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Bitcoin: Halving, ETFs, and the 21 Million Cap

Bitcoin is a fascinating and complex phenomenon that has captured the attention of many people around the world. As a Bitcoin enthusiast, I’ve been ruminating on several key aspects of Bitcoin recently, including the halving, ETFs, and the implications of mining all 21 million Bitcoin. In this note, I will share my thoughts on these topics and invite you to join the discussion.

ETFs: A Double-Edged Sword?

One of the most debated topics in the Bitcoin community is the role of ETFs, or exchange-traded funds. ETFs are financial instruments that track the price of an underlying asset, such as Bitcoin, and allow investors to buy and sell shares of the fund without having to own the asset itself. ETFs are seen as a way to increase the liquidity, accessibility, and legitimacy of Bitcoin, especially for institutional and retail investors who may not want to deal with the technical and regulatory challenges of owning Bitcoin directly.

However, ETFs also have some potential drawbacks that could undermine the essence and value of Bitcoin. For instance, ETFs could make Bitcoin more dependent on fiat currencies, such as the US dollar, and reduce its volatility, which is one of the main attractions for speculators and traders. Moreover, ETFs could expose Bitcoin to systemic risks, such as a bank run or a market crash, that could trigger a massive sell-off of Bitcoin ETFs and cause the price to plummet. In a worst-case scenario, ETFs could even enable malicious actors to manipulate the Bitcoin market by creating artificial demand or supply.

Therefore, ETFs are a double-edged sword that could either boost or harm Bitcoin, depending on how they are designed, regulated, and used. As a Bitcoin enthusiast, I believe that ETFs are beneficial as long as they are transparent, secure, and aligned with the principles of decentralization and censorship-resistance that Bitcoin stands for.

Halving and Miners: A Balancing Act?

Another important aspect of Bitcoin that I’ve been thinking about is the halving, which is the process of reducing the reward for mining new blocks by 50% every 210,000 blocks, or approximately every four years. The halving is intended to control the inflation rate of Bitcoin and ensure that the total supply will never exceed 21 million. The next halving is expected to occur in May 2024, when the reward will drop from 6.25 to 3.125 bitcoins per block.

The halving is anticipated to trigger another bull run, as it creates a supply shock that increases the scarcity and demand of Bitcoin. However, the halving also poses a challenge for miners, whose revenue will be halved as well. Miners are essential for securing the network and validating transactions, and they incur significant costs for electricity and hardware. Therefore, the halving could make mining less profitable or even unprofitable for some miners, leading to a significant number of miners going bust or bankrupt. This could reduce the hash rate and security of the network, making it more vulnerable to attacks.

To cope with the halving, miners need to balance their costs and revenues, and possibly upgrade their equipment or join mining pools to increase their efficiency and chances of survival. Alternatively, miners could switch to other cryptocurrencies that offer higher rewards or lower difficulty. However, this could also affect the value and adoption of Bitcoin, as it could reduce its network effect and competitiveness.

Another point to consider is the interplay between ETFs and the halving. I suspect that the halving won’t have as significant an impact as previous ones due to the stabilizing effect of ETFs. As more investors buy and sell Bitcoin ETFs instead of actual Bitcoin, the demand and supply of Bitcoin on the market could decrease, reducing the price fluctuations and the incentive for speculation. As a result, I predict the next bull run will only bring Bitcoin up to 80K-90K, which is still impressive but not as spectacular as some may hope.

The 21 Million Cap: A Dilemma?

Lastly, let’s discuss the 21 million cap, which is the maximum number of bitcoins that will ever be created. The 21 million cap is one of the most distinctive and appealing features of Bitcoin, as it sets it apart from fiat currencies that can be printed endlessly and lose their value over time. The 21 million cap also creates a sense of urgency and exclusivity for Bitcoin, as it makes it a scarce and limited resource that people want to own and use.

However, the 21 million cap also raises some questions and challenges for the future of Bitcoin. One of them is: what will happen when all bitcoins are mined, which is expected to occur around the year 2140? Once all bitcoins are mined, there will be no more block rewards for miners, and they will have to rely solely on transaction fees to cover their costs and earn profits. However, transaction fees may not be enough to incentivize miners to continue securing the network and validating transactions, especially if the demand and usage of Bitcoin declines or stagnates. This could lead to a loss of network security and functionality, making Bitcoin less reliable and attractive.

