Economics of halving: what will happen to the price of Bitcoin?

Author: Dominik Stroukal

Compilation: Share Finance Neo

Bitcoin is approaching $ 10,000 again, and of course you want to know what will happen next. 2020 is a special year for Bitcoin in many ways, one of which is halving. The next halving is expected to happen on May 12, 2020, so let's take a closer look at what will happen next.

There are many theories about the impact of halving on prices, and most of them have some economic basis. Although they often talk about this issue unclearly, they point to changes in supply and demand. Economists love this simple model. If we expect supply to decrease or demand to increase, then the price of Bitcoin should increase. Let's explore why Bitcoin should or shouldn't rise to record highs.

Supply : Bitcoin inflation drops to 1.8%

By May 2020, the miner's return will be halved to 6.25 Bitcoins instead of 12.5 Bitcoins. Only about 900 Bitcoins are created every day. As a result, the annual growth rate of Bitcoin money supply will fall by more than half to 1.8%.

Compared to what we know better, in 2019, the U.S. money supply grew by 5.15%. Over the past 50 years, the dollar has fallen below 2% only in 1993 and 1994.

Of course, one might say that many Bitcoins have been lost, so inflation is actually higher. If all lost or unusable Bitcoins account for one-fifth of the total supply, then BTC's actual inflation rate is about 2.25%. Compared to the United States, this has hardly changed. We only need to add one year to each year from 1993 to 1994 (that is, 1992 and 1995), when the dollar inflation rate was below 2.25%.

In other words, Bitcoin's inflation rate is already low, and it will decline further.

What does this mean financially? The decrease in the number of newly issued Bitcoins means a slowdown in supply growth. Now miners spend part of the newly mined bitcoins or send them to exchanges to pay for electricity and other fees. Buyers will fight for less bitcoin, which should drive up prices under current demand.

This was the case with the last two halvings, which is why many people cannot wait for the next halving.

Supply: Forget Stock-to-Flow

More than a year before the third halving, all Bitcoin fans were challenged by an article from PlanB, which predicted that the next halving would drive the price of Bitcoin to $ 90,000. Mathematically, this model looks very convincing, and the idea behind it is also impressive: the fewer new funds flowing into the stock market, the rarer commodities will be. The more unique the product, the higher the price. As production is halved, the scarcity measured by this inventory-flow model will increase significantly. However, is it possible to predict prices this way?

There is no need to turn corners. In my opinion, it is completely meaningless to use inventory-flow to predict prices. First, price is the result of supply and demand. Observing supply is certainly useful, but without demand we cannot find price. If the demand for bitcoin falls, its price will fall with the same circulation. After all, just look at Bitcoin Cash and you'll immediately see that this model doesn't work.

Secondly, if we know that Bitcoin will increase 10 times due to the incredible inventory flow, and each time it halves, it will increase 10 times. Why haven't we reached that point yet? Is the speculator so irrational? But maybe you can Defend it because it is too dangerous (PlanB does just that). Third, according to the stock-to-flow model, in the next few decades, the value of Bitcoin should be higher than the GDP of all countries in the world. Once the number of newly created bitcoins is equal to the number of losses, and the number is less than the number of losses, the model predicts that the price of bitcoin will be infinite and then negative.

Demand : halving to attract attention …

There is no historical necessity. People tend to use history to predict the future, and there are repeated cycles. Of course, there is no such thing, but what is interesting is the fact that people believe it. Therefore, repeated history sometimes becomes a self-fulfilling prophecy.

In short, expectations related to halving attract attention and help meet those expectations.

In fact, this article is proof. We talk, write and speak about halving. If it motivates hesitant people to try Bitcoin, halving its own value will increase demand, driving up prices.

Demand : Some are only temporary

Not everyone is attracted to the technical and economic characteristics of Bitcoin. Many people are just looking for a way to get rich quickly.

There is nothing wrong with this, as it is in all possible markets. With their own funds, speculators have the risk of correctly estimating future prices and provide the market with important information functions. Thanks to them, today's prices contain information on the future expectations of those who are really involved.

However, market prices are constantly changing, and upward movements are attracting more and more people to the market. As with any asset, there are unreasonable short-term expectations that will blow a big bubble, which will burst later.

Historically, the bubble started to expand in a relatively short period of time after the first two halves. After January 2012, prices rose 100 times within a year. After the second time in 2016, it took Bitcoin a year and a half to increase the price by 30 times. In both cases, Bitcoin exceeded the symbolic threshold, first at $ 1,000 and then at $ 10,000. In both cases, however, it plummeted from its peak, losing about 85% of its value.

But what will happen in the future? Unfortunately, no. This sounds tempting, but taking only two points and trying to approach them in the future will be extremely irresponsible.

Demand : Is the market efficient?

But even if all this makes sense to you, there is one thing that will make it messy. If we know almost exactly when the halving will happen, it is not difficult to be prepared. Speculators are not stupid, they will not miss this opportunity. In the past we may have tried to explain that they didn't know about Bitcoin. But in 2020, this is untenable.

Economists call it the efficient market hypothesis. Any known information should already be included in the price. But in reality, is the market really like this?

Bitcoin was slightly above $ 3,200 at the end of 2018, and the growth since the last bottom was largely explained by an expectation: Before Bitcoin is about to halve, people will pay attention to Increased. Therefore, if you expect Bitcoin value to rise sharply immediately after falling by half, then lower the Bitcoin value based on what you think others expect. Try to separate those who understand the real and media effects of halving supply and demand from those who will only rise temporarily because of rising prices.

Of course, the market is not completely effective, especially for such risky assets, on the one hand, it is a great asset, on the other hand, there are risks such as unpredictable government regulation, fierce competition, and endless crooks. At any time, not only must the risk be continuously re-evaluated, but the opportunity must be re-evaluated. And the price.

All in all, the secret to Bitcoin's long-term success is not to wait for it to halve. What we have to do is to patiently explain the existing risks and opportunities.

Limited supply is necessary but not sufficient for price increases. The next Bitcoin halving plan is a natural demand stimulus plan. Unless the public realizes that Bitcoin has changed beyond the scope of people's perception since the previous halving plan, it may cause the bubble to swell. Of course, everything will get better and better.