Why does BTC have a halving event?
I used to think it was such a silly way to program the Bitcoin protocol. Why would the creator of Bitcoin introduce such jarring volatility on purpose? Cutting emissions in half every four years? Why? Why not 10% every year, 0.1% every month, or even 0.00002% every block? These are are completely valid options that would all accomplish pretty much the same thing: the reduction of BTC inflation to zero after a hundred years or so.
The halving event occurring every 4 years creates a very shocking event on a planned cycle. What's the point of doing it this way? The difficultly adjustment also acts in a similar way but every 2 weeks instead of every 4 years. Many have theorized that BTC mining difficulty could result in a death spiral and a seized network that doesn't product blocks if it happened to get unlucky at a bad time. In fact a token called Digibyte (now ranked slightly under Hive) created an open source technology called Digishield that allows difficulty adjustments to occur after every block.
But what actually happened during field testing?
Theory and practice are rarely the same thing. I can make claim all I want that the halving event doesn't make sense, but that's just a hypothesis. To reach a conclusion we have to look at the results and objectively dissect what actually happened. Has Bitcoin ever suffered a negative affect from the cataclysmic event that cuts the security teams wages in half?
There's some debate to be had.
Certainly it is not a very tough sell that BTC has never been in a compromising position because of the 4-year cycle. Emissions were slashed from 50 to 25 in 2012, then from 25 to 12.5 in 2016, and once more in 2020 from 12.5 to 6.25. Come April it will be 3.125.
Essentially every time it's happened it's been pretty much a non-issue for the network on a fundamental level. Everyone knows it's coming; nobody is surprised. The network has never been attacked because the income for security went down. In fact, everyone celebrates because of the speculative ramifications. Emission goes down, supply goes down, number go up. In fact number goes up so much that the USD amount we end up paying for security goes up exponentially over time even though it keeps getting cut in half every four years. Everyone's happy.
Volatility
What we do have to admit is that the halving event surely makes Bitcoin very volatile and totally unpredictable. As everyone guesses at what tomorrow's price will be, we end up getting huge up and down swings. This type of instability is bad for a currency and becomes poor yardstick for measuring value (unit of account). And yet everyone celebrates because number go up on the average.
4-year cycle
The halving creates a very defined four year cycle. This tends to be bad in terms of how wildly unpredictable the price is from a month to month basis, but also is nice that over these 4-year periods we often have a very good idea as to what's going to happen in general.
- Halving event into rampaging bull market.
- Rampaging bull market into crippling year long bear market.
- Crippling bear market into a ninja bull market that everyone thinks is bearish.
- Everyone recognizes the ninja bull market and forgets they ever thought otherwise.
- Modest bull market into the next halving event.
- Halving event into rampaging bull market.
- The cycle continues.
The craziest thing about the 4-year cycle is that it somehow tricks the human psyche into being convinced it doesn't exist. Every single cycle we hear the usual suspects say extremely cliché taglines like, "This time is different." It's become a meme at this point. The psychology of it all is fascinating. How many were convinced price would drop to $12k or even $8k even though they all have lasted almost exactly 12 months each?
Spoiler alert: it's not happening. We are a full two years past the last all time high, and only just did have people started to snap out of it and put their bull market glasses back on, as predicted. This happened in 2019 as well. If the price isn't spiking straight up people are prone to call it a bear market even when the end price of the year is double the start price.
Bear market flush.
What I'm now coming to understand is that the volatility caused by the 4-year cycle is actually quite cleansing. It's like a wildfire that burns off all the stagnant or dead undergrowth and allows new life to rise from the ashes.
Every single bear market all of the garbage that gets built just gets absolutely annihilated no matter what, and honestly the more I think about it the more I realize how amazing that is. In 2014 we got the MT GOX collapse. Too much BTC in one centralized place without enough security and multi-sig protection. Flush. 2018 all the ICOs got flushed. Bye bye. 2022 all the DEFI garbage got flushed. 3 arrows capital: gone. TERRA LUNA: goodbye. FTX: sayonara. In fact just hours ago SBF was found guilty on all seven charges. Not that I care or wish him harm, but these things did happen.
Conclusion
So we can see that the disgusting volatility that the halving event creates could actually be a good thing. Could Satoshi Nakamoto have possibly foreseen this? I'm skeptical. It might just be a happy accident, but it's also possible he may of had some kind of hidden insight as to why to setup the network in this manner.
Bitcoin has a pulse. It's alive. Every block forged is a representation of this ideology. The halving event is like a snake shedding its skin, and when it does it seems to not only leave behind unwanted emissions but also all the centralized and greedy hunks of garbage that exist wholly outside the network. Bitcoin is very much attached to all products created within the industry. Even this indirect connection has to power to crush greedy scammers and force them back into the darkness. Just ask NFTs.
Even more importantly: the halving event creates an artificial cycle that trumps the legacy macro environment. We've gotten firsthand experience with this just recently. Doesn't matter that the economy looks bad. Doesn't matter if another war just broke out. Doesn't matter if we are printing billions to send it overseas and printing billions more to service the national debt. Bitcoin simply does not care. The 4-year cycle has spoken. The bull is back for 2 more years. Don't jump on the "this time is different" bandwagon when it rolls around. That's bait.
