Friends and associates,

In architecture, the keystone is the wedge-shaped stone piece at the apex of a masonry arch or the round one at the top of a vault. Though seemingly just one piece among many, the keystone is crucial because it locks all the stones in position, allowing the arch to bear weight. It's an apt metaphor for something that appears insignificant yet proves essential for stability and function, much like the halving in bitcoin’s lifecycle.

Programmatic Scarcity

The appears minor since daily issuance is small compared to daily trading volumes, and there is no doubt that its significance reduces over time as Bitcoin’s trading volumes rise and new issuance falls. However, it's a crucial psychological marker that reinforces Bitcoin's unique value as a non-state, censorship-resistant, and scarce digital asset. There are no other assets of Bitcoin's stature that programmatically reduce new supply issuance.

Bitcoin's annual inflation rate has now dropped below 1%, which is lower than gold, making it the world's preeminent pure store-of-value asset.

Monetary Independence

The halving showcases a revolutionary concept: monetary policy can exist independently of governmental influence, a game-changer for the financial world. Imagine a scenario where financial markets had precise knowledge of central bank actions years in advance. Could we create robust economies that don’t require constant policy tinkering?

That is a lot to get one’s head around and it is unclear how the existing economy would navigate a world where central bank life support was suddenly unplugged. (Long-term, I am convinced the global economy would be significantly better off, but heroin addicts struggle to break an addiction cold turkey...)

The bigger the bitcoin ecosystems, the less painful the transition and the greater the reliability of this new world.

Miner Dynamics Raise Bitcoin Floor Price

The overnight doubling of Bitcoin mining production costs during the halving has a substantial market impact. In other words, post the halving most of the miners remain in business but the mining ecosystem only gets half the reviews so cost/bitcoin doubles.

In the subsequent weeks, inefficient miners exit the market, reducing mining costs. However, production costs don't revert to previous levels, establishing a higher base cost for Bitcoin.

Production costs are a way to value bitcoin

I would argue that bitcoin's pricing is not primarily determined by production costs because it is more akin to a new monetary technology, an alternative store of value or a new financial infrastructure but production cost has historically served as a price floor. This parallels with the gold market

If the price falls below the production cost, it's a temporary scenario. High-cost miners exit the market, causing the hash rate to plateau and decline, which would lead to an increase in production cost thereafter. Additionally, miners become less inclined to sell at a loss when price is below production cost, leading to a stabilization of price at these levels

Take-away: the market remains biased higher in a halving year, despite the reduced importance of each subsequent halving.

I recently had the pleasure of joining Tania Habimana on CNBC Africa alongside Neil Wilson from Finalto to delve into in the halving and a few other topics. I hope you enjoy:

Rob Price, CFA

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