NOTHING in this or future newsletters are financial advice; I’m providing information solely for entertainment and educational purposes. Any investing choices you choose to make are entirely your own.
There are big changes happening to our two favorite digital assets! If you said Cardano and Dogecoin, you’re disowned.
EIP-1559
On August 7th Ethereum implemented a new change to its code called EIP-1559. Most simply, EIP-1559 is an upgrade to how transactions are paid for on the Ethereum network. Historically, transaction fees (called Gas fees, and paid for in ETH) are submitted with a transaction and given to miners in exchange for their processing of transactions. Miners are financially incentivized to accept transactions with higher gas fees, so gas fees fluctuate along with network congestion as users constantly try to out-bid one another to have their transactions accepted faster.
Now, instead of a constant gas-bidding war, EIP-1559 instituted a “base fee” for all transactions, with an optional tip to miners to speed along your transaction. The net effect is that fewer users have to compete for the latest gas price, fewer transactions are dropped for having too low of a gas price, and fewer people are overpaying with gas.
The biggest change of all is that the new “base fee” doesn’t go to miners — it gets burned. So instead of that ETH being circulated back through the network to be sold or sent to other addresses, it’s now gone forever. This results in a net decrease in the number of Ethereum that gets distributed in each block (a new Ethereum block is mined about every 12 seconds). Currently about 2.8 ETH are minted each block, which results in an annual “inflation rate” for Ethereum of about 4%. Now, with base fees for transactions being burned, that inflation rate is substantially decreased by anywhere from 10%–100%+ per block! You can watch in real time how much ETH is being burned per block and how much ETH has been burned total since EIP-1559 went live at ultrasound.money. For those who don’t want to click, as of the writing of this email we’re at 23,246.55 ETH burned. That’s not dollars; that’s ETH. And ETH is currently trading at $3,141 which means that $73,027,558 in ETH has been burned in four days.
And this is just part one.
The next big upgrade coming to Ethereum is called Ethereum 2.0, and it signals the switch from Ethereum functioning as a Proof-of-Work blockchain (like Bitcoin) to a Proof-of-Stakeblockchain. This means validators holding ETH will now be responsible for verifying blocks instead of miners, and no miners means no new ETH being mined. Some new ETH will still be distributed to validators as incentive for securing the network, but this change will further decrease ETH’s emissions. Combined with the fee burn implemented in EIP-1559 Ethereum will become deflationary at an estimated -0.5% annually. This is huge for Ethereum, and means that the value of ETH is only going to go up.
Bitcoin’s Halving Cycle and Stock-To-Flow
Ok, now for Ethereum’s big brother, Bitcoin. Bitcoin is capped at 21 million coins. Currently about 18.7 million of those coins are already in circulation. The remaining 2.3 million coins will be mined slowly, block-after-block, until the total supply has been mined in about 2140. Why is it going to take so long?
Every 21,000 blocks, or about every 4 years, the amount of Bitcoin that is mined per block is cut in half. The first halving happened in 2012. From 2016 to 2020, 12.5 Bitcoins were released per block (which happens about every 10 minutes). After the May 2020 halving only 6.25 Bitcoins are mined per block.
Now you may guess that these massive reductions in supply have influenced Bitcoin’s price; and you’d be right. The first halving in 2012 saw Bitcoin rise from $12 to $1,150 within a year. The second halving in 2016 occurred when Bitcoin was at $650 (after it “crashed” from $1,150) — and surged to $20,000 over the next 17 months. The third and most recent halving occurred in May of 2020 and spurred our run up to $50,000. However, $50,000 isn’t our “target”. It’s the half-way point.
There is a particular model for viewing Bitcoin’s price called the Stock-to-Flow Model, or S2F. The model has its fans and its detractors, but it’s performed very well over the last 10 years for predicting Bitcoin’s price action.
The S2F model shows that Bitcoin’s hottest market peaks occur not the halvings themselves, but in-between them; about 800–900 days before the next halving. Right now we’re at about 958 days out from the next halving. That means we’re on track for one of those bright-yellow peaks on the chart above. I’m very excited about the potential for a new Bitcoin all-time-high before the end of this year that blows our previous high of $64k out of the water.
