Why Bitcoin’s next “Halving” can’t raise the price like the last time
Whether you call it “halving” or “halvening,” one of the few things we can be sure of in crypto is that the conversation about Bitcoin’s next reduction in the mining reward will intensify over the next six months.
Why? Because previous halvings have caused bullfights. And who doesn’t like a bullfight?
Many are convinced that the next halving will have the same effect on the market, and it is not just a belief that history repeats itself: models have emerged to support this theory.
But if the bullfight is expected, why hasn’t it happened yet? Why is halving no longer included?
Because halving is much more than an event, it is also a story and, by the way, uncertain.
What and why
First, a review of what halving or halving is and why it happens
To keep inflation under control, the bitcoin protocol was programmed with a strict limit of 21 million, with new bitcoins entering the system as an incentive for network processors (“miners”) at a gradual and controlled pace. The rate at which they are created is reduced by half every four years, apparently to mimic the greatest difficulty of extracting gold. On November 28, 2012, the initial reward of 50 new bitcoins was halved to 25, and since July 9, 2016, miners have received 12.5 bitcoins for each block successfully processed.
The next reduction, after which the network incentives will be 6.25 bitcoins per block, is expected by May 2020.
The previous graph shows that the price (represented by the light blue line) began to rise before each of the previous halves and continued for some time after. However, the data set is limited: the market has only experienced two of these events, and it could be difficult to assume that the pattern will be repeated.
That’s where a fundamental supply / demand analysis comes in.
Bitcoin investor and analyst Tuur Demeester recently pointed out that, for the cryptocurrency to maintain a price of more than $ 8,000 until the next half, the market would need an investment entry of $ 2.9 billion to offset the deflationary effect of the new bitcoins that enter the system. Even assuming that investment growth remains constant, reducing sales pressure after halving (with fewer new currencies in the market) would lead to an increase in prices.
The pseudonym operator plan B has gone a step further and has used the stock-to-flow ratio (S2F), which divides the current inventory by annual production, to create a model that retroactively predicts past price movements for bitcoin with a high degree of precision, using gold and silver as reference points. This model predicts a bitcoin price of almost $ 60,000 after the next half.
While this model has its critics, it has undergone a rigorous interrogation, and it seems that the regression is maintained. It also makes intuitive sense: a reduction in supply should improve the value, everything else is the same. So why does the price no longer rise to that high level?
This is where the narrative comes in.
Technically, halving is not a “fundamental” event, since it does not represent a value driver in traditional investment terms. “Fundamental” in asset analysis refers to variable but quantifiable characteristics that can boost an assessment, such as profit, market size and balance sheet. In this sense, preprogrammed shortage is not fundamental, it is objective.
We can expect that the facts themselves are not open to interpretation, but their impact is almost always. No one doubts that halving will occur; However, the narrative surrounding its influence is unclear.
Let’s see why.
Reasons for skepticism
First, some argue that halving is already included. Did the change from $ 3,300 to $ 12,000 earlier this year? That was it. The argument is that the market is relatively efficient in terms of information distribution, so smart investors would obviously have incorporated supply adjustment into their models and would have taken positions accordingly.
Second, the models tend to fit until they do not. Today, the bitcoin ecosystem is very different from previous halves: four years ago, crypto derivatives markets were in their infancy, institutional participation was scarce and valuation frameworks were virtually non-existent. It is not unreasonable for investors to believe that “this time is different”.
Some industry experts have hinted that the halving could be negative if it reduces the profitability of miners and forces many of the smaller ones out of the market. It is true that this could be compensated with an increase in prices, but if it turns out that it is not proportional, greater centralization of the network could raise security concerns.
In addition, in traditional markets, price is rarely a function of supply. It is more influenced by demand, which the S2F model does not take into account. In the absence of an established and widespread use case (for now), the demand in the crypto markets is driven by the narrative.
Bull run forward?
However, in recursive logic, the narrative could affect the demand in half (halving). The general expectation that it will influence the price could stimulate the demand for bitcoin as an investment asset, which will influence its price, especially as new investors, attracted by supply models and historical correlation, enter the sector.
And the asymmetric risk comes into play: the possibility that the models are wrong and lose everything will have a smaller impact on my portfolio than the possibility that the models are correct and get a return of 500%.
Therefore, even if supply-based models try to rewrite traditional investment principles, it does not mean that we will not see a rebound in prices.
If that happens, the narrative will come together around the confirmation that the supply-based models were correct, even if they were not the cause. We could end the vertiginous cycle of narrative that influences the price and narrative that does not influence the price.
Even so, this would not be the only surprising feature of the crypto markets in the coming months. The buzz around the bitcoin supply program will highlight its unique economy, which in turn should further arouse investor interest.
If this leads to more entries at a time when the new supply falls, the graphics that predict a recovery after half will prove to have been correct all the time.
On the other hand, the narratives can be fickle, and brave is the investor who is supposed to hold. They also rarely thrive in isolation, and, let’s face it, there are many things happening that can have a big influence on the price of bitcoin.
Either way, it is difficult to deny that the emergence of forecast models is a positive step that will help us understand the dynamics of the market and the role of Bitcoin in a broader financial market. Sophisticated investors will no doubt accept them and treat the underlying assumptions with a good dose of skepticism.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.