The next half of mining rewards is in Bitcoin (BTC -0.24%) The network is not like others. Cathie Wood, the mind behind Ark Invest, has found a game-changing quality in this essential update that sets it apart from the first three.
Will this unique event make Bitcoin a better system for long-term wealth storage than investing in gold? lets take alook.
What Cathie Wood said
In a recent video interview with Yassin El Manjra, Director of Digital Assets at Ark Invest, Wood revealed rarely discussed details about Bitcoin's next halving event that could be a game-changer for the cryptocurrency market:
The supply growth rate will halve to just under 1% per year. If you compare that to gold, you will find that the supply of gold has increased on average by approximately 1% per year. Bitcoin supply growth will fall below that. (Edited lightly for readability)
Why is this insight so important?
This goes back to the famous idea of prices in the free market that reflect the balance between supply and demand. Gold has traditionally been viewed as a great store of value due to its limited supply and rather slow rate of new production. But now, for the first time, Bitcoin's supply-side growth rate will suddenly fall below the inflation rate of gold.
“The continuous addition of a fixed amount of new coins is similar to gold miners spending resources to add gold into circulation,” according to a Bitcoin technical document outlining how this cryptocurrency works. “In our case, CPU time and electricity are spent.”
So so-called “open source peer-to-peer money,” or digital gold, is finally playing the role for which it was designed. This certainly sounds like a game-changing event.
Bitcoin's gold-like stability
Bitcoin's limited supply is no secret. In fact, its lifespan limit of 21 million digital coins is often cited as a reason to invest in this digital model for long-term stability.
19.6 million of these tokens have already been mined, leaving less than 7% of the total supply for future mining efforts. With scheduled mining rewards halved over approximately four-year intervals, Bitcoin's growth rate will slow further in 2029, 2033 and beyond. The last Bitcoin is supposed to be mined around the year 2140. After that, mining rewards will consist of transaction fees alone.
This very long-term plan is coded into Bitcoin's software. Changing these growth-limiting parameters would require overwhelming agreement among supply-side stakeholders to sacrifice the financial stability of their own assets — an unlikely event, especially if bitcoin actually develops into a widespread digital alternative to gold.
Impact of the next Bitcoin halving
Until now, the Bitcoin halving has always heralded a sharp increase in the price of the cryptocurrency.
For example, one bitcoin was worth $12 at the first cut in 2012. One year later, the price peaked at $1,170 before falling again. The halving in 2016 pushed Bitcoin prices from $640 to $19,650 in 17 months. Mining rewards were last reduced in May 2020 at $8,600. After 18 months, this price cycle reached $67,500.
Past performance does not guarantee future results, but Bitcoin breaks this rule of thumb in some ways.
- Half are completely predictable. This will happen approximately every four years, radically changing the economics of Bitcoin mining each time.
- The mining process serves a crucial purpose in processing Bitcoin transactions. Without it, blockchain technology will grind to a halt. Therefore, the whole system only makes sense as long as miners receive enough rewards to run a successful business. When mining rewards are halved, the constant consumption of processing cycles and electrical power will produce half the number of Bitcoin tokens. Bitcoin miners will stop working if prices do not rise over time.
- Therefore, the halving inevitably leads to a rise in Bitcoin prices. It's not the only factor that comes into play when market makers determine the real-time price of Bitcoin, but it is arguably the most important and predictable pattern-making tool at the crypto table. The inevitability of this trend will only be broken if Bitcoin itself falls out of fashion and closes its doors. Therefore, the pattern of large price increases in the months following each halving will continue as long as Bitcoin has a future.
- The next half may indeed be different, as an inflation rate below the annual increase in gold production indicates a game-changing level of value protection stability.
The cryptocurrency market as a whole, and the Bitcoin market in particular, continues to face many headwinds and challenges. The progress of cryptocurrencies can be hindered by legal and regulatory barriers, slow uptake of cryptocurrency-based services in the consumer market, and unexpected technological leaps, to name a few. But the steady rhythm of mining rewards halving will continue regardless, leading to a strong stabilization or Bitcoin apocalypse.
Image source: Getty Images.
Bitcoin is worth a modest investment today
I expect the Bitcoin community to address and overcome these inevitable challenges as they arise. The supply side appears strong, as long as the global market is able to generate a constant or increasing amount of demand for these digital assets.
In the long term, I see tremendous value in widespread adoption of cryptocurrencies and blockchain networks, and Bitcoin is the 800-pound gorilla to conquer in this sector. So I suggest adding some Bitcoin exposure to your portfolio, but I wouldn't focus entirely on cryptocurrencies yet – just in case your ambitious gold replacement plan doesn't pan out.
