Bitcoin Halving

Everyone's going to be talking about it. And actually the way prices are going, everyone's already been talking about it and anticipating what will happen. And we're going to probably talk about our two cents on it as well. Yeah, hang tight. Let's let's explore Bitcoin halving.

And it's in the anticipation of the Bitcoin halving event. So let's get into what the halving means,

It's always good to know about this technology because whether or not bitcoin stays , the technology underlying it is definitely here to stay because that adds a lot of value intrinsic or otherwise. Before we talk about Bitcoin halving, maybe it's worthwhile to just talk about what is cryptocurrency. We had a Bitcoin. episode a long time ago when it was popular and trending back in 2020 or 2021, but we've gathered more subscribers and regular listeners.

And there's always, possibility that you've not known about it. So , let me just give a brief outline of what it is. So I suppose the first question I'll start with a very basic question. So the first thing to think about is if it resides within computer , why can't I just copy and paste and make more bitcoins ? we'll start with answering that question is that we can't do that. No one can do that.

And if it was possible, then there won't be any value of any currency because everyone would be doing it and it would be like a million percent inflation overnight or over an hour. So for a coin or a currency to work, it has to have that kind of regulated circulation in the market. Otherwise everyone would have as many as they like. And that doesn't work. Okay. What is crypto currency the name crypto currency.

It, you can guess it's a currency of a sort, and it is protected by cryptography which is widely used in many other things in cyber security. You have many ways of securing data and any kind of transactions using cryptography. It's, using an underlying technology called blockchain technology.

Blockchain technology is basically many people or many organizations around the world validate how much currency everyone in the world has at all times and because it's validated by many people around many different countries, there is no central authority who can manipulate it. As a result, it's a fully independent of any government or any kind of government. Third party organization, which is what the main attraction is for cryptocurrencies.

Uh, Bitcoin one of the first currency that uses this technology and then became popular. There are many other cryptocurrencies as well. Second popular, is Ethereum. And then there are many hundreds and thousands of Currencies that are in circulation in the market today, and there are exchanges where you can, transfer each of these things between each other and also buy them. So I guess that's a very brief introduction of cryptocurrency and Bitcoin.

, Amit: uh, one of the things that you mentioned is that it's maintained by many people. So that's why it's called a decentralized currency because it's decentralized in nature. Most of the currencies in the world are maintained by central banks. The pound is maintained by the central bank of UK, which is the bank of England. And the the U S dollar is maintained by the federal reserve.

So the circulation and the demand and everything is maintained by a central body, but with Bitcoin that's not the case because many different entities can download the blockchain and They can maintain the ledger. So it has a decentralized nature. You can go to the Bitcoin website or the blockchain website and download the entire Bitcoin blockchain and you can see the transactions. Of course, everything is encrypted, so you will not be able to identify people by names.

But you, if you can get a string of their digital wallet, then, and if you can track the currency and if you know someone's digital wallet ID, then you can trace all the transactions that they have ever done or from one person to another person. And to maintain a blockchain, you basically have miners and Bitcoin halving is actually related to this mining activity. Bitcoin, when it was invented by Satoshi nakamoto, and it was the first cryptocurrency, it's a digital currency.

And the main problem that they were trying to solve is how do you prevent cut copy paste in a digital world? And the way he came up the solution with which he came up with was basically blockchain. And blockchain means, there are different blocks. Each block has different number of transactions, say five to 10 transactions. And these blocks get added in a chain. So you can add a set of transactions in a block and that block can be added to the previous block.

So suppose there are 10 blocks and you want to add the 11th block will have say 10 transactions and then it has to be added to the 10th block. Now the part in which you have to add it, that is the part where you have to solve a cryptographic problem. Basically, you have to identify certain number of zeros in a certain string of numbers. So you have a 13 or say 20 digit number. And in that you have to identify the first 10 digits, which are zero through a cryptographic algorithm.

which Satoshi Nakamoto created. If you are able to solve that problem you will be able to attach the block, the 11th block to the 10th block, and you will get some bitcoins in return. So that's called mining. So you are basically solving a mathematical problem. through computation and getting rewarded for your work. So that's why Bitcoin is basically the blockchain is based on proof of work. Ethereum is based on proof of stake. So that's the main concept.

