By Annabelle Pollack
This new model will allow SALT to distribute risk, enhance security, reduce interest rates, fund loans more swiftly, and focus on expanding its suite of wealth preservation products
We’re excited to announce Fireblocks, a platform that secures digital assets in transit, as our first partner for securely storing and transferring customers’ collateral assets. The partnership with Fireblocks marks a shift in SALT’s business model from self-custody to a more distributed custody approach that will allow us to onboard additional partners in the future and add greater flexibility for capital providers. This new approach also enables us to distribute risk, fund loans and conduct transactions more quickly, and provide customers with enhanced security for their cryptoassets, as well as lower interest rates on crypto-backed loans.
“When SALT was founded in 2016, custody wasn’t where it is now, so we built a proprietary custody solution to keep our customers’ collateral assets safe,” said Justin English, CEO of SALT. “Now that the industry has matured and companies like Fireblocks have come to the forefront, we’re excited to work with them to streamline our operations and expose their networks to our suite of wealth preservation products. They have a proven ability to safely and securely store and transfer collateral assets and to do so swiftly, which will inevitably allow us to provide faster service to our customers and focus more on product development.”
The move toward third-party custody solutions will also enable SALT to provide greater security and flexibility to capital providers that may prefer to work with a specific custodian, provided the custodian meets our rigorous security standards.
“MPC has quickly become the industry standard among the largest and most trusted institutions in the digital asset space,” said Michael Shaulov, CEO and co-founder of Fireblocks. “We’re proud to partner with the SALT team to help them strengthen security, reduce costs and expand operations as they move into the next stage of their growth.”
Fireblocks meets these security standards by combining multi-party computation (MPC) with Intel SGX technology to create a proprietary, defense in-depth approach to digital asset security — this allows organizations to accelerate operations without relying on physical hardware or slow, manual processes.
“Security is our top priority as we make this shift to be commensurate with our growth and distribute risk among trusted custodians,” said Dirk Anderson, chief technology officer at SALT. “The primary reason we’ve chosen Fireblocks as our first partner is because of their approach to MPC technology. Not only does it meet our security standards, but it will grant us more flexibility and increase the speed at which we can conduct transactions. This means we can fund stablecoin loans much faster and reduce the turnaround time for returning customers’ collateral assets once their loan has matured.”
From a customer standpoint, the biggest and most exciting changes to note are increased security, faster services, and the offering of lower interest rates. Aside from these changes, the customer experience will largely remain the same. Just as they do now, borrowers will still be able to make deposits and withdrawals, and will be able to continue tracking the health of their loan via our Loan-to-Value monitoring and real-time notification systems.
“We believe working with Fireblocks and other custody partners in the future is in the best interest of both the business and our customers,” said English. “Not only will we be able to offer more competitive interest rates, but we will have the time and resources to focus on expanding our offerings to include products that are designed to help our customers build and preserve their wealth.”
SALT, the pioneer of crypto-backed lending, offers a way for individuals and businesses to use their cryptoassets as collateral to secure a fiat or stablecoin loan without having to worry about credit checks. SALT offers flexible loan terms and accepts multiple cryptoassets as collateral including cryptocurrencies, stablecoins, and tokenized gold. SALT also offers competitive interest rates and does not charge origination or prepayment fees. As cryptocurrency becomes more widely adopted and additional real-world assets become tokenized, SALT’s mission is to offer solutions that make it possible for people to securely hold, manage, and borrow against their cryptoassets. Founded in 2016, SALT is headquartered in Denver, Colorado. For more information, visit www.saltlending.com or follow us on Twitter, Facebook and Medium.
All SALT loans are subject to KYC, AML, and other Terms, Conditions, and Restrictions. Please see saltlending.com/terms and FAQ for additional information. Loan options and terms may not be available in your jurisdiction, for your loan amount, and/or collateral type. SALT Loans are subject to jurisdictional limitations and other restrictions. SALT may not be able to offer a loan to all borrowers. SALT loans are originated by Salt Lending LLC. NMLS #1711910. NMLS Consumer Access (https://www.nmlsconsumeraccess.org/).
Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks enables exchanges, custodians, banks, trading desks, and hedge funds to securely scale digital asset operations through the Fireblocks Network and MPC-based Wallet Infrastructure. They have secured the transfer of over $70 billion in digital assets and have a unique insurance policy that covers assets in storage & transit. For more information, please visit www.fireblocks.com.
