This article is compiled and organized by BlockWeeks
Bitcoin's transparent issuance mechanism: the foundation of scarcity
The transparency and predictability of Bitcoin's issuance mechanism is a core feature that distinguishes it from any other asset or currency in the world. No other asset has a calculable inflation schedule, nor does any asset have a supply event that is known in advance and can halve the daily issuance overnight. Bitcoin's anonymous creator, Satoshi Nakamoto, wrote the "halving" function into Bitcoin precisely to counter the continuous depreciation of fiat currency.
"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." — Satoshi Nakamoto, February 11, 2009
"By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended." — Satoshi Nakamoto, Bitcoin Whitepaper, October 31, 2008
The Fourth Halving: The Mechanism of Halving Issuance
On April 20, 2024, Bitcoin will usher in its fourth halving at block 840,000. With each halving, the number of newly issued bitcoins miners receive for each block mined (the "block reward" or "block subsidy") is cut in half. After the fourth halving, the block reward will drop from 6.25 BTC to 3.125 BTC, equivalent to a decrease in daily issuance from about 900 BTC to about 450 BTC. Consequently, Bitcoin's annualized issuance rate will drop from about 1.7% to about 0.85%. According to Coin Metrics data, by the fourth halving, 93.7% of Bitcoin's total supply will already be in circulation.
The halving occurs every 210,000 blocks (approximately every 4 years). After the fourth halving, the Bitcoin network will undergo 30 more halvings. The halvings will continue until the last bitcoin is mined, expected sometime after 2140. When all bitcoins have been mined and entered circulation, miners will no longer receive block subsidies and will rely entirely on transaction fees and other off-chain payment forms.
Bitcoin's programmatic issuance reduction approximately every 4 years is the centerpiece of its transparent, predictable monetary policy, and it also makes Bitcoin a provably scarce asset. Most importantly, Bitcoin's monetary policy is immutable code enforced by consensus, a consensus maintained by network stakeholders—miners, nodes, and developers. Bitcoin's scarcity and the predictability of its monetary policy stand in stark contrast to the significant depreciation of global fiat currencies, and this is precisely why it has earned the title of "digital gold".
Visualizing the Halving in Bitcoin Core
Bitcoin Core is the open-source software created by Satoshi Nakamoto that lays the foundation for the Bitcoin protocol. Developers regard it as Bitcoin's primary reference implementation (although the network is also compatible with other software implementations). Therefore, all the functions and logic that define Bitcoin exist within Bitcoin Core.
The code in Bitcoin Core that enforces the halving consists of 7 lines of C++ code. A line-by-line breakdown is beyond the scope of this report, but it is necessary to visualize the portion of code responsible for determining the block reward at the current block height:
Line 1240: Calculate how many halvings have already occurred.
Lines 1245–1248: Determine the miner's block reward.
Mining: The Other End of the Halving Mechanism
Mining is a critical component of the Bitcoin network. When a user wants to send bitcoin to another wallet, the transaction is first broadcast to the network, where nodes check its validity. Before being included in a block, transactions exist in a queued state in the "mempool", a pool of unconfirmed transactions waiting for miners to package them into blocks. The block subsidy is both a means to incentivize miners to contribute computing power to the network to process and settle transactions, and a way to distribute the supply of newly minted bitcoin. As the price of bitcoin rises, the incentive to mine for these rewards may also grow significantly.
Miners produce blocks by computing the correct hash value for the next block. Therefore, the miner with the highest hash rate (computing power from specialized ASIC machines) has the highest probability of finding the next block hash. The first miner to compute the correct hash receives the block subsidy plus the transaction fees in that block. Typically, the time required to compute the correct hash is about 10 minutes (i.e., Bitcoin's block time). The network guarantees miners a block time of around 10 minutes through difficulty adjustments. These adjustments occur every 2016 blocks (approximately every two weeks) to respond to increases or decreases in network hash rate. The greater the hash rate, the higher the mining difficulty. Thus, difficulty adjustments ensure consistent block production and the execution of Bitcoin's monetary policy.
The Impact of the Halving on Bitcoin Mining
Bitcoin miners' revenue consists of two parts: the block subsidy and transaction fees. At the time of the halving, the significant reduction in block rewards means the mining industry is facing a critical juncture: with block rewards shrinking significantly, miners must adapt and innovate to maintain profitability and sustainability in an ever-changing landscape.
The Impact of the Halving on Bitcoin's Price
What impact the halving will have on Bitcoin's price is a debate that arises with every halving. Historically, market participants have viewed the halving as a bullish event for BTC's price, while the opposing view holds that the halving has minimal impact on price. Below are the current bullish and bearish views in the market regarding the halving's impact on BTC's price.
Bullish View
A 50% reduction in Bitcoin's block reward makes Bitcoin scarcer as an overall asset while reducing miners' absolute selling volume. Miners are seen as continuous forced sellers of Bitcoin—these operations are extremely capital-intensive, and selling BTC is miners' primary source of income. Therefore, miners will always sell a portion of their block rewards for fiat currency to cover operating expenses such as energy, labor, debt, and new machines. Many believe that the decline in supply growth corresponds to a reduction in selling pressure from the mining community, which drove Bitcoin's price increases after the three halvings in November 2012, July 2016, and May 2020, and may do the same after the fourth halving. Market participants who view the halving as a bullish signal also cite the widely circulated stock-to-flow model to quantify the impact of Bitcoin's supply reduction on price. Supporters of this view generally believe that investors have not yet fully priced the halving into current Bitcoin valuations.
Bearish View
Because Bitcoin's price approached its all-time high for the first time before the halving, market participants who view the halving as bearish for Bitcoin's price believe that the market may have already priced in this factor ahead of the halving, making it difficult for the halving itself to bring additional upward price momentum.
Scarcity, Predictability, and "Digital Gold"
Bitcoin's immutable monetary policy, combined with its hard cap supply of 21 million, is a revolutionary concept for a macro asset. The transparency of Bitcoin's daily issuance schedule allows anyone in the world with a computer to verify for themselves whether Bitcoin's issuance is proceeding as planned, without relying on or trusting any intermediary. Moreover, every node in the Bitcoin network can confirm that the 21 million hard cap supply remains intact.
The predictability and transparency of Bitcoin's fixed supply make this emerging asset a viable alternative store of value to fiat currency. Unlike Bitcoin's fixed supply, fiat currency is subject to the discretionary actions of central banks, which have the authority to adjust the money supply to manage economic stability or stimulate growth. This discretion results in no upper limit on the total supply of fiat currency and an unpredictable issuance schedule. Evaluating central bank actions reveals the impact of this unpredictability: in response to the global economic turmoil caused by the COVID-19 pandemic, the Federal Reserve printed $5 trillion out of thin air, more than doubling the size of its balance sheet. This money printing, along with U.S. government fiscal spending, seeped into the U.S. economy, helping to mitigate the negative effects of lockdowns and pandemic measures and stimulate the economy, but ultimately led to the highest inflation in decades. Even gold, hailed as the oldest scarce monetary asset, does not have a clear total supply, and its production, while determined by market dynamics rather than central bank policy, remains unpredictable.
Bitcoin's resilience through multiple bear markets highlights the broader market's reassessment of its value as a decentralized macro asset—transparent, predictable, and scarce. Bitcoin's monetary policy is fixed, and each halving further proves its vitality. Halvings will continue to occur, and stakeholders will never be bailed out by the system. The upcoming halving on April 20, 2024, will reinforce these facts and remind the market of Bitcoin's unique properties.
"If you don't believe me or don't get it, I don't have time to try to convince you, sorry." — Satoshi Nakamoto, July 29, 2010