And once the mining is done, the miners, are the people who actually attach the transactions. So not everyone can attach a transaction. You can mine a Bitcoin but mining takes a lot of processing power. And initially when the Bitcoin was invented the mining was pretty simple, but as the blockchain increases in size because We are talking about 100 say 10 years of transactions or 20 years of transactions, and there are millions of transactions. So you can imagine the size of the blockchain.

So it's, it must be about a million blocks or maybe more. So if and the challenge and why it is so efficient is that when you want to add Say a particular transaction because the ledger decides who has what coins at any given point in time and that ledger decides Okay, you have these many coins. You have that many coins you have paid this much to this person So now you have only this much and not that much.

The way they make sure that no person can put a fraud transaction in the blockchain is suppose you want to add a transaction in the middle of the blockchain. The problem is you'll have to calculate the cryptographic algorithm for each of the previous blocks. So suppose you want to add a block after 1 million blocks. So that is 1 million and 1.

So in order to put that 1 million and 1 block, you'll have to calculate the cryptographic, the algorithm or the value for each of the previous blocks, because you don't know it and you're modifying it. And any of the blocks after that have to be recalculated as well. So basically your ledger will be different from someone else's ledger. And all these ledgers are then tabulated to make sure they're all in sync. If one is not in sync, then it means some fraudulent activity has occurred.

And that is the basis of this blockchain and that's why the decentralized nature prevents fraudulent activities. yeah, that's a, it's a really intriguing sort of technology, the way to think about the whole monetary system. And this is completely different than all the other traditional ways money was handled because the traditional money is what we're calling Fiat currency now.

So the way Fiat currency has been for centuries is that, you never knew exact amount of how much money is in circulation. , there was an estimate, of course, but there was no guaranteed that this is exactly it. Now the this whole technology, blockchain technology, imagine this, that, in a country, there is only one bank. And that bank is giving out, cash money to everyone to survive and, to go about their days.

But what is happening is we don't know the transaction the bank is making with everyone. And we also don't know the transaction people are making with each other. What if all of those transactions were public? So that's what's, that's what the case is for all the cryptocurrency. Every user has a wallet and all the transaction ever has taken place historically from the very start of Bitcoin or any cryptocurrency until now up to this very second.

Every transaction to every wallet between wallets to exchanges outside exchange Everything is recorded and is public so you're able to download the whole history right now Although you have to have a serious amount of hard drive space for it, but it is available right now for you to see even online you can just literally type your wallet address and see all the transactions they've made historically ever.

Now what that makes sure is that Everyone is in agreement with what wallet has how much currency and what wallet had how much currency on a given date and time, which makes it impossible to copy Bitcoin or any other cryptocurrency or any kind of fraudulent activity . Obviously, humans have found other ways to be fraudulent, but this whole monetary system is fully protected from fake notes , in real cash situation.

If you have fake notes in circulation, You have other sort of government policies that public don't always support the, that government interventions. Bitcoin and all other , cryptocurrencies are protected from all of that because it's decentralized. No one has control over it. And everyone knows all the wallets and how much each wallet has and all the transactions and they will continue to know until Bitcoin is available and alive.

So that's like the sort of the new way of thinking off of a monetary system, where this works. And that's the whole blockchain as Amit you just explained. So that's a cryptocurrency in not just briefly, but we went into quite a bit of detail, but it can only help to understand what happens. So Amit, you were mentioning the miners validate, it needs to be validated by poeple and you can become a miner today.

Although you need, you would need serious level of computing power now that it is really popular, but in all honesty and no one's stopping you from becoming a miner today and validating becoming one of those end points or one of those nodes, which who says that, yes, I agree that, all of these wallets have these amounts and if you're in agreement with everyone, that means you're contributing to the network. Now, obviously miners need some sort of, um, return for their investment.

They're having to spend time, money and effort into it. And one of the ways they get return is. As long as they're giving the correct answer to the algorithm questions they are rewarded I

But what if you could have 0. 00001 to the eighth place of decimal pence and that is the beauty of a digital currency. So you can go up to the eighth place of decimal. So you can actually own 0. 001 Bitcoin. And that has a specific value in terms of dollar or pounds. So firstly, you have total number of coins , that can be mined is finite. Then, because it's a digital currency, it can be broken down into up to eighth place of decimal.