Kendra Staggs, [email protected]
Yelena Osin, [email protected]
Cryptocurrency is a disruptor. Not only has it changed the way we conduct business, but it has changed the way we think. The most obvious manifestation of how cryptocurrency has disrupted our thought patterns is in the way we think about money — about who issues it, how to transact with it, how to put it to work and how to keep it safe. It also has changed the way we think about our government, our right to privacy and our financial freedom. What’s less obvious is how cryptocurrencies are disrupting the way we think about and participate in asset-based lending. The advent of Bitcoin catalyzed the creation of a myriad of cryptocurrencies, many of which became viewed as assets, yet at the time, there was no way for crypto investors to unlock the value of these assets without selling them. This is the problem SALT’s founders set out to solve in 2016 and in doing so successfully, made asset-based lending as we once knew it a thing of the past.
Creating a New Asset Class
As Bitcoin began to experience wider adoption following its release in 2009, it became clear that some investors were purchasing crypto to trade on a daily basis while others were choosing to invest long-term, viewing Bitcoin more as an asset than as a spendable currency. As more investors adopted this long position and began to think of cryptocurrencies as an asset class in their own right, the term “HODL” emerged in 2013 on a bitcoin-talk forum and has since become one of the most commonly used words in the crypto vernacular. This HODL culture has grown significantly over the years and has evolved to where investors are buying, selling and trading these assets not only for themselves but on behalf of others. This activity has taken the form of crypto portfolios and crypto funds, which offer access to this new asset class for individuals and allow them to diversify their portfolios while eliminating some of the overhead of learning how to purchase and safely hold cryptoassets. By providing a way to collateralize cryptoassets to secure a cash or stablecoin loan, SALT provides opportunities for individuals, businesses and capital providers to build and preserve wealth.
How to Lend Cryptoassets
As the first-ever crypto-backed lender, SALT has developed the technology and processes required to successfully lend against cryptoassets, giving borrowers a way to unlock the value of these assets without selling them. Take Bitcoin for example. It’s one of many cryptoassets we accept as collateral on our platform, yet it makes up more than 80% of the collateral securing our loan book.
What makes Bitcoin a strong form of collateral? The answer lies in Bitcoin’s combined characteristics. Like gold, Bitcoin is scarce, fungible, divisible, transferable and durable. It is also extremely liquid given it is traded on global exchanges every day. Additionally, as a decentralized asset, Bitcoin is highly secure. All of these properties make Bitcoin both a viable asset and a highly efficient form of collateral that has piqued the interest of some of the largest financial institutions in the world.
One thing to note is Bitcoin’s volatile nature, which can pose challenges specifically for the ABL market. However, SALT’s risk management technology effectively manages this volatility. Our technology includes real-time loan-to-value (LTV) monitoring, margin call and liquidation triggers, real-time notifications and the safekeeping of assets through institutional grade custody solutions. For example, our loan-to-value (LTV) monitoring system tracks the prices of assets 24 hours a day, 365 days a year, providing borrowers with the ability to monitor the health of their loan in real-time. If, during periods of heightened volatility, a borrower’s collateral declines in value and their LTV breaches our margin call threshold, we protect the borrower by issuing a margin call that prompts them to take action to restore the health of their loan. Actions borrowers may take include paying down principal or depositing additional collateral to recalibrate their LTV to an appropriate level (70%). If no action is taken and asset prices continue to decline, SALT has the ability and the right to liquidate collateral assets to preserve lender capital. The overcollateralized nature of our loans combined with our risk management technology and ability to liquidate assets enables us to protect the lender, and as a result, we’ve experienced zero losses of principal to date.
