Why the Bitcoin Halving is Important for the World Economy
In the previous posts in this halving series, we’ve discussed some of the nuts and bolts of the halving feature along with the business cycle pertaining to the miners in the ecosystem. In this post, we will discuss why the halving is so important when looked at through the perspective of monetary policy and it’s ramifications on the world in the coming decades.
Bitcoin vs. Gold
Before we do that, let us take a step back and discuss Bitcoin’s closest processor, gold. Gold worked so well in the past as a monetary base for entire civilizations because it contained all the attributes we look for in money. Gold is durable, portable, divisible, uniform, has a limited supply and is generally accepted. The most important attribute and the one which contributes most into making gold what we call “hard money” is it’s limited supply. We have a finite amount of Gold in the Earth’s crust and the more we dig up, the harder it is to obtain the rest.
Measuring the Demand for Gold & Bitcoin
One way to measure the limitedness of the supply of gold is to look at ‘Stock to Flow’ ratio. This ratio compares existing supply, or ‘inventory’, of gold against the annual production. The current ratio for gold can be obtained by dividing the total supply (190,000 tonnes) by the annual production (2,900 tonnes) to get a ratio of 66. In order words, it will take 66 years for the supply of gold to double. This feature makes gold a strong store of value because the supply increases incrementally compared to any other asset.
Bitcoin Will Soon Become Scarcer Than Gold
The importance of halving events every four years is that they increase the stock to flow ratio of Bitcoin, making the new supply of Bitcoin scarcer when compared to the outstanding supply. After this past halving Bitcoin’s stock to flow ratio has inched closer to that of Gold and by 2024 it will have surpassed Gold. This implies that Bitcoin is the scarcest asset we have ever encountered and it will continue to get more and scarcer over time.
Bitcoin Scarcity Offers the Market a Safer Solution
The scarcest assets tend to have to most capital flow to them for the purposes of storing value. Gold is currently the best store of value, but Bitcoin is a close second. The halving feature is extremely important because it allows us to predict the stock to flow ratio well ahead of time. It cannot be changed or tampered with. This removal of uncertainty makes Bitcoin the safest store of value asset on the market.
This concludes our halving series! If you have any other questions or comments please do not hesitate to contact The Coin Shack.