And now what the network does is that the network increases or decreases the difficulty of the challenge that needs to be solved. So the network has to generate a Bitcoin every 10 minutes. That's the whole thing. So it generates bitcoins every 10 minutes. So every 10 minute you add a block, you get some bitcoins. And based on that 10 minute analysis the bitcoin halving is now every four years. Now, why every four years?

So Satoshi said that after, or he designed it in the in his white paper that the amount of bitcoins that you get for adding every block reduces by half. So suppose you were getting say 20 bitcoins for every block you're adding. Now you will get only 10 bitcoins for every block you're adding. So the miner now has to figure out how do I remain profitable? Because say when you were getting 20 bitcoins, the value of the bitcoin was say 1, 000.

But now you're getting 10 bitcoins, the value of bitcoin might have shot up. So you're fine. You're covered because the value has gone up. So you can bear your cost or you add transaction costs. So every time a block has to be added, there is a fee attached and you increase the fees. But normally the Bitcoin price appreciates during the halving event. So and then the network adjusts.

And so suppose the, so the network behaves in a way that suppose there are a lot of miners, so the difficulty increases to keep the 10 per minute number stable. Now, suppose, there are not enough miners, the difficulty drops so that it can still generate every 10 minutes. And this ensures that there is a constant flow of bitcoins up to a certain number of years after which it is halved. And this halving occurs every four years. So this is today's trailer.

We are in 2024. The last halving was in 2020. And then the one before 2016 and the one before was 2012. And if you have been following Bitcoin, I got onto Bitcoin somewhere around 2016, 2017. And that's when the price shot up. Quite a lot. So 2016, 17, 18, the price went very high. Then it came down and then it got stable. 2020, it again went a bit high, came down, went stable, and now it has again come up.

So people are anticipating that because of this, in the network, Now you will generate less bitcoins. So whatever bitcoins are already there in the network becomes more precious. And that's what they are thinking that, okay, maybe it should be of more value. Now, no one knows what happens once the 21st million bitcoin is generated. Everything drop will people just cash out and then no one is there to maintain the network. What happens after the 21st million Bitcoin generation?

No one knows because we have never been in a scenario where this event can occur. But. We know that it won't be mined for I don't know the exact number of years, but it won't be mined for the, for many foreseeable years. So this event Bitcoin halving is important.

Now, after the 21 million Bitcoin is already in circulation and everything is created, then, as you said, we don't know what to expect. What will be the price? Whether everyone's just going to leave it or will correct itself

But after 21 million Bitcoin is , in circulation, then there won't be any new Bitcoins that will be generated for you, even if you mine, but there is transaction fees of each transaction that is made. So all of the transactions that are validated by miners, they're going to distribute the transaction fee among themselves. Which may not be as a attractive, lucrative as it is now, but it will still generate money.

And as a result of not being lucrative enough, a lot of miners will stop their business stop putting effort into it. As a result, what will happen is there is going to be less miners in the in, in the world. And that would make it a lot less difficult to mine. So it would be a lot easier to mine.

So in order to attach a block, the computational power sometimes increases or decreases depending upon how many miners are there in the network. If the number of miners reduces, the computational power becomes easier so that you , still validate about one block every 10 minutes. Now because there are less miners, the problem becomes easy and the computational power over a period of time increases.

So now you have a three gigahertz processor, maybe in 10 years time you'll have a five gigahertz processor and maybe GPUs with 10, 000 cores. So you'll be able to calculate problems much faster, figure out the solutions and be able to calculate or add a block to say, 10 million or 1 billion transactions and you'll be able to calculate all the 1 billion parameters or they might be a quantum supercomputer.

The whole thing is that now fraudulent activities might become simpler if there are less miners and the cryptographic problems are becoming less hard. The pace of computer development or the chip speeds are increasing and it increases exponentially then we might see fraudulent transactions. I have to completely disagree you on that

Right now, it's just a sort of a racehorse whether, people are investing to make money because the price will increase and this is not how you buy pounds or dollars. You could potentially compare it to gold. But yeah, if it's a cryptocurrency, if it's a currency for future that you want to use to buy your daily grocery shopping, you can't do that now.