Choosing a Crypto-Backed Lender
SALT’s business model is attractive to crypto investors (e.g. traders and asset managers) and businesses (e.g. mining operations and exchanges) for a few reasons. First, we provide access to liquidity, offering loans ranging from $5,000 to the millions. Typical use cases include businesses seeking working capital to fund operational costs and large capital expenditures, or investors seeking leverage, diversification or risk management. Second, since our model is asset-based and requires overcollateralization, we do not rely on a borrower’s credit profile and can fund loans within 24 to 48 hours, assuming the borrower meets our strict AML/KYC requirements. Third, customers know their assets are safely and securely held with institutional-grade custody providers for the duration of their loan. Fourth, our loan process is straightforward and customizable. We allow borrowers to lend against a single cryptoasset or a portfolio of cryptoassets and offer flexible loan terms, including durations ranging from three to 12 months, LTVs up to 60% for individual loans or up to 70% for business loans, and competitive interest rates ranging from 5% to 12% depending on the borrower’s jurisdiction, loan amount and LTV. While we are no longer the only crypto-backed lender in the world, we are one of the few that incorporate a human element into our business model. Unlike completely automated lenders, SALT offers both phone and online support, and assigns each customer a loan support specialist at the time of loan origination. These human touches positively impact a borrower’s experience with the platform; they know that by choosing SALT, they will always have the option to speak with someone about their financial needs.
The Evolution of the Crypto Market and Tokenization
Since SALT’s founding in 2016, the crypto lending market has grown exponentially. According to a report from Credmark, the crypto lending market reached $8 billion in total lifetime loan originations as of Q4/19 and has since surpassed $10 billion following Q1/20. These numbers not only indicate the growing demand for liquidity among crypto holders but also the growing interest among capital providers to get involved in the crypto market. For example, we’ve witnessed an influx of both crypto native (BitGo Prime and Genesis Capital) and traditional financial institutions (Silvergate) that provide leverage and liquidity vehicles at the institutional level.
Another thing to consider regarding the evolution of the crypto market is that as the world becomes tokenized, the very definition of the term “crypto market” is changing. With the emergence of companies like Paxos and Harbor, we’re beginning to see increased tokenization of real-world assets like gold and real estate. At SALT we already accept Pax Gold (a gold-backed cryptoasset) as collateral on our platform and our vision for the future goes well beyond our current collateral scope.
The Role of Alternative Investments
As crypto becomes more widely accepted, a growing number of people are assessing their own risk profiles and determining the best way for them to participate in the crypto market. For those with lower risk profiles, the market has evolved in recent years to offer individuals or businesses indirect exposure to this new asset class. As previously mentioned, crypto portfolios and crypto funds are part of this evolution along with alternative investment companies like Cadence (portfolio company of Coinbase Ventures). Cadence is a securitization platform for private credit that grants access to exclusive high yield, short term investments traditionally reserved for institutions. In February 2020, we partnered with Cadence to offer prospective investors the opportunity to gain exposure to cash flows associated with a portfolio of underlying loans collateralized by cryptoassets. The first note of $500,000 was oversubscribed in five days and we have since worked with Cadence to issue $2.9 million in notes to investors to date. As more companies like Cadence provide structure, liquidity and indirect exposure to alternative asset classes like crypto, we expect to see even greater demand from investors seeking attractive risk adjusted returns.
Opportunities for Institutional Investors
There’s no doubt cryptocurrency has changed the way we think about asset-based lending. It has formed a new asset class and also has catalyzed the trend of broader tokenization — a trend that will inevitably expand the universe of collateral options and have a meaningful impact on the ABL industry. If you’re a decision maker at an institution and are interested in learning more, email [email protected] to discuss opportunities to build and preserve wealth in this rapidly evolving industry.
By Rob Odell
China’s central banking system officially launched large-scale testing of what could be the world’s first digital sovereign currency. The People’s Bank of China, the nation’s central bank, is working with main banks in major cities, with a focus on digitizing the renminbi. During this trial, users register their mobile phone numbers for access to digital wallets. Through that access, they can use digital currency, issued by the central bank, to withdraw and transfer money, and to pay bills.
If this test is successful, it means that China could be one of the first countries to develop and maintain central banking digital currency, or CBDC. But China’s move toward CBDC doesn’t necessarily mean that other countries’ central banking systems will, or can, automatically follow. Moving an economy from bills and coins — whether physical or virtual — to 100% digitization isn’t something a country just does. Furthermore, there is the question of whether central banks can — or should — work directly with consumers and businesses, in direct competition with commercial and investment banks.
As such, the CBDC reality is a few years away.
Defining Digital Currency And Central Banks
Mention the words “digital currency” and the first thought that might come to mind is Bitcoin.
