Polar Opposites

>> May 12, 2020

>> Blog Post #70

Not a day goes by without you hearing about the dramatic effects the COVID-19 pandemic has on people’s lives and on the economy. The economy has tanked in all countries as a direct consequence of people closing shops during the confinement.

I’ve actually suspected that this economic turmoil is a bigger factor in why many countries are currently getting out of their confined states and back to more normal working arrangements (read normal as in the “norm”) than the sanitary situation itself.

You’d think that the markets would tank because of this but I have actually been extremely surprised by just how fast they have rebounded since the initial – and very strong – crash that occurred between end of February and end of March.

The only reason I can think of, and it’s probably the right one, is that the insane amount of money that has been injected by governments around the world in liquidity has artificially supported markets that are no longer correlated with the real economy. At this point, I believe it is fair to wonder if this can’t just go on forever as no one really seems to care. But please take a look at it and try to spend just two seconds figuring out if you are the one benefiting from the “free” money and / or the stock “performances”. Chances are, you might say no in both cases. Just think about it.

On the other side of the spectrum, Bitcoin has just lived another day yesterday. And nothing has changed. Well actually nothing has changed in the value proposition. The hardest money the world has ever known, sitting on top to a very decentralized protocol and network, with unprecedented censorship resistance characteristics. You have to marvel at what bitcoin has accomplished since its inception.

Yesterday was another milestone in Bitcoin’s very short, yet tremendously rich history. Bitcoin went through its 3rd halving.

See unlike FIAT currencies which might just be inflated into oblivion, Bitcoin’s total market supply is capped. No more than 21 million Bitcoins will ever be produced. The supply is finite, and its rate of production is hard coded in Bitcoin’s consensus rules so that it gradually decreases over time.  Bitcoin’s protocol states that every 210,000 blocks, the block subsidy is cut in half.

Now, I won’t get into too many details on how this works, as it can get confusing fast depending on how much you know regarding bitcoin, but you have to understand that the block subsidy, is part of the reward that is allotted to the miners in return for the work they provide in securing the bitcoin network. Here’s me trying to explain this as succinctly as possible:

Transactions are created every day by the participants who send and receive bitcoin. These transactions are pooled together and included in blocks by the miners, acting as some sort of housekeepers of the network. The miners are compensated for their housekeeping tasks by receiving a reward every time they mine a block. The block reward consists of the block subsidy – the part we are looking at today – and the transaction fees that are included in every single transaction contained in the block that is mined. When mining a new block, the miner will include in the block a transaction paying himself that subsidy, effectively creating new Bitcoins in the process. This is the only way Bitcoin is created, until the total number of Bitcoin every created reaches 21 million, at which point miners will only be collecting transaction fees.

As I said, yesterday was the third halving. Initially, the block subsidy for miners was 50 new bitcoin per block. After block 210,000 the rate of issuance of new money was cut to 25 new bitcoin per block, with blocks being produced approximately every 10 minutes. Since last evening, we are down to 12.5 bitcoin per block, which means every day, approximately 1,800 new bitcoins are issued.

This is going to be a very – VERY – scarce asset, not artificially inflated by governments. Its value proposition is extremely different from that of US dollars or Euros for example. No matter what you think of any of these three currencies, or your home country’s currency, you have to realize there might be some benefit to holding some funds in bitcoin, just in case.

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