Unless you have been hiding in the Himalayan mountains meditating for the last two months, you’d know about the COVID-19 Coronavirus outbreak that is sweeping across the world. Reports state that coronavirus infections have crossed 300,000 worldwide, and economists have no idea how severe the economic implications will be.
An impending price war on oil combined with COVID-19 Coronavirus outbreak fears, stock prices are plummeting literally in every stock market around the world. The S&P 500 saw its worst week since 2008. The yields on the 10-year U.S. treasury saw a record low yield of 0.52%.
2020 has started on a positive note for Bitcoin, rising from $6,584 on December 2019 to a 2020 high of $10,367 in February. Bitcoin price is currently at $6,350 at the time of writing article (21st March 2020), which is a 16% drop YTD. If we were to go back a year, Bitcoin price was $3,900 in March 2019, which roughly translates to an annual price gain of 55%.
Using portfoliovisualizer, I’ve made a comparison in terms of returns for equities in Singapore, China and the United States. I’ve used Greyscale Bitcoin Trust as a proxy for Bitcoin and also included returns from Bonds and Gold.
So far, Bitcoin has weathered the impact better than equity markets and in 2020, there is another event that might potentially boost Bitcoin prices. That event is known as the “halving”.
Today, bitcoin miners bring in 1,800 “fresh” BTC per day. This year in May, there will be a “halving” and the number of bitcoin created in a day will be reduced from 1800 to 900. This process has happened twice before, and history tells us that each event, led to an increase in Bitcoin price. It grew by a factor of at least 10 times.
If you are confused, I want you to take the mining of Gold as an analogy. The World Gold Council estimates there are 190,040 tonnes above ground. Let’s call this the “Circulating supply”. At the same time, there are gold mines all around the world , mining out new gold from below ground. It is estimated that roughly 2500-3000 tonnes are mined each year, and let’s call this “ New supply“.
So what is the “Circulating supply” and “ New supply “ for Bitcoin?
As of today, there is 18,282,050 Bitcoin mined and circulating around the world. The current “New supply” rate for Bitcoin is 1,800 Bitcoin per day, and in a few months this would reduce to 900. Below is a table of the BTC “New supply” rates
|Date reached||New Supply ~BTC per day||BTC Increase||End Circulating Supply|
|Estimated Mar 2020||900||1.79%||18,703,125|
Let’s look into the concept of halving, how it influences the price of Bitcoin and what expectations we can have for the future. A common question that’s asked, is “ How many Bitcoin will there ever be in the world? & What is the supply of Bitcoin like? “
Bitcoin is based on a deflation model, which means that over there, there will be fewer and fewer Bitcoin created and eventually that supply would end. Based on estimates, we shall see this occur in 2140. The last Bitcoin will be mined and its supply would reach 21 million.
This is a model that’s the opposite of what we are used to, which is inflation. Fiat currencies like SGD or USD, are government-controlled and their supply typically increases over time.
For example, the US government can “print” money via various open market operations which has a multiplier effect when commercial banks perform fractional lending. This makes it possible for banks and governments to “create” additional currency when it’s necessary. Such operations cause rising prices over time, which impacts the cost of living.
The $10 you hold in your pocket today, would buy you less stuff 20 years into the future due to inflation.
Bitcoin is deficient due to its deflation model. When something is deficient and there are constants or growing demand, it becomes incredibly valuable over time. Good examples of this would be a piece of art by Picasso, collectibles like Magic the gathering cards and Gold
Historical correlation between Bitcoin Halving and Price
Going back in time, the first halving happened during November of 2012. Price was around $13 then, and by December 2013, it hit a high of $1200. The price movement remains volatile and decreased back to $220, which was still an incredible 1,700% increase in a year.
By the second halving in July of 2016, Bitcoin’s price rose to ~$600 ( 4600% growth ) and went on to reach an all-time high of $20,000 during the 2017 bull run.
Quoted from Anthony “Pomp” Pompliano, co-founder of Morgan Creek Digital Assets. “Supply-Demand economics remain valid,” he says. “They are a great way to determine the market price. So, if the demand for a fixed-supply asset increases, we continue to see price appreciation.”
He also claims that “one of the largest drivers of that demand or increase in scarcity is the halving in May 2020 which I think is going to be a big moment.”
Market participants echo bullish sentiments towards halving and predicts the BTC prices will continue to follow the uptrend, reaching a new high in 2021.
I believe that markets are semi-efficient, and the price reflects all publicly available information. This means that the markets today, have priced in the effects of Bitcoin halving. One of the value propositions of BTC is that it has a predictable supply schedule. Price spikes in the past happened due to a lack of information and knowledge about Bitcoin.
Information regarding mining is more readily available today, and there are more channels for market price discovery. There are crypto exchanges around the world, as well as derivatives exchanges such as CME and BAKKT. I’m of the view, that BTC prices will grow after the halving, but at a more unexpected pace, with different demand catalysts affecting the price more than mining.
A report was done by trade block, states the current cost to break-even on mining, is $6,851 per BTC. This is done under the assumption of the current network hash rate being (~113,000,000 TH/s) and the number of bitcoin mined per block (~12.73, which includes transaction fees). The number of $6,851 is also in line with other industry reports.
With this assumption, the cost of BTC post-halving would rise to $13,702. Accounting for hash rate growth, commercial mining cost-savings and improvement in efficiencies – miners are probably expecting future prices to be in the range of $12,000 – $15,000 per BTC.
The situation of Bitcoin today is a different one compared to the beginning of 2010. During those days, only a couple of Cypherpunks were experimenting on BTC, and it was worth $0.0025 each.
Today, I believe that almost everyone has ( at least in developed countries ) heard about Bitcoin at least once. We have the media, and Cryptocurrencies’ euphoric 2017 to thank for this.
While the media made Bitcoin’s name famous, most people still don’t know what Bitcoin is. They have simply retained what the media, be it social or mainstream, portrayed. A majority would see BTC as a speculative instrument that promotes criminal activities, facilitate dirty money laundering, or is simply a scam.
Over time, people would begin to identify Bitcoin for what it was designed to be. A check n inflationary pressure, and a safeguard towards loose monetary policies. During times of recessions, it might not be seen as a mainstream safe haven asset yet but the narrative of “digital gold” appears to be growing.
This last month, Trillions of dollars’ worth of value have flowed out of equities and into bonds/fiat/gold. With QE, lowering interest rates and stimulus packages happening around the world. I believe investors would be looking for historically uncorrelated assets to place their money in, and we could see the bottoming of BTC prices followed by the first major rally as part of bona fide “digital gold”.
Chris holds MSc Applied Finance from the Singapore Management University and is the sole recipient of the 2015 Columbia Threadneedle Investment Award. He has been working in the banking industry as an investment banker before starting CryptoTrader.sg in 2017
Chris has a knack for simplifying the complex, identifying trends and helping people obtain investment insights. Always seeking passive income, he has achieved reasonable success investing in equity (~15% per annum), but his foray into Bitcoin and other Cryptocurrencies has reaped returns that are much higher
Chris now aims to share his knowledge and help others achieve the same level of success