Certainly, Bitcoin, Ether, Litecoin, and other cryptocurrencies are digitized value exchanges, which can be used to buy goods and services. But cryptocurrencies and central banking digital currencies are two very different sides of the digital coin. While cryptocurrencies are privately developed and distributed, CBDCs are government-backed sovereign currency systems, complete with appropriate denominations. In other words, think digitized fiat currency, overseen by the central banks.
Much like cryptocurrencies, however, CBDCs are recorded on digital ledgers, which keep track of ownership and transactions by users with ledger accounts. But unlike cryptocurrencies, these ledgers would be overseen by central banks, which would also issue the currencies and process transactions.
Speaking of central banks, these institutions have big-picture monetary goals for the nations in which they operate. The above-mentioned People’s Bank of China, as well as the U.S. Federal Reserve, Bank of England, Deutsche Bundesbank, and others are responsible for national monetary policies. They also deal with the nation’s commercial and investment banks, as lenders of last resort. They aren’t in business to work with consumers or businesses.
Just because central banking systems don’t work on the commercial level, it doesn’t mean they haven’t. In writing for the National Bureau of Economic Research (NBER), economists Michael Bordo and Andrew Levin pointed out that central banks’ histories are filled with examples of interactions with consumers and businesses, and “often, these activities were considered more important for the central banks than the conduct of monetary policy, both in terms of daily operations and the priorities of top management.”
For example, the Bank of England conducted general business and consumer banking activities during the 17th and 18th centuries. And, in the United States, a highly successful post office savings bank system operated from 1911 through 1967, using the post office network to offer government-backed deposit accounts and other financial services. In many cases, postal banking performed central banking functions — such as funding two world wars — before the Federal Reserve stepped in to determine national monetary policy.
Digital Sovereign Currency Structure: The Theory…
Researchers and scholars have been pondering the idea of centralized digital currencies for a few years. The most recent study along these lines was released in June 2020 by the Federal Reserve of Philadelphia, and entitled “Central Banking Digital Currency: Central Banking for All?” Led by University of Pennsylvania economist, Jesús Fernández-Villaverde, the authors explored whether a central bank, such as the U.S. Federal Reserve, could successfully implement a 100% digital sovereign currency structure, which could realistically compete with commercial financial institutions without too much disruption.
The authors determined that, in theory, and absent any kind of financial panic, a digital conduit between central banks and consumers might be effective in optimizing fund allocations. Furthermore, a direct-to-consumer sovereign digital currency could help streamline and potentially eliminate current time-consuming and costly payment systems.
Bardon and Levin also suggest that central banking systems could offer digital currencies to the general public through specially designated accounts, opened in partnership with commercial banks. The banks could keep corresponding amounts of commercial funds in segregated reserve accounts at the central banks. Furthermore, setting up a CBDC infrastructure would be a straightforward process. Thanks to the internet, brick-and-mortar branches wouldn’t be necessary.
So, in theory, a CBDC is workable.
Now, The Reality…
China is pushing ahead to set up the first bona fide, workable CBDC. Meanwhile, other central banking systems, including the Bank of England, Bank of Japan and the Swiss National Bank, are working with the Bank for International Settlements (BIS) on additional CBDC research.
But the BIS cautions that jumping on the CBDC bandwagon right now will mean bumps in the road, mostly in the forms of security, convenience and accessibility. The current coins-and-bills banking system has sophisticated infrastructures in place to handle peak demands for money, and can support potential bank runs. Then, there are the questions about privacy and potential data breaches. Take for example, a situation in which the Federal Reserve issues $1 million to an individual’s stablecoin address. That individual then spends $100 from the same address at an online retailer.
Right now, with the way most blockchain technology functions, that retailer can look at that stablecoin address and see without question that there is nearly $1 million in the account. Cryptocurrency proves that while blockchain technology is great for anonymity, it is far from private. We must find a way to bring the same level of privacy to CBDCs as we currently experience with traditional banking, so that it is both private and public in all of the right ways. Until then, CBDC will likely remain more of a futuristic vision than become a reality.
And, from a larger-picture perspective, Fernández-Villaverde and his colleagues caution that the move to CBDCs could give central banking systems monopoly power, siphoning business away from commercial banks. Commercial and investment banks are set up to support maturity transformation — in other words, using consumer and business deposits for longer-term loans, such as mortgages. Central banks don’t have the capacity to do this; such a lack could be dangerous to economic policies.
