How bullish is 2021? Bitcoin’s halving cycles provide information

Is Bitcoin’s price growth programmed in? Anyone looking at the past halving cycles must realize that the price of crypto currency number one is growing systematically. If that continues, we can expect rates above 100,000 US dollars this year.

The beauty of digital money is that it can be programmed. Bitcoin’s value proposition is not measured on the basis of its physical properties – as is the case with gold – but follows algorithmic principles. Bitcoin is software and that has clear advantages. After all, this way the ideas of its creator of good money could be differentiated down to the last detail: Make your money the way you like it.

Attentive readers of BTC-ECHO should know that Satoshi Nakamoto loves hard money. And hard money is almost an understatement: with the regular supply halvings, Satoshi has created what is probably the scarcest commodity in human history. After all, the inflation rate will tend towards zero in the future and is already only around 1.8 percent pa How does it work?

About every four years, more precisely every 210,000 blocks, the so-called block subsidy is halved, i.e. the proportion of new BTC that miners serve as a reward for successfully propagating a new block. While it was 50 BTC in the first halving period from January 2009 to November 2012, the supply growth per block is currently only 6.25 BTC. Bitcoin’s supply follows a predefined pattern that is implemented in the depths of the source code. And that is what drives the course.

It does not take a degree in economics to understand what happens to a good whose increasingly scarce supply meets an increasing demand. The only variable that can adjust in this interplay of supply and demand is price.

Halving cycle leads to boom and bust

Let’s assume that the demand for Bitcoin remains unchanged after a halving event. Then a constant demand meets a halving supply. Even under these, still conservative, assumptions, the price would rise. Normally, a rising price would lead to exhaustion on the demand side, as investors’ willingness to pay has reached a plateau at some point.

Bitcoin is now a good that cannot really be squeezed into the models of economics. Because what could be observed in the past 3 halving cycles is not a decrease, but even an increase in investor interest in Bitcoin in the wake of Halvings.

From an investor’s point of view, the benefit of BTC increases proportionally with its price and thus also the willingness to pay. Bitcoin thus behaves completely contrary to most other goods, but in any case diametrically opposed to other assets such as stocks. Because the inherent risk of stocks increases with their price and the likelihood of price corrections increases. It’s different with Bitcoin. The higher the price, the more robust the asset. Bitcoin thus behaves similarly to a so-called Veblen good, the perceived benefit of which correlates positively with the price. In the case of Veblen goods, the demand curve is the inverse of “normal” goods. That is, the higher the price, the more users ask. Typical examples of Veblen goods are luxury watches.

What Halvings are essentially triggering is a boom in demand induced by a negative supply shock – an opposing tendency with enormous explosive power.

Because just like Bitcoin’s boom cycles, the overstimulation, i.e. the subsequent bust, follows a pattern. And you can see that in the chart. As can be seen, the Bitcoin cycle from 2013 to 2017 lasted exactly 1,477 days. In other words: 4 years and 17 days, exactly one Halving cycle.

In the meantime, Bitcoin has made up good ground. Between the two all-time highs there was a staggering 1,600 percent price gain.

Difficulty adjustment as a corrective

Bitcoin is above all a conglomerate of technologies that already existed before. SHA-256, Proof-of-Work, Public Key Cryptography: Satoshi didn’t invent any of these, he was just the first to put all these technologies together and build digital money out of them. But there is one exception.

In order for algorithmic monetary policy to be complied with, a mechanism is needed that prohibits overzealous miners from “overtaking” monetary policy. The talk is, you guessed it, of Difficulty Adjustment. Without the Difficulty Adjustment, BTC would not work. After all, it ensures that the relative difficulty of finding blocks is adjusted every 2,016 blocks so that a block is found every 10 minutes on average. If it happened too quickly, it corrects it upwards – and vice versa.

The idea is brilliant. Because as demand increases, so does the price and the supply side tries to skim off the possible margins; In other words, mining rigs are running at full speed. But instead of more BTC entering the system than planned, the difficulty corrects upwards and the supply amount remains where it should be. This increases the hash rate and thus the robustness of the network without damaging monetary policy.

The programmed course pump

“Past returns are not an indicator of future performance,” is the investment advisor’s mantra. Of course the future is uncertain. However, it can hardly be denied that the Bitcoin rate is largely shaped by the halving cycles. If one extrapolates past experiences into the future, it becomes undeniably bullish for Bitcoin.

This is exactly what the data analysts at Ecoinometrics done. That gives us an approximate picture of what can still be expected. If BTC behaves as it did in the first cycle, Bitcoin would hit an all-time high of, buckle up, 800,000 US dollars.

If Bitcoin grows as it did in the previous cycle until December 2017, a price plateau of “only” just under 300,000 US dollars results. It is exciting, however, that Bitcoin is currently above plan and is growing much more bullishly than in 2017, as can be seen in the following graphic. A cycle top of $ 300,000 later this year is a conservative estimate from that point of view.

By the time of going to press, more than 350 days have passed since the halving. So we should get clarity as soon as possible. Because on average it takes about 550 days for Bitcoin to set up a cycle top after halving. That would be the case at the beginning of November this year.

Of course, these are just hypothetical considerations. Nevertheless, it is not implausible that Bitcoin will continue as before. The fundamental data speak for themselves and models such as PlanB’s Stock to Flow also predict price levels above 300,000 US dollars in 2021.

Previously, you could set the clock according to Bitcoin’s halving cycles. Why should that change in the future?

Disclaimer

This article previously appeared in the April issue of our monthly magazine Cryptocompass.