Bitcoin – The Demand. The Supply. The Halvening
Bitcoin price history
The price of bitcoin this last week has been in the $610 to $700 range and, at the time going to press, stands at $642. One year ago the price was $210. This threefold increase is impressive. Since January 1, the price is up 50 per cent.
Bitcoin is seven years old and is capitalised at $10.15 billion. But it is still at an experimental stage with significant upgrades to its protocol that are under development. A complete failure of Bitcoin remains a possibility and after such gains many observers have expected a significant downward correction by now.
Why is the price, for now at least, proving so resilient to profit taking? Are we seeing the start of mainstream acceptance; the digital gold that many hope it will become — or is this just another speculative bubble? What are the demand and supply forces that are supporting the long-term bull market in bitcoin? And what are the threats that could put the bears in control and bring the price back down? I, Lance Nelson, address these questions here, but for more on this topic you can find me co-hosting Bulgaria Now Podcast www.bulgarianow.bg where, in special bitcoin episodes, I talk to others in the bitcoin space.
The underserved and government subsidy of Bitcoin via regulations
The underlying real-world use cases for Bitcoin are alive and growing. It’s useful to understand what these are and the role they place to underpin usage, and therefore, bitcoin’s market price.
At the moment, the bitcoin price is supported by government regulations. The collapse of the bitcoin price after the closure of the Silk Road market place provides good evidence to this theory. Government backed censorship on financial transactions means there’s a large section of the economy that needs fungible electronic cash.
The almost full recovery in bitcoin’s price since then has been alongside the emergence of new dark markets. Once again, bitcoin is the currency of choice for illicit online purchases.
The underserved are forced into using bitcoin, and in increasing numbers. Take, for example, countries such as Venezuela, Zimbabwe, Brazil and Argentina. They have political instability and are prone to printing money and causing high inflation. If currency controls are imposed, then it’s the dollar that becomes the preferred currency of trade. But as they trust lose trust in their country’s currency, they are using bitcoin to trade and transmit money across borders.
While governments continue to enforce KYC “know your customer” and AML “anti-money laundering” regulations, most existing banks are in denial and will struggle to adapt to the disruptive nature of bitcoin. After all, their business model is both protected and constrained by these rules.
Regulations, along with the war on drugs, means that there are people in the developed world who use bitcoin to serve their needs. Then there are a further two billion people in the world who have no bank account. Bitcoin is ready to serve them as mobile device ownership spreads to this group.
The Halvening
Part of what makes bitcoin valuable is the finite supply of 21 million bitcoin. The creator of bitcoin, Satoshi Nakamoto, did a clever thing, he programmed into the code that after every 210 000 blocks the mining reward would be cut in half.
On Saturday July 10, at about 6pm (GMT+2 time see www.thehalvening.com), the block subsidy on block 420 000, for only the second time ever, is cut in half from 25 bitcoin to 12.5 bitcoin. The community refers this to as “The Halvening”. A successful glitch-free halving event will help prove that bitcoin has a future.
The old finance saying is that you buy the rumour and sell the news could apply to bitcoin right now. Naturally, many people are excited about what the halving means for the network.
But the consensus prediction is that the price will drop after halving in the short-term. The rumour has been the lead up to halving; the news is the actual halving. Once the event is behind us, some excitement will drop off and people will no longer be buying bitcoin because of halving. That should send the price down, or at least see a sideways price movement, for a few more weeks.
Bitcoin price short term
With so many factors poised to influence the price in the short term, the consensus view is that price will tread water around $640 — so not venturing too far out of its current range. Buyers should be wary about chasing short term price increases right now. Let the halving hype pass, it may be an anti-climactic moment. But then again, this event might just be the start of a fresh run upwards.
At the moment there are 3600 BTC ($2.4 million) that are generated every day. This will be slashed to 1800 BTC per day ($1.2m), and the rate will never ever increase. There are only 5 286 750 BTC left to be issued by the network. As more people see that the entire idea of what money is will soon change forever they will start have a bout of FOMO (Fear Of Missing Out). We may see some post halving buying that will support my more optimistic view.
The price often needs a positive news flow, such as another source of bitcoin demand. One such story is expected to come from the launch of the Winklevoss Bitcoin ETF (exchange-traded fund). It will be structured very much like the SPDR Gold Trust ETF (NYSE Arca: GLD). The fund will hold an amount of bitcoin sufficient to back up the shares of the ETF. This fund will create an easy way for ordinary investors to own bitcoin.
Bitcoin price long term
There is much to look forward to. There will be more use cases, faster confirmation times and better on-boarding of new users. In one year from now bitcoin will work better. Today it feels like it’s the equivalent of 1995, the internet was new and amazing then. But who would have guessed then that Google, Amazon, Facebook and Netflix made the internet a whole lot better in the years that followed?
The upside story presents a reasonably good probability that the price could exceed $900 within the next twelve months. However, bear in mind all those investors who bought bitcoin six months to a year ago ago. Will they be tempted to take profits? They certainly could be if the price, post halving, starts to fall sharply.
Predicting when is the best time to buy, or sell, bitcoin has been close to impossible. Investors need a stomach for volatility. They also need understanding that bitcoin’s value could, once again, lose most of its value. But if there’s one thing that is unlikely to change any time soon, it is that the fundamentals of bitcoin remain; it is the largest decentralised digital currency that has a known fixed supply. The first half of 2016 has been quite a ride. Bitcoin will provide plenty more excitement ahead in the post halving months to come.
If you’re interested in learning more, then listen to the regular bitcoin specials, including the bitcoin halving on July 9 on Bulgaria Now Podcast www.bulgarianow.bg hosted by Lance Nelson. Attending a bitcoin meet up near you is a good way to learn more. There’s one meet-up every month at the home of a bitcoin ATM, Coffee Bar White in Sofia. See https://www.facebook.com/groups/550409705136927/ for the meet up dates.
Full Disclaimer: This article does not constitute financial advice. Never invest in bitcoin, or any other crypto currency, money that you can’t afford to lose.
(Photo: Leszek Soltys/freeimages.com)