Keeping It Cash … For Now
Though the Chinese central bank is experimenting with sovereign-backed digital currency and centralized ledgers, the CBDC concept isn’t close to implementation. Even China is phasing in CBDC very slowly. Coins and bills will be with us for a while longer, at least until security, accessibility and privacy issues — not to mention potential monopolization scenarios — can be worked out.
Still, the increasing use of cryptocurrency continues to prove that digital mediums of exchange are workable. As the People’s Bank of China continues working with sovereign-backed digital exchanges, other central banks will likely examine their own regulatory, legal and technical risks to determine the feasibility of CBDCs.
How Financial Firms Navigate the Markets to Grow in Any Climate
SALT was featured on Adroll’s blog alongside Catch Benefits and Hippo Insurance. Learn how we’re navigating the markets and changing the way people interact with money in the full blog post here.
Read Adroll’s full blog post here
ICYMI: SALT Announces Justin English as Chief Executive Officer
In case you missed it, we recently announced that Justin English has been named chief executive officer at Salt Blockchain Inc., parent company to SALT Lending. Co-presidents Rob Odell and Dustin Hull, who have been working together for the past six months to fill the CEO role and onboard English, will remain co-presidents and will continue to support SALT in their respective roles as chief product officer and chief financial officer.
Read the full announcement here.
Creative Wealth Preservation with Blockchain Center
Our CPO Rob Odell joined Blockchain Center’s VR Crypto Mondays to talk with their CEO about crypto lending and creative ways to preserve your wealth.
Watch their full discussion here.
We Want to Hear From You
Share your feedback with us by rating our content and/or leaving a comment on our “What’s New” feature.
Share your feedback here
Black Lives Matter
As operations at SALT carry on, it is not lost on us, as a company nor as individuals, that Black Americans continue to fight for racial justice. We are committed to hearing, learning from, and supporting our Black customers & communities in this fight for a more inclusive world.
Want to stay up-to-date on all things SALT? Signup for our monthly newsletter here: https://cdn.forms-content.sg-form.com/76a45090-a050-11ea-8926-5efcf9d8f941
Questions about our products and offerings? Contact [email protected]
As cybercriminals are becoming more sophisticated, their attacks are becoming increasingly challenging to defend against. Two of today’s most concerning types of cyberattacks for cryptoasset owners are phishing and SIM swapping. Phishing accounts for 90% of all social engineering incidents and 81% of all cyber-espionage types of attacks, while SIM swapping, although less common, can cause equally devastating effects. Cryptocurrency holders in particular, are attractive to black hat hackers and are uniquely vulnerable to phishing and SIM swapping attacks — here’s what you need to know to protect yourself.
Protecting against phishing attacks
Phishing is a socially-engineered cyberattack that is primarily used to obtain sensitive information including as usernames, passwords, bank/credit card details, or public and private keys to cryptocurrency wallets. The vast majority of phishing is done through email but it can also come through texts/SMS, social media, and chat services. Disguised as a trusted entity, the perpetrator tricks you into opening a message containing a malicious link or attachment. The links will typically then lead you to copycat sites resembling webpages of banks, payment processors, or online crypto-wallets. These sites are designed to trick you into entering your usernames and passwords.
There are also phishing scams that specifically target cryptocurrency holders. In most instances, the attackers masquerade as some of the more popular online wallet services (e.g. Blockchain.info or Coinbase) and prompt you to give up your credentials. In other scams, emails may include seemingly relevant attachments containing malware that infects your device and stealthily scans its files, searching for private keys to a cryptocurrency wallet.
As a general rule of thumb, if you get an email you weren’t expecting, and if something — anything smells “phishy,” disregard it entirely. Additionally:
- Consider anything that comes into your spam folder a red flag
- Be aware of email spoofing, which is when an attacker makes an email look like it came from a legitimate sender. For example, an email can look like it came from whitehouse.gov but it will likely (not always) go into spam since the address is spoofed.
- Attackers can also make look-alike domains using a Cyrillic character that looks identical but isn’t. Those may show up in your inbox (not spam).
- Always check the authenticity of any URLs included in the email and beware of URL redirects.
- Avoid reacting impulsively to any calls to action (downloading attachment files or replying with any sensitive information). Keep in mind that phishing attacks are designed to make you feel a sense of urgency to respond.
