Halvening

BTC is a currency based on a concept. It is also property like land, stocks and gold are property. It can be sold for dollars or purchased for dollars (or any other currency) on an open market. It has associated a futures market so it can be shorted. It exists in banks and people can lend and borrow against it and get paid interest. It is highly volatile. It is not a tulip. It is not worthless.

Gold has value and it holds its value because of its scarcity. Scarcity means you have to expend a lot of energy and capex to mine it, so there is intrinsic value, the cost of mining. It also hedges inflation since governments can’t debase it like dollars or bonds. It stands apart. Land is somewhat like that except land is under government control. Land has an advantage in that they aren’t making anymore of it so it too has a natural scarcity and therefore a natural means to store wealth.

It presently costs about $7500 in raw input to mine a BTC. The cost is a function of a miner’s efficiency and equipment and cost of electricity. So a single BTC is worth $7500 as a base cost, not nothing. It can go to nothing same as land can go to nothing, but it can also remain as worth something. BTC has a scheduled decline it what you get paid to mine one. This sets up a scheduled tension in supply and demand. In the beginning there weren’t many coins mined so it was fairly trivial to mine one. You could do it using a Raspberry Pi. Likewise the relative ease of mining made the value of a coin low so you could buy a cup of coffee for 10 BTC. As coins were mined the difficulty of mining rose since there are a total of 21M coins that will ever exist, so as coins get mined the cost to make more coins goes up. The cost however is not linear. It’s a power function. Every so often (about every 4 years) the amount a miner gets paid to mine a coin is cut in half. 1 goes to 1/2 goes to 1/4 etc so the cost of mining and therefore the base cost of a coin goes up. This occurrence is called the halvening. So theoretically in a binary BTC universe at the if it suddenly costs twice as much to mine a coin, the price on Tue may be $7500 and on Wed may be $15,000, because of the excess cost of production. It’s not a 2 x correlation but it’s a definite upward pressure on value. Value is set by trading in a market and just like gold or oil if the price gets cheap miners turn off their mining rigs, supply dwindles and demand over takes forcing price to rise.

You might say yea yea but who needs a BTC? I need gas to live my life but not BTC! Today there is severe financial manipulation and distortion in the markets. Interest rates are at a 5000 year low, a market peak (see what I did there?). This level of sustained government forced low interest coordinated around the world has never happened in recorded time. It defines an economic inflection point. Inflection points are when the local second derivative of a growth curve changes sign from + to – or – to +, so inflection points have a precise mathematical definition. If the inflection goes from + to – it means the failure of the growth curve is 100% assured unless another inflection occurs. The US stock market represents such a growth curve. The Japanese stock market also represents a growth curve. The Japanese market reached an inflection point in 1990 where growth went from + to – and despite the Japanese central bank’s wildest machinations to flip the inflection from +/- to -/+ they have failed. This is how important an inflection point is to an economy. Failure does not necessarily happen all at once. The Titanic took a long damn time to go down, a long time for people to get picked off one by one instead of a mass instant extermination.

Japanese debt is running 250% of GDP. Normally central banks reduce rates to the point such that relative deflation is replaced by inflation.

Inflation monetizes the government’s debt. You pay your debt in cheaper and cheaper dollars. Deflation does the opposite. You pay your debt in dearer and dearer dollars. Central banks manage this dearer and dearer conundrum by printing dollars. By increasing the money supply the value of each buck is debased. Why would the FED want 2% inflation and what does that mean to you? The government is 100 trillion shy in funding it’s liabilities so it would love 5% inflation or 10% inflation to inflate away it’s debt. Then it can pay you your SS check in dollars that are worth a dime. The problem of course is a loaf of bread worth $1 in today’s terms is worth $10 in “dime dollar” terms. The FED by it’s very policy of a 2% inflation rate is assuring your 1M nest egg will only be worth 500K in 50 years but the real cost of living will not be reduced.

So what’s this got to do with BTC? BTC’s value is based on the cost of mining, the same as gold. As such it’s price is not amenable to inflation. You can’t print BTC and there are 21M that will ever exist. Every time there is a halvening the base price of BTC has an upward bias based on it’s scarcity and cost of production, same as gold. Gold has been the metal because of its scarcity and cost of mining that has topped the scale in what is called “hardness”. Hardness means as fiat currencies fluctuate in value according to government manipulation (money printing) gold is set by scarcity and the cost of getting it out of the ground. If a $1 falls in half in an attempt to monetize the debt a bit of gold rises to 2$ based on it’s scarcity the fact it doesn’t rust and universality of acceptance as a store of value. After the next halvening in May 2020, BTC will attain a similar hardness to gold when viewed in terms of the intrinsic cost of energy used to produce it. In 2024 it’s hardness will surpass gold and the pressure on it’s price will further accelerate. If central bank’s game is to monetize debt owning something resistant to debasing is like getting paid a coupon on a bond. That will be the value of BTC and why it won’t go to zero. It won’t be amenable to inflation or government debasement. It can be stored on an encrypted thumb drive where as a kilo gold bar weighs 2.2 lbs and a 400 oz gold bar weighs 27 lbs. Try boarding a plane with a kilo or 400 oz gold bar. Try getting out of the airport without getting robbed. Try living in a country where the central bank is monetizing the debt without getting robbed. D o you think Venezuelans might have an opinion? Discuss among yourselves.

5 Replies to “Halvening”

  1. Excellent and thought provoking discussion as always Gasem.

    Do you have any opinion on what the other crypto currencies are going to do with btc value? Say something comes along that has the same benefits could it disrupt btc to the point where it loses value?