It's just impractical for the businesses to accept it and for you to pay with it either is completely impractical, but it might become practical when the whole market corrects itself. There is not much of a reward of three bitcoins every hour or whatever. And then, the validators are getting transaction fees as their sort of return on investment and people just use it on a daily basis to pay for stuff. So that could happen. That's one possibility, or it could just be abandoned by everyone.

That also happen. We've talked about Bitcoin and cryptocurrency and the technology in multiple episodes actually in the past. Obviously overall, now we're a little bit more mature in terms of knowledge. We know how it is , as you mentioned from 2016, 17, I've came to know about Bitcoin from 2018.

But however, the price increased since then, I've unfortunately not become a millionaire because obviously I bought a very small amount, a hundred pounds worth of Bitcoin at that time as early adopter as just, to know, but that was it. And , while I did make a decent profit more than if I had invested in S and P 500, but. It's still not life changing at all. What it is because of being with it and growing the knowledge all throughout, as well as having the time to think about it.

My opinion on Bitcoin, which I was a, like a blind fan before now it's a little bit more matured outlook , on this whole thing. There is obviously two sides to the coin and we should know about both sides. The main argument of buying Bitcoin are two. One is, Oh, it's going to be the currency of the future. It's going to replace the traditional currency, . So you can pay for stuff and live your life with it. And the other sort of convincing argument is, Oh, this is going to the moon.

And if you invest now, you're going to make a lot of money. Even though the prices shot up now, It could go even higher, double or triple , in value , in this year, now, these two things, these two reasons are self contradictory. It can't be both the currency that can shot up three times its value can't be a currency that can be used as a payment in Uber, because would you part yourself with your Bitcoin because it could be three times the value tomorrow.

And the way it's volatile a business wouldn't also take the risk of accepting it, or even if they accept it, why would they give it away ? These two sort of arguments are completely self contradictory, and that's one of the reason to be aware of. That it can be either one of these. It can't be both. So if you are thinking of buying and if you are thinking of investing a significant chunk of your portfolio, do think about it. What do you want as an outcome?

Are you buying it so after all of these hype is finished, do you want to buy a coffee with it? Pay for Uber with it? Is that why you're buying it now? Because the price would be higher. So you could get more in however many years when it becomes all normalized, or are you buying it in hopes that the price will go up and you're going to make a decent profit. Whichever one you want to go for is fine, but it can't be both. It can only be either one of them.

And obviously if you're investing for profit and , nothing we're saying is financial advice we would also say that, the whole of your capital is at risk and you could lose all of your money, not most of your money, but all of your money while doing this and if you're investing you're already aware of it anyway. The other thing I also wanted to talk about is a lot of people compare Bitcoin is the future replacement of gold.

And one of the reason why this 21 million the limit of Bitcoin is that it's comparable to gold. Basically there is a finite amount of gold. 21. million . And that is the limit. And that is all there will ever be. And Bitcoin is also, there will ever be 21 million Bitcoins. And that is all there will ever be. And it intentionally chosen this number to correlate with gold. And because it's a limited resource, the price can only ever increase.

Now, if it's a limited resource, and you also have to think about, it can't be practically worldwide used as a currency because inflation, as bad as it is, 1 percent or 2 percent inflation is necessary for growth in society. Inflation 2 percent is actually healthy for an economic system. And if Bitcoin circulation overall is limited forever , That part is like gold can't be increased and, gold is not a worldwide currency for a reason.

Obviously it was at one point, but all of these things that, Governments do to maintain the 2 percent inflation is actually useful in many ways. And also this is a recent, couple of decades worth of outlook is that we don't like when government intervenes. But actually, a democratic government not always works as we would like. But, usually they are doing the best they can for the betterment of the most of the people. So they're not always intentionally doing bad things.

