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Today's Bullets:
The Epochs
The Formula
The Future
Inspirational Tweet:
The Halving is here, the Halving is here!
Unless you've been on holiday and/or ignoring the financial markets altogether the past week, you likely heard about something called the Bitcoin Halving.
I mean, even Senators are getting in on the Halving excitement!
All kidding aside, Senator Lummis has been a strong advocate for Bitcoin, and I appreciate her presence in DC. It's always good to see her posting about Bitcoin.
That said, whether you are new to Bitcoin or a newly-minted HODLer, you may or may not know exactly what the Halving is and how it is governed.
The simple answer is math, of course.
But before you worry you'll be subjected to intense numbers and calculations today, have no fear. Because we always keep it simple and accessible around here, and today is no different.
My goal is to arm you with knowledge. The kind of stuff you can point to and explain to others after reading this. And we always like to have and poke a little fun (usually at the Fed or Treasury) around here, too.
So, grab a nice hot or cold brew coffee (getting warm where we are already) and settle into your favorite chair for some math-made-simple with The Informationist.
🤓 The Epochs
Whether you call it or have heard it called The Halving or Halvening (this sounds more like a Vampire or Shape-Shifting affliction to me, TBH), there's a simple but super important reason for this (roughly) four-year event.
You'll see why I said 'roughly' in a moment.
One of the aspects of Bitcoin that you're likely well aware of, is the fact that there will only ever be 21 million Bitcoin produced.
Exactly. Unlike the endless and relentless expansion that the fiat-photocopying masters employ for dollars and yen and euros and more, Bitcoin is ruled by an equation.
Whoa.
Before we go further, for those of you wondering, if there's only 21 million of them, how could there ever be enough for the whole world to use?
The answer is, each of those 21 million Bitcoin can be divided into 100 million parts, or Satoshis, as we like to call them.
Bitcoin was invented by Satoshi Nakamoto, so this is a nice little hat tip to the founder.
So, that makes a total of 2.1 quadrillion satoshis.
To put it in more tangible terms, if the value of each Bitcoin rises to $1 million USD, that would make each satoshi worth one US penny.
And the total value of all the Bitcoin in the world at that point would be $21 trillion, or roughly 1.5X the current value of all the gold in the world.
Plenty.
Back to the Halvings.
The way the supply is limited is that the total production of Bitcoin that is mined is controlled by an equation (we will get to that in a moment) that cuts the production (the amount mined) in half every four years, or so.
Now, imagine that gold miners were governed by a law that made them cut production in half every four years. As you can then imagine, the value of gold would rise with this decreasing production and thereby hardening of gold money.
Truth is, we don't know exactly how much gold is still out there to be mined on earth, on the moon, or perhaps elsewhere in our Universe. And so, gold continues to expand its supply at a fluctuating rate.
Back to basics and how Bitcoin mining is similar but very different.
Bitcoin is mined by computers competing to solve complicated mathematical problems (there's that math governance again)
The miner that solves the problem wins the award
This happens roughly every ten minutes
This reward is cut in half every four years
Once the reward is cut in half, we enter what is know as a new Bitcoin Epoch.
So, the reward yesterday morning was 6.25 Bitcoin, and after the Halving, the reward yesterday evening was cut in half and is now 3.125 Bitcoin.
We entered a new Epoch.
Some of you may be asking, why does this happen every four years, and why did there seem to be some confusion around exactly when the halving was going to occur?
Let's dig just a little deeper and into the math side of things now to answer that and more.
🫣 The Formula
You have likely seen the equation, maybe in an article or if you've been to a Bitcoin conference, on a t-shirt or a hat. It looks confusing, or like another language. It looks like a bunch of jumbled nonsense.
It looks like this:
I once heard someone say that, just looking at this equation was enough to make them break out in hives.
Perhaps a bit dramatic, but yeah, to the non-math types, I get it. it looks super confusing. Intimidating, perhaps.
First things first, let's demystify some of this.
We will use this annotated graphic as a key. Take a peek:
That big ∑ at the front of the equation is the Greek symbol for Sigma. And this basically means Sum.
The 32 means there will be 32 equations to sum.
The part after the ∑ are the equation(s).
This equation tells us that there are 210,000 mining Blocks (these happen every ~10 minutes, as miners solve a different and very difficult equation to win the award) for each Epoch.
See, the miners are performing a calculation (different than the one above!) that is automatically adjusted in difficulty to take into account the number of computers trying to solve it. Kind of like in James Bond's Skyfall, where Q says, "it's like trying to solve a Rubik's cube that is fighting back"
In any case, it takes about 10 minutes to solve these problems, and so 210,000 of these contests adds up to approximately four years.
