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Bitcoin’s price is on the move, thanks to new ETFs. And thanks to the ‘halving’ just around the corner, speculation about its future price is on the move, too. The halving makes for a good show.
It also reveals bitcoin’s value proposition, and what sets it apart from both traditional money and other cryptocurrencies: it is a monetary system with rules but no rulers.
I spoke to Craig Warmke, co-author of Resistance Money: A Philosophical Case for Bitcoin to understand in detail the madness around Bitcoin halving. Warmke is a Bitcoin Policy Institute Fellow and Associate Professor of Philosophy at Northern Illinois University.
On how the Bitcoin network works
The rules ensure that about every ten minutes, the Bitcoin network rewards miners for publishing a block of transactions.
The reward in each block declines over time. But that decline isn’t gradual. Bitcoin’s code instead contains something dramatic: every four years, the block reward halves.
Before the first halving, miners earned 50 fresh bitcoin per block. For the last four years, each block netted 6.25 bitcoin. Upon this fourth halving, at block 840,001, the reward drops to 3.125.
Like a solar eclipse, halvings are dramatic, rare, and entirely predictable. Although miners suddenly lose half their revenue, none will be caught by surprise. Bitcoin’s monetary policy was encoded fifteen years ago. It specifies the issuance schedule for the rest of the time.
We can roughly calculate the dates of future halvings through the year 2140—when bitcoin’s supply approaches its 21 million cap and issuance ceases forever.
On difference from the traditional monetary policy understanding
Bitcoin’s predictable policy contrasts starkly with traditional monetary policies, which emerge from small groups of people responding to fluctuating economic indicators. Consider traditional currencies and their central bank managers.
Officials print money or influence interest rates to stimulate or crimp new money creation. When things go well, these levers of control achieve price stability. With a stably priced currency, a basket of goods and services continues to cost about the same.
That’s good for planning, borrowing, and lending, and the economy overall. But when things go poorly, the levers of central banks cause the very sorts of problems they were designed to solve.
Think of currency crises in Venezuela or Zimbabwe where life savings evaporate overnight. Recently, Lebanese central bankers printed money right into their own pockets at everyone else’s expense. By and large, non-bitcoin cryptocurrencies have decisions behind the curtains, too.
Their boards and foundations often modify issuance schedules and other aspects of monetary policy. Like central bankers, these deciders have the tinkerer’s mindset.
Sometimes, this goes poorly, as when the tinkerer introduces software bugs. Hackers happily exploit them and steal user funds. Sometimes, tinkering improves the investment thesis for asset holders. In August 2021, for example, ethereum restricted its issuance.
That benefitted holders—especially the founders who had awarded themselves free tokens at the network launch.
On what’s so unique about Bitcoin
Bitcoin awarded no free tokens at network launch—its creator had to earn bitcoin through mining like anyone else. The rules continue to equally apply to all. And the rules prevent bitcoin from responding to economic indicators.
Bitcoin has no CEO, no board of governors, and no monthly conference during which reporters carefully monitor every twitch or sigh for clues about future policy. There’s no Fed Day. Bitcoin is governed by rules, not rulers.
Bitcoin’s lack of levers has pros and cons. We ordinarily want stable prices, and a capped supply makes for vertigo-inducing price swings. Although Bitcoin’s purchasing power is not stable, its supply is. Local currencies might enjoy stability—until they don’t.
Then, few come back to life. The lever-pullers lose our trust. Bitcoin is still here, however, despite routine price instability. Bitcoin’s lever-pullers can’t lose our trust. There aren’t any.
Bitcoin offers something special both despite and thanks to its rigid schedule. Yes, bitcoin lacks the genius of the world’s best tinkerers. But, for the very same reason, bitcoin is immune to human bias, corruption, and stupidity. And it’s available to all who need it.
Not everyone needs bitcoin. Those under responsible monetary regimes get by with the dollar or yen or euro. But for much of the world, bitcoin is a boon: an opt-in monetary system with set rules and no rulers to reset them.
On supply of Bitcoin
Bitcoin’s supply is no mystery; scheduled halvings see to that. Not so, demand.
A bet on Bitcoin is a bet on future demand, and Bitcoin’s present price reflects these bets in sum. So long as monetary tinkerers do their thing – with mixed results – there will be an appetite for the opt-in alternative Bitcoin provides.
As other institutions display corruption or incompetence, bitcoin earns trust through its automated policies. For those escaping to Bitcoin, the halving is no mere curiosity; it confirms Bitcoin’s value as money beyond rulers.
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