# Can Block Reward Halving Still Increase Value?

There has been a lot of chatter lately about an impending event that represents a drastic change in the world of Bitcoin: In about 3 days the block reward is going to be cut in half from 50 BTC to 25. While it’s immediately obvious that this has potentially severe implications for miners everywhere, there is another aspect of the block reward change that opinions seem torn on, and I for one would like to take the temperature of the community.

It is known that the block reward is changing. It is known that it will be changing very soon. It is known that decreasing the inflation of a currency increases its scarcity and therefore its value. What’s not known is exactly how a market will react when the change is drastic and they can see it coming a mile away.

Bitcoin currently experiences an annual rate of inflation of about 33% – with the halving of the block reward that rate drops drastically to about 12.5%. Subsequent halvings will drop the inflation rate slowly to zero at which point Bitcoin becomes truly deflationary. We have sound economic theory for what should happen at every step along the way, but very few examples from real life where a massive reduction in the availability of an asset can be seen with exact precision years in advance. We don’t know the time scale of the market’s reaction.

The Bitcoin community seems to have divided opinions about what we’re likely to see in a few days, and while there are many theories most fall into one of two camps:

1. The majority of the community is ignorant of the inner workings of Bitcoin, especially the inner workings of Bitcoin mining. Most of them won’t see the scarcity coming so we can expect a large increase in BTC value following the block reward halving – it’s simple supply and demand.
2. Bitcoin is not only transparent about these things but has a community that knows and cares about them, too. Most Bitcoin users have seen this coming for a long time and the block reward halving is responsible for the price rise from $5 to$12 we’ve seen in recent days – it’s still simple supply and demand but the timeline is different.

It’s hard to know which opinion is right. Bitcoin is extremely transparent and it’s easy to see most of the market forces at play, but this specific issue comes down to one difficult-to-answer question: what percent of the community is aware of the impending change? It’s a hard statistic to find with any accuracy, but just for the hell of it I’m going to ask my audience anyway:

Will Bitcoin's value increase with the reward drop?

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I think that the market knows this is coming but that just means that when the new supply gets cut in half we will know why the miners have suddenly doubled the price they are willing to sell their fresh new coins for. They won't be able to get double the price until the supply actually gets cut in half so we have to wait for the event to actually happen before the market effects can be seen.

2. _bc says:

Not everyone needs to see this coming. Most miners see it, and have acted accordingly. They've influenced the market with their actions/inactions, and hardware.

Having said that, there was volatility before the halving, and there will be volatility after the halving.

Great work on the blog. Keep them coming, please.

3. Nicolai Hel says:

The supply of BTC will not be reduced. The rate of increase of supply will halve. This is disinflationary, not deflationary. There will continue to be more and more BTC available so to say that there is a "scarcity coming" due to the halving is incorrect and beside the point.

It is likely that the rate of adoption of BTC among new users, businesses and niches will continue to grow and probably exponentially for quite a while, so the difference between this growth rate and the reduced linear growth rate of the Bitcoin monetary base is what matters here.

Many have anticipated this decrease in the growth rate, but most have not, since there are many that just use BTC on a regular basis (eg. on Silk Road or day trading or gambling or …) and there are so many that have recently just discovered it for various reasons. The few people that would buy in advance of the anticipated increase in price are either speculators/inverstors or people who (think they) know what's going on and have a use for BTC in the fairly near future. For example, someone who wants to make some investments in miners. Most people just buy BTC when they need it and usually end up scrambling at the last minute to get it done.

The value of BTC compared to the USD will likely rise steadily since the adoption rate will continue to grow faster and faster for the foreseeable future, people will keep buying BTC mostly on an as needed basis and the growth rate of the monetary base will be much smaller than it has been.

I would argue that the having is almost a non factor in the medium to long term. I would argue that the Bitcoin adoption rate will dwarf the growth rate of the monetary base and we can almost treat the monetary base as standing still when things really start rolling in terms of adoption.

These are very early days for Bitcoin, but it is clearly buttressed by a cadre of freedom loving crypto-anarcho-geeks who will do whatever it takes to keep this ball rolling down the (truly) free market capitalism lane, and a cohort of experimenters and experiencers who don't like governments telling them that they can't enjoy whatever substances, pornography and gambling activities they deem fit to their mental health. With these two intersecting sets of users and maintainers serving as the foundation, Bitcoin will be supported while the rest of the world comes to see the beauty. This is how the Internet was born and flourished.

Love the blog, by the way. You are doing the Bitcoin community a huge service. Thank you.

• David Perry says:

Thanks for the kind words – and the several paragraphs of educational words – it's good to know people are actually interested in what I'm writing. The stats can only prove that people are reading, it's these kinds of comments that show I've actually made people think about something and that's what I'm all about.

Thanks for not just reading, but participating!

4. inflateaway! says:

Everyone knows no more than 21 million bitcoins can potentially circulate. Today's (and tomorrow's) inflation does not matter that much, since the 21 million BTC already exists in everyone's mind. Most bitcoins are hoarded because everyone understands they will never be more than that, and each increase in bitcoin's acceptance will increase it's value.

Why would the supply get cut in half? Most people buy bitcoins from exchanges, then turn around and spend them at a merchant almost immediately. The merchant then turns around and cashes the bitcoins back out at the exchange for their local currency.

I also wonder what will happen when there are no more bitcoins to be mined. The theory is, there will be enough computers building blocks in the chain by then, but I find it hard to believe miners will continue paying for electricity to build blocks, when there's no longer a monetary reward for doing so.

• Hiawata says:

The miners will still collect the increasing transaction fees.

6. Ramon says:

Start filling a bathtub with water at a rate of 1 liter per minute. When it's halfway filled, turn the flow rate down to 1/2 liter per minute. The impact is marginal, and will in fact quickly reduce the level of surface disturbance.

Bitcoin will continue to rise in value, albeit not without some initial volatility following the Great Halving. Once that settles, the primary factor returns to external demand.

7. Awesome site/blog, keep on posting interesting articles!