While I’m not an expert, I do have a suggestion for how to address this issue. When all 21 million bitcoins are mined, we may need to switch to a proof-of-stake model, which is an alternative consensus mechanism that does not require mining. In a proof-of-stake model, validators stake their own bitcoins to participate in the network and earn rewards for creating and validating blocks. This could offer a better network protection and incentive, as validators would have a stake in the network and would not want to harm it. Moreover, a proof-of-stake model could also reduce the energy consumption and environmental impact of Bitcoin, which is another concern for some critics and regulators.

However, this suggestion is not without its drawbacks and challenges. For one thing, switching to a proof-of-stake model would require creating an unlimited amount of bitcoins, which contradicts the 21 million cap and the anti-inflationary nature of Bitcoin. This could erode the trust and value of Bitcoin, as it would make it more similar to fiat currencies that can be manipulated and devalued. Moreover, switching to a proof-of-stake model would require a major change in the protocol and the consensus of the community, which could be difficult to achieve and could cause conflicts and divisions among Bitcoin users and developers.

Therefore, someone with more expertise and authority will need to devise a solution that continues to incentivize network protection and usage of Bitcoin while maintaining the 21 million cap and the trust and value of Bitcoin.

Conclusion

These are just some thoughts I’ve had on these matters. I hope you found them interesting and informative. I’m eager to hear your thoughts on what I’ve said or any thoughts you may have on the same topics. Please feel free to share your comments and feedback below. Thank you for reading and happy nostring!

#bitcoin #halving #etfs #21millioncap #proof-of-stake #mining #networksecurity #inflation #bullrun #networkeffect #nostrnote

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Discussion

makeasnek 1y ago

Oh nevermind now I see the new post. Must have just taken a while to come through the relays :)

makeasnek 1y ago

This is a well thought out post.

A few things:

- While most PoS currencies have an inflationary supply, I don't believe, and I could be wrong here, that they are /required to/ have one. There's no reason your reward for staking can't just be tx fees. Proof-of-stake is just a system for assigning who has the authority to make the next block. Instead of using hashpower, they use proof of ownership of a randomly (but predictably) selected set of coins.

- You are assuming that mining has to be profitable to work. I'm not sure that's a safe assumption. I think that most miners are not making much money, or at least, aren't able to make money unless they are "speculatively mining" ie mining at break-even or loss and then saving some BTC to sell at an expected higher price. Which, to be fair, for a deflationary currency is not an unviable strategy. This is because of the way Bitcoin's difficulty function works. If mining is profitable, people flock to mining, which increases competition, which makes mining less profitable. When mining is unprofitable enough, people turn off their rigs and do something else instead. Until enough do that for mining to become "profitable" again. This means that /on average/ mining is at a breakeven point for your average miner. The network will buy hashpower at the cheapest price it can. And when you consider that miners are often deriving secondary benefits from mining (such as waste heat) or treating it as an energy storage solution, that cheapest price may be well below what the formula of BTC reward - cost to mine would give you.

- Large power competition is also worth considering. Large powers have some incentive to have some "stake" in or "control" of the global currency network. If BTC is the dominant global currency and China ends up with all the hashpower, that is a problem for the US. Big powers regularly throw billions of dollars into holes in order to maintain their competitive edge and make sure things like global trade routes/rules tilt in their favor. The space race or the race to make the most undersea cables is another example. Mining is going to become one of those areas of great power competition. If the US wants to continue to be able to, for example, issue sanctions against its enemies, in a Bitcoin standard world, that means they need to control significant hashpower. While they will never be able to fully /censor/ transactions without 51% of hashpower, they can /delay/ them. Likewise, if you want your economy to be efficient and competitive, you want to be able to guarantee that your transactions make it onto the chain. If your country has delayed transactions, that will have a real economic impact. So Bitcoin may very well be the next frontier of great power competition. Great powers don't care about profitability since that's not the goal of their mining.

Michael J Burgess 1y ago

Thank you for your detailed explanation. You’ve given these topics a lot of thought.

Regarding PoS currencies, you’re right that they aren’t necessarily required to have an inflationary supply. The reward for staking could indeed be transaction fees. This is an interesting perspective that I hadn’t fully considered before.

Your point about mining profitability is well taken. The dynamics of mining profitability, competition, and the Bitcoin difficulty function create a complex system in which mining may not always be profitable but can still function due to factors like speculative mining and secondary benefits.

The issue of large-power competition is indeed significant. If Bitcoin becomes the dominant global currency, hash power distribution could have geopolitical implications. This is a complex issue that warrants further discussion.

Your insights have given me a lot to think about. I appreciate your thoughtful contribution to this discussion. Exchanges like these help us all learn and grow. Thank you for sharing your knowledge and perspective.