-world" uses besides currency. There are timestamping functions and tokenization protocols that provide a benefit beyond currency. These are all digital uses, but very real.

tromp 6y ago

> Like gold, Bitcoin has a fixed supply. Gold may have a finite supply, but it's been mined for millenia and has slowly increased its supply rate over time, and will likely continue to do so in our lifetime. In contrast, Bitcoin's emission which ranges from 2009 through 2140 is heavily tilted to the first few years. Its final century from 2040 through 2140 accounts for only about 0.5% of emission. The only point of the halvings is to be able to claim "finite supply". A constant reward would still have the yearly supply inflation rate (stock to flow ratio) going to 0, albeit more slowly. So crucially, supply would still be scarce, would be more predictable (time independent), more fair to late adopters, and be much closer to Gold's emission over our lifetime. It would also avoid the inherent instability [1] of mining rewards dominated by transaction fees. If we further consider the fact that coins inevitably get lost, then even a constant reward will yield a softcap of supply, where yearly emission merely serves to balance the yearly losses. Unfortunately, practically all cryptocurrencies subscribe to the notion that early miners must receive greater rewards, even when they often already enjoy lower difficulty. [1] https://www.cs.princeton.edu/~arvindn/publications/mining_CCS.pdf https://www.cs.princeton.edu/~arvindn/publications/mining_CC...