Data shows that the Bitcoin network fundamentals are improving at speed. As an illustration, as per NYDIG data, there were 25.6 million BTC addresses and 900,000 daily active addresses in late 2020. Currently, at least 40 million addresses hold varying BTC amounts in their wallets, as per Bitcoin.com data. The Bitcoin network has 955,380 daily active BTC addresses.
The network’s improving fundamentals prove that more people worldwide embrace bitcoin’s use case as a technology and an asset. Furthermore, a growing network effect is evidence that the network will exponentially be of immeasurable value in the future.
The growing number of BTC wallets makes Bitcoin difficult to displace. Its network’s strength is its strongest economic moat against its competitors. So, how has Bitcoin built this deep tenacity against the raging effects of the broad cryptocurrency market macro factors and its sentiments?
The Bitcoin philosophy
Fourteen years ago, Satoshi Nakamoto released the Bitcoin block 0 or the genesis block. Satoshi lodged the quote, “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks,” in the block. This Easter egg would become the cornerstone of the developing network’s ideology.
On Jan 3, 2009, governments and their central banks were bailing out private financial institutions whose excesses had set off the economic meltdown.
For instance, the US Treasury Department bought off $700 billion of toxic assets in their bank bailout package to prevent institutional collapse through insolvency. The quantitative easing (QE) rounds revealed the power of the private sector institutions over the global economy.
Then, they represented a shift in monetary policy. Governments had become extremely involved in the financial markets, establishing a problematic power flow between them and the financial sector. There were fears that QE measures would eventually lead to runaway inflation.
Bitcoin would offer an alternative approach. It invited like-minded users to join its network and abide by a financial system governed by hard-coded rules. Bitcoin would have a 21 million BTC supply, and its network effect would keep its limited supply an “inflation-resistant” asset.
Now, Bitcoin’s open-source software does not generate income for its network users. Neither does it divvy up dividend rights to users.
There is a cost to acquiring each of its cryptocurrency tokens. For example, to obtain bitcoin, its users must either mine BTC, receive it in trade, or purchase it off an exchange.
Then, BTC’s most important use case is that its supply will diminish over time like gold. But unlike gold, BTC’s supply will decline in a reliable, transparent, and predictable manner. Bitcoin has excellent “inflation-resistant” systems.
How would its network keep BTC’s supply constant? Through protocols such as the Bitcoin halving.
What is Bitcoin Halving?
The Bitcoin Halving is one of the most anticipated events in the cryptocurrency calendar. On the ‘halvening’ day, the Bitcoin code slashes its block mining rewards in half. Consequently, miners receive lower mining rewards for their block mining efforts. In addition, BTC halving lowers its hardcoded inflation rates by half.
Now, bitcoin miners are the backbone of its network’s security. They independently run the Bitcoin core software on their electronic devices forming an internet-like matrix that stretches across the globe.
Due to their data block mining efforts, Bitcoin can function without the interference of coordinating entities such as financial institutions. Bitcoin miners earn mining fees or block rewards when they authenticate 1MB worth of valid transactions.
They do so by partaking in a competitive process that solves a complex mathematical problem or a ‘hash .’Their robust computing power mining devices will produce a 64-character long random output, completing the hashing process.
This process will make that data block’s transaction records immutable. Another task is broadcasting valid data blocks to other mining nodes to prevent double-spending.
Bitcoin halving history
The bitcoin halving protocol cuts its mining by half after its mining network wraps up the mining process of 210,000 1MB blocks. On Bitcoin’s 2009 release, its miners would earn 50BTC per block reward. These high rewards were vital to its growing network.
They would incentivize the early adopters who pursued mining without a vibrant buyer market. The first halvening took place in 2012. First, it lowered the mining rewards to 25BTC. Then the 2016 halvening event dropped it further to 12.5BTC.
On May 11, 2020, one of the most memorable of the network’s halvings took place. It took place amid a renewed wave of quantitative easing. The FED printed $3.38 trillion between Jan and October 2021, turning BTC into the safe-haven asset of the pandemic season.
This event lowered the digital currency’s mining rewards to 6.25BTC. The next event will occur in early 2024. After that, miners will receive 3.125BTC as a reward.
Bitcoin halving implications on price action
Halvings brew a large amount of turbulence for the digital currency sector. This effect occurs because bitcoin miners have extracted 18.5 million of its 21 million supply from its ethereal mines.
Consequently, 89% of BTC supply is in circulation, and the digital currency’s supply is on rapid deceleration. It will run out by 2140.
It follows then that speculators will buy off any BTC they can find on exchanges since lower supply translates to high costs of new BTC.
As an illustration, after the first halving, BTC prices shot from lows of $12 to $1000 in one year. One bitcoin was selling at $670 at the 2016 halvening event. Its prices had shot up to $2,250 by mid-2017, hitting $19700 by the end of that year.
The 2020 halvening event occurred when one BTC was selling in the $8,700 range. The token’s price exploded after that, rising to $48,000. You can therefore say that halvenings are a long-term bullish signal for BTC.
Bitcoin halving implications on its mining network
As per Bitcoin’s hard-coded rules, miners can only discover a new block after ten minutes post a block reward. Consequently, a miner can solve the Bitcoin PoW algorithm and mine 3.25BTC every ten minutes. When BTC was new, this mathematical equation was not overly complex.
In 2009, you could easily win many BTC block rewards using standard multi-core computers. The Bitcoin mining algorithm complexity was low and attracted many crypto nerds and hobbyists who later grasped its philosophy.
These early adopters later became a crucial part of its network growth strategy. In addition, they evangelized to the masses of its BTC’s “inflation-resistant” qualities, increasing its network effect.
However, the mining process turned into a technical endeavor as more miners joined the network. Bitcoin’s code updates its mining difficulty every 2,016 blocks or epochs.
Moreso, the proof of work algorithm difficulty level adjusts the difficulty bomb whenever there is an influx of miners stabilizing the 10-minute block reward time.
It also lowers it when fewer miners are on the network, easing block reward discovery. This process also steadies the rate of inflation.
As an illustration, on Jan 21, 2022, the difficulty bomb hit an all-time high as North American and Chinese miners went head-to-head on block rewards. The algorithms’ complexity had also slumped in July 2021, when China banned commercial BTC mining.
Bitcoin’s mining network has grown steadily over time, and so has the sophistication of its mining equipment. Naturally, then, the continually rising demand and cost of BTC will bring more mining capacity to the network.
Consequently, the difficulty bomb will increase, barring miners that cannot keep up with the rising cost of specialized mining rigs.
As an illustration, the ASIC Antminer S19 XP, Antminer’s latest mining rig, sells at an average of $14,000. However, a fall in block rewards and a rise in difficulty bomb rates could lower BTC’s mining network numbers.
Mining will become less efficient, compelling, and unprofitable to individual miners. Some pundits say that this eventuality will centralize mining. Miners will consolidate into large pools, increasing their hashing power for profitability.
Centralization could cause a 51% attack. But, the beauty of a strong network is that it makes such attacks expensive. A 51% attack on Bitcoin could financially ruin an attacker. Then should a 51% attack occur, the network miners could activate a hard fork to secure the incentives they earn for working on valid data blocks.
As long network activity incentives miners on Bitcoin’s global network, a mining network will always be ready to secure Bitcoin. At the end, when miners eventually mine all bitcoin, their activity will have led to mass adoption and high volumes of global transaction rates. They will onwards generate profits from transaction processing fees.