    And what about talks of governments banning crypto? That could wipe out value in an instant if it happens here, wouldn’t it?

    I have heard of people losing a lot of btc (such as the person who threw out a hard drive that had millions of dollars of btc). I do own bitcoin now and keep it on the coinbase platform (which I think insures against hacking). It is not as safe as putting it in your own wallet and taking it offline but carelessness and losing that would make me nervous to do so (plus not sure how either will be easy for heirs to get to unless I just write down passwords etc which also makes it less safe).

    I love the concept of crypto and see huge advantages over Fiat money for the consumer. I do hope it takes off (since I did speculate in it). A decade or so from now I will either look like a genius or fool.

    1. There won’t be a 1 crypto fits all kind of asset. BTC is clearly the mac daddy none of the others have the kind of optionality BTC possesses. I’m not investing in anything else. I’m not a trader or interested in arbitrage. My ownership is basically like buying a permanent non expiring call option on the currency. I like the way the math works. BTC is non correlated to any other asset class and it has high volatility so I can sell some stocks which I think are very dangerous and buy BTC as a substitute for volatility in my portfolio. No other crypto asset is as serious as BTC. Not sure how the government bans it. There is a vault in Canada that holds gold that can be purchased with BTC. If the government bans it I just take a trip to Canada and buy some gold. The US doesn’t own the world and the market exists independent of what the US thinks. If the US bans it there will be 100 other dodges like that. The solution to loosing it is simple don’t loose it. The solution to not loosing the passcode of a wallet is write it down and hold that securely. A wallet costs $60 and can hold billions. Include instructions with your will. Unless you hold the passcode and the wallet it’s not enough. The government would be better to make a path for legit ownership since it’s property and the sale generates cap gains. The real problem is quantum computing which allows difficult problems to be solved in seconds. The solution to that is quantum generated cryptography. What are you so worried about your money is in a bank. Who says the bank is going to give you your money back? This is preciely why I bought BTC in the first place. The currency froze in Greece on 2015 and the bank wouldn’t give you any. You could have had 1M in cash in the bank and you could get $50. BTC did not freeze. So what’s more risky cash or BTC?

      1. The way to think of different crypto’s is to think of their properties. Gold is presently the hardest asset. It’s scarce, it has an energy cost of mining, there is more available to be mined but at an ever increasing marginal cost, it’s price is set by supply and demand, it does not tarnish or rust, it stores it’s value based on it’s weight and purity (physical properties). It’s commercial value is to act as money and jewelry and in the east (Asia) the two are one in the same. It has no industrial use. Silver is another metal. It has many of the properties of gold, but its not particularly scarce, does not cost as much energy to mine, it does have industrial use, it does rust but that’s actually an advantage since the oxide of silver had better AC electrical conductivity than the raw metal. It stores value in weight and purity. It’s value is less than gold and it’s lighter than gold. It’s price is determined on a market. The thing with gold is it’s heavy and has a huge store of value. An oz of gold will fetch $1400 of barter. You can’t buy a cup of coffee with gold, you can buy a car. Silver OTOH has much less value density. An oz is $20 so 1/4 oz will buy you a Starbucks. This is why there won’t be one size fits all crypro. BTC right now has high volatility but it’s far less volatile as 2 years ago. It’s in an early stage of creation. Halvenings will occur well into the 22nd century and each one will further harden the currency against the government’s ability to erode it’s value by fiat. I think it’s destiny is to become more and more value dense until well after I’m dead and my children are dead. There will be another coin like silver which will be pegged somehow and have it’s volatility reduced enough to act as a normal vehicle of exchange. Trading in BTC will be like trading in gold. Trading in the low vol crypto will be like trading in dollars. Governments may very well not care about BTC as long as they can tax the cap gains. It then becomes a renewable source of income for them as the price rises, so why kill the golden goose. IRA’s were designed to serve the same function. You take your money and place at at risk in an IRA. If you prosper, at a later date the government has claim to a steady steam of your money until well after you are dead. What you get is a “tax break” upfront so they can claim a higher percentage on the back end with a doubly progressive tax (RMD + ordinary income) and you dutifully (not you personally, since I do it also) invest in this scheme like a lemming, gleefully setting yourself up as a slave to the government in your old age. IRA’s are the governments permanent money making machines. You freely risk your assets they freely reap your profit.

        BTC offers a different game. It’s easy to buy and possess. If it grows to maturity as a store of value, the government will let it stand since it was purchased with already taxed money. Unless in a Roth when it’s sold at a profit it will generate capital gains same as a stock or piece of land. It’s to the government’s advantage to pray to God the volatility drives the price to the moon. The government will be the provider of the coin used as general currency. It costs nothing to mint it is secure as far as transaction ledger so what it is used for has an immutable record in other words I won’t be able to use it to traffic heroine or guns or avoid taxes because it has a finger print. The same is true of BTC coin, each transaction is recorded permanently so when they come for their taxes there isn’t any hiding the gains. For reasons of information control and it’s utility as a tax generating money machine

  2. Fascinating. I’ve been discussing gold with Dr. S from the Docs Who Cut Back series. S is a huge proponent of having some gold on hand at home – argument being that paper or virtual assets were not sufficient to get you out of Nazi Germany before the deportation.

    Even with your hoard on a thumb drive, would that be sufficient to get you out of the failing nation in a time of volatility? Would such digital currency be accepted in a time of great digital distrust and collapse?

    Appreciate the education,

    CD

  3. If it comes to escaping the country I’m standing pat. I’m old, set, a vet and not interested in living some post apocalypse dystonia.

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