The existing system of providing rewards for participants in the Bitcoin network may not be designed in the best way, according to Bitcoin Magazine experts. They note that a gradual reduction in rewards could hypothetically lead to a completely different economic pricing model. Since the next halving will be in April 2024, and we already have a certain number of precedents with BTC halvings, now is a good time to evaluate the mathematical and economic features of the model.
Halving
Bitcoin, like any other cryptocurrency, strictly follows the instructions laid down in its code. One of these is halving – a reduction in the block reward that occurs every 210,000 blocks, that is, approximately once every 4 years. This is necessary to ensure that the total number of BTC does not exceed 21 million units.
The total number of mined coins is determined as follows: this is the sum of all BTC received for each new block from the launch of the Bitcoin blockchain until the last 32nd halving, which will take place in 2140. Initially, before the first halving, the block reward was 50 BTC. After – 25. Now, after the third halving, it’s 6.25. In April, after the fourth halving of the reward, it will be 3.125.
The reward is calculated using the formula 50/2^i, where i is the halving counter. That is, at i=0 (before the first halving) the reward was equal to 50 (2^0=1, respectively 50/1=50). Now, after the third halving, i=3, so 50/2^3=6.25.
Halving problem
As the reward is halved, this is bound to come as a shock to the market. If demand remains unchanged, then the price naturally rises. Rapidly rising prices lead to a “hype cycle” that attracts the attention of the media and new consumers.
In a sense, as experts note, halving is a built-in “media resource” of Bitcoin. But there is a problem. Because the price is very volatile, it reaches the top and collapses sharply. This prevents Bitcoin from gaining a foothold and institutionalization in areas where stability is valued – primarily as a means of payment.
The main feature of Bitcoin is its store of value (SoV) function.. That is, BTC is viewed as an asset that retains and increases value over time.. But if someone purchased a coin at the peak of its value, it will not be possible to realize the SoV soon. Hodler will not sell Bitcoin bought at the peak only when he fully understands the protocol, trusts the code and knows that the price will recover and soar after the next halving. This requires a certain “threshold of entry”: a level of abstraction, an understanding of how the process works, and a whole belief system. Negative short-term price movements greatly cloud Bitcoin's SoV.
For a more clear example, Bitcoin can be compared with other innovations and solutions, where the advantages of other technologies are obvious after the first use. TV, telephone, email, microwave are excellent examples of innovations whose value is felt immediately in the first minutes. You can compare the rate of adoption of color television compared to the computer. Television conquered the world faster because its value became immediately clear. The computer was a much more complex device, so people did not immediately see the benefits of a PC in their daily lives. Perception of value plays a big role in how successful an innovation is.. According to Everett Rogers, who pioneered the study of innovation adoption curves, perception is one of the main drivers of the diffusion of new technologies.
Experts also note that the shocks that halvings expose to the price of Bitcoin negatively affect the perception of BTC as a technology and thereby slow down the implementation of cryptocurrency as an advanced and mass solution.
The fact that Bitcoin pricing is formed in waves, including as a result of halvings, is indirectly told to us by the BTC exchange rate chart for all time. A bullish trend emerged in Bitcoin immediately after the first halving in November 2012.. So, if at the beginning of November 2012 the asset was trading around $11, then after 12 months the rate exceeded $1,150, after which it began to decline.
Source: tradingview.com/
Similarly, after the second halving in July 2016, BTC globally entered a growth phase, which also increasingly reached its peak in December 2017:
Source: tradingview.com/
Finally, the third Bitcoin halving in May 2020 was also marked by its gradual growth, and the peak occurred in October 2021
Source: tradingview.com/
Alternative
According to experts, the alternative is simple: a gradual reduction in supply. That is, no halvings, but with each block the reward will be slightly reduced. Thus, in block 0 the reward will be 50 BTC. Block 1 will have 49.9999 and so on. Moreover, it is not necessary to introduce a simple linear function; a more complex algorithm can be specified.
The key here is that this approach can help reduce volatility. Such a change would turn Bitcoin into a more stable asset, gradually increasing its price over time.
Conclusion
There is no clear answer as to how much better a gradual reduction in rewards (emissions) would be than halvings. In the end, the halving process and the rapid “wave-like” growth in value provide stable attention from the media, which plays an important role and may turn out to be more “useful” for further expansion in the market than similar growth with less volatility.
This material and the information contained herein do not constitute individual or other investment advice.. The editors' opinions may not coincide with the opinions of the author, analytical portals and experts.