Unlike the official means of payment, also called Fiat money, the emission rate of the digital cryptocurrency Bitcoin decreases over the course of time, specifically every four years. When Satoshi Nakamoto, the mysterious father of cyber currency, created the first bitcoins ten years ago, that was 50 pieces per block of calculations every ten minutes. In 2012, the first in the code of the cryptocurrency resorted to halving the money creation rate, also called “Halving”. The same computational effort has now been rewarded with only 25 bitcoins per block. The second Halving took place in 2016 – since then there are only 12.5 Bitcoins per block. On May 20 of next year, the next Halving round will take place. From this day, only 6.25 bitcoins can be digitally generated every 10 minutes.
The Bitcoin money supply will only increase by 328,500 units per year, compared to the current 657,000 per year and over 2.6 million ten years ago.
The digital currency cash draw ends when the last bitcoin is calculated in 2140. Bitcoin production, also known as bitcoin mining in the industry, is limited to a total of 21 million pieces thanks to the built-in algorithm. There can never be more than this money supply. The horror for any modern central bank but for investors and currency speculators an interesting aspect.
Provided that the demand for bitcoins exceeds the emission rate, rising prices are theoretically inevitable. In practice, however, new trading bans, hacker scandals and, above all, over-speculation in the run-up to halving could lead to this situation not being timely. The anticipation of the scarcity in Bitcoin mining could already lead to strong appreciation in the run-up, which limits the price potential thereafter.
The money creation process is getting more and more complicated with Bitcoin
Reducing the “reward” of solving Bitcoin arithmetic blocks to half each every four years is not the only factor that complicates the money creation of the pioneer cryptocurrency over time.
It is becoming increasingly expensive to calculate blocks and generate the digital coins. This is because mining becomes more difficult as more digital miners join the Bitcoin network.
Due to the increased level of difficulty, the bitcoin miners need more powerful hardware and more energy to solve the cryptographic algorithms.
This ever increasing difficulty in digging the digital coins has led to the miners networking to “mining tools” to jointly solve blocks and then share the scraped bitcoins. The calculated bitcoins are recorded according to the computing power that each network member contributes. The release of the blocks has become so difficult that several thousand to ten thousand miners join together with the capacities of their computers. As a result, this often means only a few dollars left for every digital miner. In contrast, there are costs for the need for extremely powerful graphics cards, preferably from manufacturers such as Nvidia or AMD, and of course for the power that is needed for the enormous computing power.
So far, the Halving was a price increase guarantee
To date, already 85 percent of all possible Bitcoins have been generated, currently about 18 million pieces. In 2012 and 2016, the thesis that the price is rising parallel to the decreasing money creation rate has been fulfilled. However, massive speculation and possibly price manipulation have led to extreme volatility since 2017. Thus, this relationship is no longer feasible without further.
It’s hard to say where the fair valuation of a bitcoin lies. Although this also applies to gold, the yellow metal has been proven for five thousand years – bitcoins have only been around for a decade. What you can say is that the halving of the rate of creation will not hurt the price development in any case.
However, achieving $ 1 million and more, as postulated by New York hedge fund manager Charles Hwang, depends on other factors.
The added value of Bitcoin, apart from its scarcity, lies above all in its discretion. You can take the digital money unnoticed everywhere (even across borders) and thus perform discrete online transactions. Bans on Bitcoin trading platforms and the closure of Darkweb trading venues such as “Silk Road” or “Dream Market” have always weighed heavily on the price in the past and are also a risk for the future.
The extent of political influence on price performance was observed yesterday when Bitcoin’s share price rose sharply in no time, as the German supervisory authority BaFin officially granted cryptocurrency status under the German Banking Act as of January 2020 as a regulated financial instrument.
Since bitcoins are now even tradable in the form of futures, the factor speculation gets an ever greater impact on the pricing of the digital currency. In addition, a significant amount of Bitcoins is in the hands of only a few market participants. Almost 1 million pieces should still be in the hands of Satoshi Nakamoto. This would correspond to a current market capitalization of approximately $ 7.4 billion.
Since the market for Bitcoin shines above all by intransparency, which of course is due to the inherent discretion of a cryptocurrency, the market is difficult to assess.