Will bitcoin undermine the Legacy Financial System, as intended?

This morning’s radio told me something it hadn’t before. The bitcoin price – it was up about 1% according to the announcer. They slipped the new addition into the end of the usual financial market update.

It isn’t the price that was noteworthy though. Nor the increase. The fact that the announcer mentioned it at all was the surprise.

Why did bitcoin suddenly feature in the radio’s news summary?

Well, my friend Sam Volkering has kicked me out of my own newsletter to explain why.

Paid-up subscribers of any Southbank Investment Research publication also receive something called Southbank Investment Daily. The idea is to form a community of readers and editors to showcase our best ideas. Without giving too much away.

Sam co-opted the publication for much of last week and part of this week. Now that the big event which made bitcoin a radio news item has passed, as Sam predicted it would, I think it’s fair to share here in Exponential Investor what happened too.

Sam explained last Thursday what was coming:

The Crypto Eclipse

Now as I mentioned yesterday I’m going to fill you in on the “halvening” or “halving” depending on your nerd level rating. My nerd rating is mega-high, so I typically call it the “halvening”.

[…] and it’s important you have a base understanding of what it is and why it exists before it happens on Tuesday.

And to understand it, you need to go right back to the start of it all…

It’s in maths we trust

Do you remember where you were on Saturday 3 January 2009?

I do.

I was tucking into a BBQ and beers at home. It was just after New Year and only a couple of months earlier I’d returned from a six-month sojourn through Europe. In fact, my final destination was London before heading home to Melbourne, Australia.

While I enjoyed the Aussie summer sun, I didn’t realise history was unfolding as well. And that very day, unbeknown to me, would change my life forever and countless others.

Just none of us really understood that yet.

That was the day The Times ran the headline, “Chancellor on brink of second bailout for banks”.

It was also the day of the bitcoin genesis block. The very first block of bitcoin’s blockchain that in the 11 years since has never once stopped working.

That was the history making part by the way, not The Times headline.

Now bitcoin exists because it was coded, programmed and applied in a peer-to-peer network that has been growing ever since. And in bitcoin’s original, genesis block raw data, was some text that read, “The Times 03/Jan/09 Chancellor on brink of second bailout for banks”.

There’s a good reason bitcoin’s genesis block raw data has that extra bit of text.

It’s because one of the core philosophies of bitcoin is to be the antithesis to the legacy financial system. As the system was failing and crumbling at that time bitcoin was being born.

And today, it continues to play that antithesis role. It is the alternative to centralised, concentrated, controlled financial power and manipulation.

It is per the original whitepaper, designed to be a medium of exchange over the internet. But its philosophies of existence are very much rooted in a new, different, alternative economic system to the legacy one that continues to fail today.

When you start to appreciate that origin story, you start to really get an idea of the importance of bitcoin during this current financial crisis.

However, what was also a part of bitcoin’s core code, part of the code that continues to enable it to function unbroken and undisrupted, today is what we call the halvening.

You see, there has to be economic incentive for peers on bitcoin’s network to secure it, add blocks to its blockchain and verify transactions – to keep the system running. These peers are “miners”.

They “mine” by solving a mathematical difficulty algorithm – that’s incredibly complex and hard to solve. By solving it, they “mine” a block, which is added to the blockchain. Within that block are all the verified transactions that have taken place during that particular block.

Now mining has costs. Energy costs, time costs, hardware costs. So there must be some economic incentive for miners to continue to keep the network running. And there is.

The block reward.

Rewards and difficulty = incentive

The block reward is the number of bitcoin that miners are rewarded with for mining and adding blocks to bitcoin’s blockchain. When bitcoin first started, in order to attract more miners to the network the bitcoin block reward was 50 bitcoin.

And in bitcoin’s code, that cannot be changed – the bitcoin block reward would be cut in half after 210,000 blocks.

Another part of bitcoin’s code is known as the difficulty adjustment. This is a dynamic system that adjusts depending on the speed at which blocks are mined.

The “target” speed of block mining is ten minutes. That means the bitcoin blockchain is set to add one new block every ten minutes. If average block speed is nine minutes, the difficulty will adjust to make it harder to solve the difficulty algorithm, to get back closer to the target ten minutes. Likewise, if the average block speed is 11 minutes, the adjustment makes it easier to solve the algorithm – always aiming for that ten-minute target.

This difficulty adjustment happens every 2016 blocks. So quite frequently.

That’s important because it means that roughly every four years we get 210,000 blocks. And that roughly every four years we will subsequently see the bitcoin block reward halve again.

The halving is set to continue to take place until all bitcoin are eventually mined – which is estimated to be sometime around the year 2140. The economic incentive from there, being transaction fees that are included in each block.

Right now, we’re still in the early days of bitcoin’s progress and the wider crypto ecosystem’s development.

But so far, every four years marks a new halving event, and what I’m saying is the catalyst for the start of a new bitcoin and crypto megacycle. So far, each megacycle has led to a boom in crypto awareness, adoption and importantly value creation.

This happened during the period after the first halving in 2012 (the first 210,000 blocks came faster than expected). This cut the block reward from 50 to 25 bitcoin.

Between 2012 and 2016 bitcoin’s value skyrocketed. And we saw an explosion of crypto projects developing and innovating in a way that was not anticipated.

Then in 2016 we prepared for another block reward halving. And at block 420,000 it happened again, cutting the reward from 25 to 12.5 bitcoin.

And from 2016’s halvening to bitcoin’s peak in 2018 the value went from around US$650 to almost US$20,000. And even today, bitcoin’s value is US$9,300 some 1,760% higher.

Well, we’re at the end of the second megacycle, and I believe on Tuesday we’ll step into the third megacycle.

The block reward will half again from 12.5 to 6.25 bitcoin. And I’m saying that I think we’ll see another repeat of the last two megacycles. But this next one could be bigger and better than the last two.

Of course, past cycles are by no means a guarantee for future action. But hey, you can’t ignore patterns and trends either, right?

What we know however, is that each cycle is about far more than just bitcoin. It’s a massive, expanding ecosystem of cryptocurrency that holds endless potential.

And the real event that you need to know about isn’t just the bitcoin halving and the impact it will have… it’s the Crypto Eclipse and how that’s going to change the legacy financial system forever.

Now you’ve missed the Crypto Eclipse – the big event happened on Tuesday.

But, as you just read, the bull market in bitcoin after halvenings takes years to play out. So you haven’t missed that. Yet.

The thing is, Sam isn’t just focusing on the halvening’s effect on bitcoin. In the last few years, many variations on bitcoin have developed, some of which may be better. Sam explained this to Southbank Investment Daily readers on Monday:

It’s the development of crypto like these, and others in the flourishing crypto space, that’s the real story and real opportunity in play here. I think that while bitcoin will be the preeminent crypto for some time, the real opportunity for investors from the halvening on Tuesday will rest with other key crypto in this next megacycle.

That’s part of the story behind The Crypto Eclipse and a big reason as to why I think you need to tune in and see what I have to say in my special briefing going out this afternoon. I’ll provide more detail on all of this and the three cryptos (that aren’t bitcoin) that I think will be the real winners should we see a new megacycle.

To find out exactly how Sam believes you should profit from the coming crypto bull market, and which cryptocurrencies will outperform in the coming megacycle, you can watch his webinar here.

Nick Hubble
Editor, Southbank Investment Research

Category: Cryptocurrency

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2020 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