Preventing SIM swapping
SIM swapping is a type of account takeover attack whereby the perpetrator breaks the two-factor authentication (2FA) security protocol by hijacking your telephone number. The attack usually starts with social engineering; scammers gather your personal details (e.g. full name, address, phone number) and call your mobile phone provider pretending to be you. Using various social engineering techniques, they then convince the wireless carrier employee to port your phone number to the attacker’s subscriber identification module (SIM).
After they’ve successfully hijacked your phone number, usually just by asking for a password reset, the attackers can break into any of your accounts — email, bank/online wallet account, and others that require a call or SMS 2FA. If your phone suddenly becomes unable to make or receive calls, you may be a victim of a SIM swapping attack and should take immediate action.
To avoid becoming another SIM swapping statistic, refrain from using your phone number with 2FA where the second factor is a call or SMS-enabled authentication. In fact, if you can, avoid giving your phone number to your email or other service providers entirely. Authentication apps like Google Authenticator or Authy are a much safer alternative, as they’re tied to your physical device instead of your phone number.
If you must provide a phone number to access a specific service, contact your cell phone provider about extra layers of security for preventing number porting. Some carriers provide additional layers of security. Also, make your standard pin something random and store that pin in a secure place like a password keeper.
Safeguard your crypto assets and personal information
Ownership over cryptoassets is established solely through digital signatures (public and private keys). Couple that with the irreversible nature of blockchain transactions and you get a potential recipe for disaster. If an attacker gets ahold of your keys or your recovery phrase, whether that’s through tricking you into abdicating them yourself (phishing) or by forcefully porting your phone number and breaking the 2FA of your online wallet (SIM swapping), the result will always be the same: your funds will be lost forever.
For these reasons, taking the precautionary steps to protect your accounts, your online identity, and, ultimately, your cryptocurrency holdings, is worth the extra effort.
Event Follow-Up with SALT’s CPO
We want to thank everyone who watched & participated in Bitcoin Magazine’s Halving live-stream celebration with us last month. To address some of the questions that came up from the event including questions regarding the SALT token, our CPO Rob Odell sat down with one of their team members for a follow-up video. You can learn more about the changes we’ve made to the SALT token from our blog post, New Changes Add Value for SALT Supporters.
Watch the full follow-up video here
Coins vs. Tokens
Ever get tripped up on the differences between coins and tokens? Our latest infographic breaks it down.
We Want to Hear from You
We have recently added an option to our “What’s New” feature for you to share your feedback on our content. You can share your thoughts by rating our content and/or leaving a comment.
See what’s new at SALT here.
Refer a Friend
Get $50 in bitcoin for you & your friend when they take out a crypto-backed loan. To learn how you can refer your friends, check out our blog post Pass the SALT, Grow Your Wallet.
Black Lives Matter
As operations at SALT carry on, it is not lost on us, as a company nor as individuals, that Black Americans continue to fight for racial justice. Until racism is eradicated completely, we are committed to hearing, learning from, and supporting our Black customers & communities in this fight for a more inclusive world. As we reflect internally on the immediate changes SALT can make to support this mission, we have proactively chosen to make Juneteenth a company holiday to honor the significance of June 19, 1865.
Want to stay up-to-date on all things SALT? Signup for our monthly newsletter here: https://cdn.forms-content.sg-form.com/76a45090-a050-11ea-8926-5efcf9d8f941
Questions about our products and offerings? Contact [email protected]
Ever get tripped up on the differences between coins and tokens? Our latest infographic breaks it down.
In celebration of the 3rd Bitcoin Halving, our CPO Rob Odell and CTO Dirk Anderson joined Bitcoin Magazine for a fireside chat where they shared their Bitcoin stories and an update on SALT’s business model.
While the world’s fiat currencies suffer from inflation as governments print more money to manage the COVID-19 crisis, Bitcoin, by design, is becoming more deflationary with each block confirmation. This is because Bitcoin creator Satoshi Nakamoto intended for Bitcoin to be the antithesis of government-controlled fiat currencies: “The root problem with conventional currency is all the trust that’s required to make it work,” wrote Satoshi in a post on the P2P Foundation Forum, “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” In the post, dated February 11, 2009, Satoshi announces the creation of Bitcoin (along with a link to the earlier published white paper) and details its characteristics that make it anything but conventional. Among these characteristics is the fact that “everything is based on crypto proof instead of trust.”
