Is Bitcoin’s price growth programmed in? If you look at the past halving cycles, you will see that the price of the number one cryptocurrency is growing systematically. If this continues, we can expect prices beyond 100,000 US dollars before the end of this year. Better get yourself an exchange discount from this site and join the party, before it is too late!
The beauty of digital money is its programmability. Bitcoin’s value proposition is not measured by its physical properties – as is the case with gold – but follows algorithmic principles. Bitcoin is software, and that has clear advantages. After all, its creator’s ideas of a good money could be differentiated down to the last detail: Make your money the way you like it.
Attentive readers should know that Satoshi Nakamoto is a friend of hard money. And hard money is almost an understatement: With regular supply halvings, Satoshi has created what is probably the scarcest commodity in human history. After all, the inflation rate tends towards zero in the future and is already only about 1.8 percent p.a. today.
How does this work?
About every four years, or more precisely every 210,000 blocks, the so-called block subsidy, i.e. the share of new BTC that serves as remuneration for miners who successfully propagate a new block, is halved. While in the first halving period from January 2009 to November 2012 it was still 50 BTC, the supply growth per block is currently only 6.25 BTC. Bitcoin’s supply quantity follows a predetermined pattern implemented in the depths of the source code. And that drives the price.
It doesn’t take a degree in economics to understand what happens to a commodity whose increasingly scarce supply meets 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 demand for Bitcoin remains unchanged in the aftermath of 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 demand-side exhaustion, as investors’ willingness to pay would eventually reach a plateau.
Now, however, Bitcoin is a commodity that does not quite lend itself to being pressed into the models of economics. Because what could be observed in the past 3 halving cycles is not a decline, but even an increase in investor interest in Bitcoin in the aftermath of halvings.
From an investor’s perspective, the utility of BTC increases proportionally with its price, and so does its willingness to pay. Thus, Bitcoin behaves quite opposite to most other commodities, and definitely diametrically opposite to other assets such as stocks. This is because the inherent risk of stocks increases with its price and the probability of price corrections increases. Bitcoin is different. The higher the price, the more robust the asset. Thus, Bitcoin behaves similarly to a so-called Veblen good, whose perceived utility correlates positively with its price. With Veblen goods, the demand curve is inverse to “normal” goods. This means that users demand more the higher the price. Typical examples of Veblen goods include luxury watches.
So what halvings trigger in essence is a demand boom induced by a negative supply shock – an inverse 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 it in the chart. Because as can be seen, the Bitcoin cycle from 2013 to 2017 had lasted exactly 1,477 days. Or in other words, 4 years and 17 days, exactly a halving cycle. In the meantime, Bitcoin has made up decent ground. Between the two all-time highs, the price gained no less than 1,600 percent.
Difficulty adjustment as a corrective
Bitcoin is first and foremost a conglomerate of technologies that existed before. SHA-256, proof-of-work, public key cryptography (explained at this site): Satoshi didn’t invent any of these, he was just the first to put all these technologies together and build a digital money out of them. But there is one exception.
In order for algorithmic monetary policy to be adhered to, there needs to be a mechanism that prohibits overzealous miners from “overtaking” monetary policy. We are talking about, you guessed it, Difficulty Adjustment. Without the Difficulty Adjustment, BTC would not work. It ensures that the relative difficulty of finding a block is adjusted every 2,016 blocks so that a block is found every 10 minutes on average. If it went too fast, it corrects upward – and vice versa.
The idea is ingenious. As demand rises, so does the price, and the supply side tries to skim off the possible margins; in other words, mining rigs run at full speed. But, instead of more BTC coming into the system than targeted, the Difficulty corrects upward and the supply quantity stays where it should be. This increases the hash rate and thus the robustness of the network without harming monetary policy.
The programmed price pump
“Past returns are not indicative of future performance,” is the mantra of investment advisors. Of course, the future is uncertain. But it is hard to deny that the Bitcoin price has been significantly shaped by halving cycles. Extrapolating past experience into the future, it becomes undeniably bullish for Bitcoin.
This is exactly what the data analysts at Ecoinometrics have done. This gives us a rough picture of what else to expect. If BTC behaves as it did in the first cycle, Bitcoin would reach an all-time high of, fasten your seatbelts, $800,000.
If Bitcoin grows as it did in the past cycle until December 2017, this results in a price plateau of “only” just under 300,000 US dollars. What is exciting, however, is that Bitcoin is currently above plan and growing much more bullishly than in 2017, as can be seen in the chart below. A cycle top of 300,000 US dollars before the end of this year is a conservative estimate from that point of view.Current price growth extrapolated to past halvings.
By the time of going to press, more than 350 days have passed since the halving. So we should get clarity soon. Because on average, it takes about 550 days for Bitcoin to cycle top after halving. That would be the case at the beginning of November this year.
Of course, these are only hypothetical considerations. Nevertheless, it is not implausible that Bitcoin will continue as it is. The fundamental data speak a clear language and models such as PlanB’s Stock to Flow also predict price levels beyond $300,000 in 2021. Until now, one could set the clock according to Bitcoin’s halving cycles. Why should that change in the future?