They may be they're failing, but they are trying their best to keep it to 2%, which is a healthy inflation rate. So I would say that if it is going to be limited, can't increase, that's also a negative point for it to ever be used as a daily currency, it could be something a store of value like you store gold as an investment, which will eventually always increase in value, et cetera.

You could store it like that but to use it on a daily payment method might not be feasible in that respect as well. The other thing is, and this is something Warren Buffett mentioned quite a few years ago, last time bitcoin was popular and I've bought into that idea that it doesn't have any intrinsic value. It's digital currency. So people who are fans of Bitcoin and the technology would basically counter argue that nothing has store of value.

A cash money is just a piece of paper until government, a central government of a country says that, okay, this piece of paper 50 pounds or whatever. And that's what gives it value. Otherwise it's just an object. Now. That may be true. But a national organization, a national government and what they say is a lot more reliable source of information than any, anything, really.

If a whole country, a government is deciding something, Everyone in that country is already bought into that piece of paper as store of value. So that's one thing. The other thing is gold, regardless of giving any piece of any sort of store of value or not by government or anyone, gold has intrinsic value. It is a metal which doesn't react very often.

And The reason, thousands and thousands of years ago, gold became popular, gold and silver became something is because of its, various intrinsic values, which we probably don't care about very much today. Like it's shininess, it's non reactive property and its property to make it into jewelry and a representation of luxury that has been for thousands of years and Is still today. So gold has intrinsic value and maybe a cash paper doesn't or it does only because the government said so.

And you don't want to accept that. That's fine. But gold, regardless of governments, regardless of anything for its chemical properties, has intrinsic value. So limited amount of this material is going to be in short supply eventually when all of it is mined and dug up, but Bitcoin is only a has store of value because everyone said so, which is a good enough argument , and it will continue to be valuable as long as everyone says so. And it can continue forever for with this argument.

And I agree and subscribe to it as well, but just apples for apples and oranges for oranges, gold does have an intrinsic value, which no one can take away from it because of its chemical properties. Now, am I saying all of these to move you away from a Bitcoin and cryptocurrency? Absolutely not. I am a fan, still a fan.

Bitcoin have own Bitcoin and other cryptocurrencies and will continue to tell and promote it because it is a really good piece of technology, which can enable so many things in future. From art NFT and other various cybersecurity protocols with blockchain technology, these, all of these things are really good pieces of technology.

So, if you don't know about it already, do be aware, do more research, get to know about it and by some, obviously based on your affordability buy very little as Amit you were saying earlier that it can be divided into, 0. 000, eight, seven zeros and one Bitcoin, which is actually very much affordable, which is,

And Bitcoin is being treated as that, not as a currency itself, because you can't actually use it to buy anything in the physical world, but it is being used as a store of value. And the only reason it has this much value is because it was the first digital currency. There are many other currencies that followed and they have their own ledgers, which are maintained in their own blockchain. . One of the things that might happen is how do we trade in different digital currencies?

How do we trade between Bitcoin and dollar? How do we trade in that? So that's another interesting aspect, but it's not scope of this podcast. But from an investment point of view or for buying point of view, Treat of it as an investment for now, it won't be used as a currency, at least not now because it's very volatile and no volatile currencies , will ever be used for any transaction for goods.

Whenever a currency inflates quite significantly, they try to be a base it against a dollar value so that you know that the dollar value is normally very stable. So most of the countries that have a very high inflation they try to base it to a dollar value so that they can still do transactions meaningfully. Otherwise it gets out of hand very quickly. And a lot of people can get bankrupt. They can lose all their assets and they can be homeless.

And also when you hear on social media and everywhere, okay, this person ordered pizza with 10, 000 bitcoins and lost money or someone became an overnight millionaire. That's not even 1%. That's 0. 01 percent or even less. It is also because it's in short supply and not worldwide adopted as a, regular currency. It also is prone to being manipulated.

So someone who owns a lot of Bitcoin could just suddenly go to one exchange and sell a significant amount and his or her friends are going to be waiting. Soon as this one person sells a lot of Bitcoin. The Bitcoin price suddenly drops in one exchange and friends who are waiting to buy buys, and then it, what happens is regular people loses money in these while the rich are getting richer. So definitely be very when you do this, I would still encourage you to be involved. But very carefully.