In creating Bitcoin as a decentralized, trustless system, Satoshi ensured that it could not fall victim to the “breaches of trust” and inflation experienced throughout the history of fiat currencies. Unlike fiat currencies that are controlled and manipulated by governments and central authorities, Bitcoin follows a strict set of rules that have been embedded into its codebase or “monetary policy” since its inception. These rules include a hard supply limit of 21 million coins, the last of which will be mined around the year 2140. Currently, more than 87 percent of the 21 million bitcoin have been mined, meaning there are approximately 3 million remaining coins to be mined over the course of the next 120 years. The speed at which new bitcoin is mined and distributed is controlled by 30 precoded “halving” or “halvening” events (our Twitter followers prefer “halving”, so we’ll go with that from now on) that will take place every 210,000 blocks or about every four years until the last bitcoin is mined. In 2008 the block reward for miners was 50 newly minted bitcoin for each validated block. Following the first halving event in 2012, the block reward reduced by 50 percent to 25 bitcoin per validated block and then reduced by another 50 percent to 12.5 bitcoin following the second halving event in 2016. 2020 marks the year for the third halving event in which the block reward will be reduced to 6.25 bitcoin per validated block.
While we don’t know the exact date of the halving event (more on this below), we know it is fast approaching and is set to occur sometime this month. There’s been a lot of anticipatory chatter about the halving as people question and speculate on how it will (or will not) impact everything from the price of bitcoin to profitability and participation of miners in the network.
We’ve compiled what we consider to be the best available resources for understanding the Bitcoin 2020 Halving event and answering some of the most common questions around it.
When will the halving occur?
The answer to this question is contingent on the speed at which new blocks are created. Given the average block time is around 10 minutes and a halving event takes place every 210,000 blocks, the halving is estimated to occur on or around May 11. While there are various countdown resources that estimate within a day of one another, our favorites are the Bitcoin Halving Countdown from CoinMarketCap and the Bitcoin Clock, which “uses data from BTC.com to get the average block time for the past two months. It then uses this block time (currently 10.3125 minutes between blocks as of March 25, 2020) to estimate the halving date.”
Tell me more about the halving. What is it exactly? What is the intention behind it?
Whether you’re new to crypto or you’ve been in the game for years, we can all use a bit of a refresher when it comes to the halving event. If you’re new to crypto, we recommend starting with this video from We Use Coins regarding the need for Bitcoin and this video from CryptoCasey, which provides a straightforward explanation of blockchain technology, mining, and the upcoming bitcoin halving event. For a more humorous take on the benefits of “the currency of the future,” check out this video from Cameralla Comedy.
Running short on time? Try this episode of the 4-Minute Crypto Show, which offers a speedy, yet thorough explanation of halving events.
If you’re already familiar with the crypto basics and want more detail on the halving, this article from CoinDesk is an excellent resource. Not only does it include an illustrative explainer video that breaks down and simplifies the process, but the article also dives into:
- the economic reasoning behind Satoshi’s decision to build the halving events into Bitcoin’s code
- how Bitcoin’s monetary policy differs from that of modern financial systems where central banks control the money supply
- the email in which Satoshi Nakamoto shares his thoughts on Bitcoin’s monetary policy and how it may play out in the future
- how the halving event will impact miners
- the history of bitcoin halving events and theories around how the 2020 event will impact the price of the asset
For additional info on previous halving events and miners’ roles in the network, Michael Sweeney from The Block provides a solid explanation in his analysis, “The bitcoin halving: what it is and why it matters.”
Interested in learning more about the economics behind Bitcoin’s monetary policy? Take a look at this article from The Block’s Mike Orcutt or this guide from Block Geeks that provides a crash course on supply and demand, inflation, deflation, and market cap as it relates to bitcoin, as well as how incentivization for miners fits into the equation. Or if you really want to get into it, Bitcoin Magazine’s Peter C. Earle explains why the 2020 halving is particularly important. He calls out the difference between the old and modern definitions of inflation, noting that in the context of the modern definition which refers to “an increase in general price levels within an economy,” the fact that “with increasing value one bitcoin buys more over time, it is indisputably deflationary.”
“What’s noteworthy about this point, Earle writes, “is that, upon this particular halving, Bitcoin ‘inflating’ at a roughly 1.8 percent rate annually will nominally — and by then, quite possibly in real terms — be ‘inflating’ at a rate lower than both the Federal Reserve target of 2 percent per year and current, CPI-based estimates of real U.S. inflation of 1.9 percent annually.”
