By: 7 May 2024

Cryptos like Bitcoin are unregulated externally, but they self-regulate

Is Bitcoin halving global monetary policy?

When Bitcoin was released in 2009, by a person whose real identity is still unknown, it wasn’t the first crypto. But in the 15 years since, it’s become by far and away the biggest and most well-known.

We all know that crypto currencies are unique because they’re not regulated by any central government body, for example The Bank of England. As such, they offer freedoms not available with regular currencies. But is all as it appears on the surface?

Is it true to say they have no monetary policy at all?

Before we get ahead of ourselves: what exactly is Bitcoin halving?

Like all currencies, there are a finite number of Bitcoins: 21 million. As of writing, 19,691,600 coins have been mined, leaving little over 1.3 million left, and it’s estimated that all Bitcoins will have been mined by 2140.

Considering 93.7% of Bitcoins have been mined in 15 years, why will it take another 116 years to mine the final 6.3%?

Bitcoin halving.

Every four years, or 210,000 blocks, the number of Bitcoins produced by mining is halved. Hence the mass slowing down of their retrieval.

Why does Bitcoin halving exist?

Firstly, it prevents inflation by controlling the price of the coins.

Secondly, it ensures the value doesn’t drop too dramatically. It does this by creating scarcity.

Indeed, this scarcity may actually cause the value of Bitcoins to rise when they’re halved, as investors and traders seek to get their hands on the increasingly rare coins.

It’s the first point that people look to as monetary policy: preventing inflation is one of the key roles of a country’s central bank. By replicating this through Bitcoin, some people argue that Bitcoin halving is monetary policy.

OK, so what makes it monetary policy?

So, we know that a monetary policy is action taken by a central bank to regulate and control the flow of money in a given country’s economy. You’ll have seen the headlines about changing interest rates to control inflation – that’s monetary policy. One of the main ways this is done is by changing interest rates to control inflation.

What’s the difference between a central bank doing this, and the Bitcoin halving?

It depends on how literally you’re taking it all

The short answer is: Bitcoin halving is not monetary policy in a literal sense. Monetary policy is defined as, “Controls by a government or central bank to control currencies/pricing in a nation.”

Now by its very nature Bitcoin isn’t controlled by a government or central bank, and it doesn’t belong to a single nation, so if you take this definition on face value, Bitcoin halving is not monetary policy.

However, when you remove the government or central bank, as well as nation, from the definition, you’re left with, “Controls to control currencies/pricing.”

So, by that definition, the Bitcoin halving – which controls the pricing and abundance of Bitcoin – is very much monetary policy.

What do the experts think?

Edvards Margevics, co-partner at CONCRYT, the Latvian paytech company, believes Bitcoin halving is not monetary policy – it’s simply market dynamics:

“Bitcoin may have been created as a decentralised alternative to the existing financial system, but I’m sceptical of the view that halving works as a monetary policy.

“Blockchain records can’t be changed once created, and the limit of 21 million bitcoins which was built into the code at its inception sets bitcoin far apart from any other monetary instrument.

“Whereas central banks can decide to raise or cut interest rates, or put more money into circulation and take it out as tool of economic policy, there is no such governance of bitcoin. Nobody has the power to change the supply of bitcoin apart from the founder, and it’s unlikely they will emerge from obscurity to upend the intended purpose of bitcoin.

“The only monetary incentive attached to bitcoin is in the mining rewards available. As more bitcoins are found, it stands to reason that the rewards on offer will decrease as the bitcoin supply becomes more flooded. But conversely, the rate at which new bitcoins are discovered could result in a slowdown in supply growth, which could push up the price of bitcoin. There could be less bitcoin available to buy if miners have less to sell. This is not so much monetary policy, but simple supply and demand market dynamics.”

However, Sasha Skoryk, head of banking at paytech Clear Junction, disagrees. He sees Bitcoin halving as quantitative tightening for crypto:

“Bitcoin’s halving is not a big deal for investors who use it as a store of value, nor for those who use it as a transactional instrument – but it’s a huge deal for miners of the coin as it reduces the level of rewards available, meaning there may be less incentive for them to keep mining for block rewards.

“In 2009, bitcoin miners were rewarded 50 bitcoin. In 2024, it was reduced to 3.125 bitcoin. While miners can earn revenue from transaction fees, it’s the block rewards that provide the bulk of their revenue.

“Although halving means more scarcity, this won’t necessarily translate into higher prices for bitcoin, as unlike other speculative assets, it comes with its own supply and demand dynamics. There will only ever be 21 million bitcoins in circulation – this is fixed for perpetuity.

“When we look at previous halving events, halving can be seen as a kind of monetary policy or crypto quantitative tightening. Given how expensive mining is, with hardware and high energy costs to account for, this quantitative tightening could make bitcoin an unprofitable endeavour for some miners.”

Either way, it isn’t without its risks

Whether you believe Bitcoin halving to be monetary policy or not, it doesn’t change the fact that Bitcoin, as with all crypto currencies, is extremely volatile. Whilst the price of Bitcoin has risen steadily, from an initial price of $0.10 per coin to a high of $73,794, it’s fallen sharply on a number of occasions.

The European Securities and Markets Authority (ESMA) has warned investors to be careful when investing in crypto, particularly as digital investments aren’t protected in the same way that cash ones are.

If you’re looking for high risk, high reward investments, then crypto may be perfect for you. But if you’re the kind of investor who likes a bit more guarantee when it comes to your money, perhaps try elsewhere.

Image: André François McKenzie on Unsplash

Robert Welbourn
Robert Welbourn is an experienced financial writer. He has worked for a number of high street banks and trading platforms. He's also a published author and freelance writer and editor.