Crypto Market Commentary 

3 October 2019

Doc's Daily Commentary

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Mind Of Mav

A Different Take On The 2020 Bitcoin Halving

Bitcoin’s Olympic / FIFA event is just around the corner – The Halving.

In a year’s time (on May 27th 2020, unless wild swings in the mining hash rate change anything) the reward for mining new blocks on the Bitcoin blockchain will drop from 12.5 Bitcoin to 6.25 Bitcoin — and this already has people speculating about how this could affect the Bitcoin price.

A lot has changed for Bitcoin since the last Bitcoin halving, which happened on July 9th, 2016, and each time it happens no one is entirely sure how price of Bitcoin, or the cryptocurrency market will respond.

Thankfully, we do have a data set to operate some educated guesses.

“Previous halving’s have shown negligible impact on Bitcoin’s price. This is because, rather like a much anticipated interest rate cut, everybody already knows it’s going to happen way in advance,” said Glen Goodman, author of book “The Crypto Trader”.

“If the market knows the supply is due to be reduced at a certain time, and by what it will be reduced by, it will begin applying that reduction to the price gradually — avoiding sharp spikes and dips.”

So, it’s priced in or will be over the next 8 months. But, let’s look at this from a different perspective — one that goes beyond May 27th.

Bitcoin is about to become a lot more scarce — or, rather, the supply being introduced is about to be more lean and certainly doesn’t cover the number of Bitcoins being lost or hoarded away.

Dictionaries usually define scarcity as ‘a situation in which something is not easy to find or get’, and ‘a lack of something’.

Nick Szabo has a more useful definition of scarcity: ‘unforgeable costliness’.

“What do antiques, time, and gold have in common? They are costly, due either to their original cost or the improbability of their history, and it is difficult to spoof this costliness. [..] There are some problems involved with implementing unforgeable costliness on a computer. If such problems can be overcome, we can achieve bit gold.” — Szabo [3]

“Precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation. This once provided money the value of which was largely independent of any trusted third party. [..][but] you can’t pay online with metal. Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold.” — Szabo

The rise in price makes sense in so far as large buyers of Bitcoins have to either buy on the market or get them through mining, and after a halving event it forces more people to buy on the market.

“Cryptocurrency markets are often very event driven, and as we get closer to the next halving bitcoin’s price will receive a boost from those anticipating the forthcoming reduction in new supply,” said Garrick Hileman, head of research at Blockchain and co-founder of Mosaic. “In the months leading-up to the last two halving events we saw bitcoin’s price steadily trend upward, and then power higher following the reward halving.”

Thorsten Koeppl, professor of economics at Queen’s University in Canada, had a different take, saying:

“It appears to us, any cryptocurrency should economically do the opposite of what Bitcoin is doing.”

“The value of Bitcoin is partly driven by its potential as a payments tool and, before the fees rose along with the price, there were people using Bitcoin for international transfers. This has become more expensive to do now. But the price is still being supported.”

The increase in fees over the last couple of years — along with the rise in Bitcoin price — is a direct result of more people using the Bitcoin network.

Saifedean Ammous (Known for my least favorite book on Bitcoin, “The Bitcoin Standard”) talks about scarcity in terms of stock-to-flow (SF) ratio. He explains why gold and bitcoin are different from consumable commodities like copper, zinc, nickel, brass, because they have high SF.

“For any consumable commodity [..] doubling of output will dwarf any existing stockpiles, bringing the price crashing down and hurting the holders. For gold, a price spike that causes a doubling of annual production will be insignificant, increasing stockpiles by 3% rather than 1.5%.”

“It is this consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history.”

“The high stock-to-flow ratio of gold makes it the commodity with the lowest price elasticity of supply.”

“The existing stockpiles of Bitcoin in 2017 were around 25 times larger than the new coins produced in 2017. This is still less than half of the ratio for gold, but around the year 2022, Bitcoin’s stock-to-flow ratio will overtake that of gold” — Ammous

Without boiling the ocean, here’s the two takeaways for the 2020 halving:

1: Bitcoin is highly likely to eclipse a 1T market cap over the next five years (time until the next halving). What will drive this will be a desire for “safe haven” assets such as digital assets and precious metals as  a against hedge global market uncertainty, countries with negative interest rate (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs.

  1. If history has shown anything, we can expect a negligible different at first, followed by a possible price increase following the event. How much will the halving affect Bitcoin’s price in the long run? That is something we cannot tell for sure, the biggest factor affecting the price of Bitcoin is the number of users on its network.

Buckle up because the next 8 months will be a ride.

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