Tell me more about the miners. How will it impact who is currently mining and who will continue to profit? Will the halving result in mining eventually becoming monopolized?
Andreas Antonopoulos tackles these questions in this short video clip and notes that we don’t need to be concerned about the monopolization of mining because the amount of profit a miner generates is not contingent on the size of their mining facility but on the smoothness of their mining operation. So while there are multiple factors that play into whether a mining operation is profitable, larger operations do not necessarily have an advantage over smaller ones. Rather, it’s all about efficiency. “Halving will increase competition in mining,” he says, and in general it will be the least efficient miners that become less profitable.
Similarly, in an interview with Anthony Pompliano the CEO of Blockware Solutions Matt D’Souza states, “The efficient miner should not fear the halving, they should welcome it.” Why? D’Souza notes that “once we go through halving the miners’ revenue is going to get slashed in half” and we’re going to experience what he considers to be “a healthy cleanse of the network.” He predicts that if the bitcoin price is still at $8k or lower going into the halving, we may experience “extreme miner capitulation” where we may see up to 40 percent of the network shutting off due to high energy costs and reliance on outdated mining equipment. He notes that as these inefficient miners begin to pull out of the network following the halving, there will be an adjustment period from May to July as the network undergoes these changes. At that point, difficulty will kick in and margins will improve for those miners who are still in the game. “Mining is about survivability,” says D’Souza, “You just need to survive. If you survive, difficulty will adjust in the future and it’s going to improve your margins because the people that are inefficient… their bitcoin is going to go to you.”
What happens to miners once all of the bitcoin has been mined and there are no more block rewards?
After the final halving event takes place and the 21 millionth bitcoin is mined sometime in 2140 miners will no longer receive block rewards, but they will still collect transaction fees just as they do currently. While we don’t know for sure how miners will react once we reach this point, according to Adam Barone in his article published on Investopedia, “Even when the last bitcoin has been produced, miners will likely continue to actively and competitively participate and validate new transactions. The reason is that every bitcoin transaction has a small transaction fee attached to it. These fees, while today representing a few hundred dollars per block, could potentially rise to many thousands of dollars or more per block as the number of transactions on the blockchain grows and as the price of a bitcoin rises. Ultimately, it will function like a closed economy where transaction fees are assessed much like taxes.”
What about the bitcoin price? How will it be impacted by the halving event?
The short answer is that there is no shortage of predictions.*
To quote Antonopoulos regarding his thoughts on price predictions: “I think it’s mostly irresponsible to make predictions about price. It’s the same as astrology and reading tea leaves.” While we agree with him on this sentiment, many people in the cryptosphere have openly made predictions about what will happen to the price of bitcoin following the 2020 halving. So, if you’re one for speculation or you just find it fun to read about people’s theories and want to be aware of what some of the most well-known people in the industry are saying, here are a few links for you to check out:
- Kitco News (interview): Anthony Pompliano says get ready for the bitcoin halving and price escalation to $100k
- Crypto New Alerts (podcast): 182: Bitcoin Price Is Likely to Plunge to $1K, Says Silk Road Founder | BTC Halving 2020 Countdown (this is the Medium Post referenced by this podcast: Bitcoin by Ross #9: A Strong Signal for Lower Prices)
- CoinDesk (article): How Financial Models Could Move Bitcoin’s Price After the Halving
- Forbes (article): Binance CEO Makes Rare Price Prediction — Says This Is When To Buy Bitcoin
- CoinDesk (podcast): Bitcoin Halving 2020: How Miners Expect the Crypto Markets to React
How can I watch the halving event?
For the previous halvings, it was fairly common for people to throw watch parties to celebrate the halving event. Now with current social distancing measures in place, in-person parties are being replaced by live streams. Our pick for how to watch and celebrate the 2020 Halving is Bitcoin Magazine’s 21-hour Live Stream for which they’ll be sharing updates across their social channels regarding exact timing, but you can track their countdown here.
*This content is meant to educate and inform but should not be taken as financial or investment advice. Trading and investing in cryptocurrencies (also called digital or virtual currencies, cryptoassets, altcoins and so on) involves substantial risk of loss and is not suitable for every investor.