The upcoming halving of mining rewards in the Bitcoin (BTC 0.64%) network is not like the others. Ark Invest mastermind Cathie Wood found a game-changing quality in this fundamental update that sets it apart from the first three.
Will this unique event make Bitcoin a better long-term storage system for wealth than investing in gold? Let's have a look.
What Cathie Wood said
In a recent video interview with Yassine Elmandjra, Ark Invest's director of digital assets, Wood unveiled a rarely discussed detail of Bitcoin's next halving event that could change the game for the cryptocurrency market:
The rate of growth in supply is going to be cut in half to just under 1% per year. If you compare this to gold, the gold supply has increased on average roughly 1% per year. Bitcoin's supply growth is going to drop below that. (Lightly edited for readability)
Why is this insight so important?
It goes back to the famous notion of prices in a free market reflecting the balance between supply and demand. Gold is traditionally seen as a great value-storage tool due to its limited supply and fairly slow rate of new production. But now, for the first time, Bitcoin's supply side rate of growth will suddenly drop below the inflation pace of gold.
"The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation," according to the Bitcoin whitepaper that defines how this cryptocurrency works. "In our case, it is CPU time and electricity that is expended."
So the self-styled "open-source peer-to-peer money," or digital gold, finally plays the part for which it was designed. That sure sounds like a game-changing event.
Bitcoin's gold-like stability
Bitcoin's limited supply is hardly a secret. In fact, its lifetime limit of 21 million digital coins is often held up as a reason to invest in this digital paragon of long-term stability.
19.6 million of those tokens have already been mined, leaving less than 7% of the total supply for future mining efforts. With a halving of the mining rewards scheduled at roughly four-year intervals, the rate of Bitcoin growth will only slow down more in 2029, 2033, and beyond. The last Bitcoin should be mined somewhere around the year 2140. After that, mining rewards will consist of transaction fees alone.
This extremely long-term plan is hard-coded into Bitcoin's software. Changing these growth-limiting parameters would require an overwhelming agreement among the supply side stakeholders to sacrifice the fiscal stability of their own assets -- an improbable event, especially if Bitcoin actually evolves into a ubiquitous digital alternative to gold.
The impact of the next Bitcoin halving
So far, Bitcoin's halvings have always heralded a sharp increase in the cryptocurrency's price.
For instance, one Bitcoin was worth $12 on the first reward cut in 2012. One year later, the price peaked at $1,170 before backing down again. The 2016 halving sent Bitcoin prices from $640 to $19,650 in 17 months. The latest reduction in mining rewards took place in May 2020 at a price of $8,600. 18 months later, that price cycle topped out at $67,500.
Past performance is no guarantee of future results, but Bitcoin breaks that rule of thumb in some ways.
- The halvings are quite predictable. They will happen roughly every four years, radically changing the economics of Bitcoin mining each time.
- The mining process serves a crucial purpose in the processing of Bitcoin transactions. Without it, the blockchain grinds to a halt. Therefore, the whole system makes sense only as long as miners receive enough rewards to run a successful business. And when the mining rewards are cut in half, a steady consumption of processing cycles and electric power will produce half as many Bitcoin tokens. Bitcoin miners would go out of business if prices don't rise over time.
- Therefore, halvings almost inevitably lead to higher Bitcoin prices. It's not the only factor in play when market makers determine Bitcoin's real-time price, but arguably the most important and predictable pattern-making tool on the encrypted table. The inevitability of this trend will only break if Bitcoin itself goes out of fashion and shuts down. So, the pattern of dramatic price increases in the months after each halving will continue as long as Bitcoin has a future.
- And the next halving may indeed be different, as the inflation rate below gold's annual production increase suggests a game-changing level of value-guarding stability.
The crypto market as a whole, and Bitcoin in particular, still faces numerous headwinds and challenges. The progress of digital currencies can stumble on legal and regulatory roadblocks, on slow uptake of crypto-based services in the consumer market, and on unexpected technology jumps, just to name a few potential game-breakers. But the steady rhythm of scheduled mining-reward halvings will continue regardless, resulting in rock-solid stability or the end of the Bitcoin world.
Image source: Getty Images.
Bitcoin deserves a modest investment today
I expect the Bitcoin community to address and overcome these inevitable challenges as they come along. The supply side looks solid, as long as the global market can generate a steady or rising amount of demand for this digital asset.
In the long run, I see tremendous value in the large-scale adoption of digital currencies and blockchain networks, and Bitcoin is the 800-pound gorilla to beat in this sector. So I suggest adding some Bitcoin exposure to your investment portfolio, but I'm not going all-in on cryptocurrency quite yet -- just in case the ambitious gold-replacement plan doesn't work out.
