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Bitcoin cycles

It is often said that there are 21 million Bitcoins and in this article we will try to better understand how this important number is arrived at.

Before Bitcoin any digital file, let's think of an MP3 song or a JPG image, could be copied unlimitedly by anyone who came into possession of it, while with Bitcoin the concept of scarcity is introduced into the digital sphere for the first time and it is precisely this intrinsic scarcity that gives value to Bitcoin. In economics, in fact, the price of a good depends on its scarcity and not on its actual usefulness. Oxygen, for example, is very precious to human beings, but on the earth's surface it is free because it is abundant, while a Picasso painting, as there are few and many people would like to have one at home, is worth millions of euros, even if it is not useful for human survival.

Conversely, Bitcoin combines a specific utility, namely the possibility of transacting P2P value, without intermediaries in a secure and inviolable way, which together with the scarcity amplifies the demand and consequently the value.

But where does the number 21 million comes from?

Satoshi Nakamoto, the pseudonym behind the founder (or founders) of Bitcoin, has established a deflationary policy for issuing new Bitcoins, i.e. the remuneration expected for those who keep the Bitcoin network and the blockchain alive.

The issuance of Bitcoins was initially defined as 50 bitcoins every 10 minutes (the time between one block of transactions and the next).

The issuance curve of new bitcoins is expected to decrease over time, so as to generate an ever-increasing scarcity and therefore an upward push in the price.

So Bitcoin protocol was designed to halve the remuneration to the "miners" (those who validate transactions and write new blocks into the blockchain ledger), every 210,000 new blocks; consequently, every 4 years or so there is a halving of this reward in bitcoin, trusting that the value converted into dollars of the same is compensated by the appreciation of the value of the bitcoin due to the imbalance between supply and demand.

This "Halving" in these first years of bitcoin's life, has already happened three times as shown in the graph below, going from 50 bitcoins per block to 25, then to 12.5 and today 6.25.

Since there is an average block every 10 minutes and consequently 144 blocks per day, this means that today 900 bitcoins are issued in the system per day against the 1800 that were distributed until May 11, 2020, the date of the last halving.

About 19 million Bitcoins have already been mined to date, and another 2 million will be mined until around the year 2140. At the current rate of monetary base expansion, Bitcoin's inflation rate is 1.8%, already below the Central Banks' target inflation rate, and will asymptotically tend to zero, making it more attractive to hold, in terms of maintaining purchasing power, compared to traditional currencies.

If the above is true, it can be hypothesized that the trend of bitcoin is strongly influenced by this phenomenon of halving of new bitcoins issued and also that the price of bitcoin undergoes strong upward pressure in the period following this phenomenon.

Let's try to see together, with the following graph, if this is true.

Analyzing this graph, it can be seen that historically there have been three phases that distinguish the Bitcoin cycle, starting in the period immediately after the halving (darker band) where it can be seen that the pressure on the price has always been very strong, reaching unreasonable peaks of value dictated by FOMO (Fear of Missing Out) or by the phenomenon of investors who are attracted by stellar returns and invest when the price has grown too much, and are followed by a phase that technicians call "crypto winter", where enthusiasm is frozen by a drastic price reduction.

Finally, a so-called pre-halving phase begins again, in which we could now find ourselves in anticipation of that of 2024, where the most savvy begin to accumulate bitcoins.

On the lower part of the graph, the days that elapse between the minimum of the price and the halving and from this advent to the subsequent relative maximum are highlighted; it is simply extraordinary and amazing how regular the cycles of Bitcoin have been.

Obviously this does not mean that there is any guarantee that this will happen again in the future, but it would simply be naive, after having made this analysis, not to take it into account for informed investment decisions.

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