210,000 X one Block mined every 10 minutes = ~4 years
Now look to the part of the equation to the right of the 210,000. This is the number of Bitcoin that is rewarded in each Block.
The reward starts at 50 and is divided by 2 to the power of i, which represents the Last Halving Epoch.
In other words, Before the first Halving, the i would equal zero (zero Halvings, thus far), and so it looked like this:
50 divided by 2 to the power of 0, or 2⁰
2⁰ = 1
And so,
50 divided by 1 = 50
Before the first halving, the reward for mining a block was therefore 50 Bitcoin!
Those were the days, I guess. I wasn't around to enjoy them.
After the first halving, this equation became:
50 divided by 2 to the power of 1, or 2¹
2¹ = 2
50 divided by 2 = 25
After the first halving, the reward was cut in half, from 50 to 25.
and so on...
After the second halving, 2² = 4:
50 divided by 4 = 12.5
After the third halving 2³ = 8:
50 divided by 8 = 6.25
After the fourth halving 2⁴ = 16:
50 divided by 16 = 3.125
Which is where we are today. The fourth Halving has occurred, and we are in Bitcoin's 5th Epoch.
Now you may be asking, what does that mean for Bitcoin and mining going forward?
How long will this continue?
🤯 The Future
Remember the 32 up there? The one above the ∑? This tells us that we will do this 32 times.
That's right, 28 Halvings to go.
And with each halving the reward will be cut in half again. So, in 4 years, the reward will drop to 1.5625 Bitcoin.
Look at this chart to see how the amount of Bitcoin created (Blue Line) decreases exponentially each Epoch. And the inflation rate, or amount of additional Bitcoin created (Orange Line) stair-steps lower until it reaches zero.
As you can see, the amount of Bitcoin created was quite high in the first epoch. After all, 50 Bitcoin mined every 10 minutes added up to 10,500,000 Bitcoin mined in the first epoch.
No wonder there are some seriously wealthy Bitcoin OGs out there.
In the next four years, 5,250,000 Bitcoin were mined, adding up to 16,750,000 total mined in the first eight years.
Flash forward to today, and 19,687,500 Bitcoin have been mined so far.
656,250 more will be mined in the next four years.
And in the 6th Epoch, from the years 2028 to 2032, there will be a total of 328,125 Bitcoin mined.
What is significant about this, is that it will be the last set of rewards that feature a full Bitcoin.
Because in the 7th Epoch, only 164,062.5 Bitcoin will be mined over 210,000 Blocks, which makes the reward for each Block mined just .78125 Bitcoin.
At that point, by the year 2032, 98.4% of all Bitcoin will have been mined already, and the inflation rate of Bitcoin will be just .33%.
Eat your heart out, JayPow. That's true disinflation for you.
How rare or scarce does that make Bitcoin?
Considering there are currently approximately 59.4 million millionaires in the world and less than 19.7 million total Bitcoin to go around, I would say that makes it extremely scarce.
And this doesn't even consider the number of Bitcoin that have been lost because of misplaced keys or trashed computers, etc.
Some estimates put this number at over 6 million Bitcoin.
Good. Lord.
Can you imagine knowing you have a few thousand Bitcoin you mined back in the day and forgot about that are on a hard drive or wallet that are now irretrievable, magnetically scrambled from a laptop drive failure, abandoned accidentally, or tossed in a landfill??? (Yes that actually apparently and horrifically happened):
So, the next time you feel bad about getting into Bitcoin late (I occasionally have those pangs, too) remember that you aren't trying to find 7,500 of your Bitcoin in a landfill somewhere. 😱
Also, with the creation of Bitcoin spot ETFs this year, the institutional investors are just now coming around to the idea that Bitcoin is not only here to stay, but that they may want to add some to their own portfolios. And they are, slowly.
This influx of serious and massive money has only just begun.
With a mere 13 million or so Bitcoin to go around these days (net of all the lost ones), and just 1.3 million left to be mined, things could get pretty spicy in the Bitcoin market soon.
I know I won't be around to witness the pure beauty of Satoshi's Bitcoin Supply Formula pay out its final reward. When the last fraction of Bitcoin is mined in 2140.
But I hope my grandkids will. And I fully intend to pass some Bitcoin down to them before then.
Do you?
That’s it. I hope you feel a little bit smarter knowing about the Bitcoin Halving and the math that governs this near-perfect supply creation.
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Talk soon,
James✌️