Northeastern professor of international business and strategy Ravi Sarathy breaks down what the quadrennial “halving” event means for crypto enthusiasts, already riding the digital coin’s recent gains.
The much-anticipated bitcoin “halving” is expected to occur in the coming days. The scheduled reduction in the number of new bitcoins in circulation has many cryptocurrency enthusiasts eager to see how the price responds at a moment when the digital coin is riding a high.
Northeastern professor of international business and strategy Ravi Sarathy breaks down what the quadrennial “halving” event means for both miners and investors.
His comments have been edited for brevity and clarity.
What does ‘halving’ mean?
When bitcoin was created in 2009, the eight-page paper that described bitcoin said that the maximum amount of bitcoin that would be issued would be 21 million. Already something like 10.5 million had been created by 2012. In the next four years, another 5.25 million were created, etc. By the time we come to 2024, which is when the next halving event is expected to take place, out of the total potential maximum supply of 21 million, something like 19.5 million have already been created.
Bitcoin does something very interesting, which is to say, it wants to be a currency that is free from government interference. So it actually builds in the idea of scarcity, and the halving is designed to prevent bitcoin from actually reaching 21 million. Bitcoin, as you know, is based on blockchain technology, and blockchain transactions are recorded, and once they are recorded, nobody can change them. They’re immutable, decentralized and open. We can literally go back to 2009 and see every bitcoin transaction that has occurred.
Today, the bitcoin yielded is about 6.25 per block; the halving says that starting at some point very soon, we’re going to reduce the reward to about 3.125 bitcoins per block.
Bitcoin mining requires a tremendous amount of computing power and energy. Tons of people from around the world are bitcoin miners, and groups of miners who share their computing power form what are called pools. If I’m going to be using all of my computing equipment to try to be the first person to solve it, and now the reward is going to be halved — what gives?
And the answer is, the people who oversee bitcoin know there is a certain amount of computing power being directed to solve the problem, and in turn they change the difficulty rate so that it becomes easier or harder to solve the problem. The idea is that, because they are cutting down the block reward by half, so let’s make it slightly easier to solve the problem so that miners can still be rewarded for their work, which will be less arduous than before.
It sounds like the process is intended to hedge against inflation.
Yes, exactly.
Will both miners and bitcoin holders be impacted by the halving?
Immediately, the miners will be impacted, because they will get less per block by solving the problem first. As I have said, 10.5 million bitcoins were created by 2012, and another 5.25 by 2016, so the percentage increase — the amount of the bitcoin being mined — is only going to be about 3% over the next four years.
But two things are happening with bitcoin. Historically, one of the problems of bitcoin is that most of it is not traded at all. In other words, liquidity is a big problem. The people who own the majority of the bitcoin issued between 2009 and 2012 are still holding on to it.
The second is there are some interesting innovations happening to bitcoin. The changes that allowed ordinals, or inscriptions, have helped bitcoin operate a lot like Ethereum. All of a sudden, you take a bitcoin and attach to it, let’s say, a piece of property. That means bitcoin, all of a sudden, becomes more useful. Instead of just being something that you hold and hope it goes up in value, it is becoming more feature-laden. And that means the number of transactions is increasing, and every miner who successfully mines a block not only gets a block reward, but also transaction fees for every transaction associated with that block. That opens up multiple sources of revenue and, thus, creates incentives for miners.
What about demand for bitcoin?
That’s really the third leg here. I would say that exchange-traded funds, or ETFs, are a huge factor. Until recently, bitcoin was wholly opposed by the U.S. Securities and Exchange Commission (SEC) because it was seen as too speculative and didn’t protect investors sufficiently. Finally, the SEC gave in and allowed a dozen bitcoin ETFs to be created. With an ETF, it’s now much simpler to own bitcoin. I can call Fidelity or whoever and say, I want to buy a bitcoin ETF, and all you need to do is have an account with Fidelity and some money sitting in the back and the next thing you know, you own $1,000 of bitcoin. That opens the door for a lot of people.
If you look around the world — whether in Argentina, Nigeria, Turkey, India, where currencies are depreciating — those countries have lots of people who want to own cryptocurrencies. Bitcoin is a possibility; ethereum is a possibility. At the end of the day, bitcoin has attractiveness to people all over the world as part of a group of alternative investments to their own local currency. And that is what is going to be a real driver of the price of bitcoin in the future — not the halving. The halving is a very small factor because it has such a limited impact on supply.
Is that the broader market sentiment in your view?
It’s very hard to know because there was a surge in price immediately after the ETFs were approved, hitting a high of $70,000 or so. In the longer term, the price will be tied to these larger macroeconomic issues: geopolitical instability, elections, macroeconomic cycles, inflation, etc. Bitcoin becomes one of the possible investment alternatives for people who want to protect themselves against these kinds of events.
And again, the big attraction of bitcoin is that it is somewhat beyond the control of governments. There’s a long-term trend of appreciation, which suggests that there is a group of investors around the world who find bitcoin to be an attractive investment — not a primary investment, but one of many possible investments.
