As usual, during this period of pandemic, there’s been a rollercoaster of events for those of us involved in financial markets. We’ve seen global stock indices drop dramatically, cryptocurrency going up and down faster than Donald Trump’s spin doctoring, and everyone feeling there’s little joy out there economically, financially or socially.
That’s what a pandemic does: kills everything. It kills people – more and more every day – but it also kills all activity outside of those who have got caught up in it. Everyone’s staying indoors and locked in.
However, what intrigued me is the way in which bitcoin and cryptocurrency has been discussed.
Bitcoin has massively crashed, losing about half its value over the last seven-day trading period. The bitcoin price was down by almost 50% late last night, falling to lows of $3,850 per bitcoin on the Luxembourg-based Bitstamp exchange before rebounding somewhat to trade around $5,000. Now, amid stock market chaos and plummeting prices across the board, one veteran trader has warned the bitcoin price could crash below the $1,000 per bitcoin level.
The price of bitcoin has fallen to its lowest level in nearly a year, losing more than half of its value amid a major cryptocurrency sell-off sparked by the spread of coronavirus. Bitcoin was trading above $9,000 (£7,100) over the weekend but dropped to nearly $4,000 on Friday morning following a series of flash crashes that began on Thursday. Other major cryptocurrencies experienced similar losses, including ethereum, XRP and bitcoin cash.
If you’ve spent any time talking with a Bitcoin enthusiast, you’ve probably been told (perhaps many times) that moments like this are what the cryptocurrency was made for. Some of its most ardent fans have contended that since the digital asset is “uncorrelated” with traditional assets like stocks, it is a “safe haven” against market crashes like those we are seeing right now.
Much to the disappointment of true believers, however, Bitcoin—in fact, the whole cryptocurrency market—has cratered right along with the stock market. Though the price has jumped today, at publication time it was still down roughly 40% from a month ago.
What is notable is that every time bitcoin’s price falls through the floor, most other cryptocurrencies follow suit. It’s almost as though they are all tied to bitcoin’s price … well, I guess they are really. But there are a few things that will change in the near future. In particular, the bitcoin halving that is coming up in May.
New bitcoins are issued by the Bitcoin network every 10 minutes. For the first four years of Bitcoin's existence, the amount of new bitcoins issued every 10 minutes was 50. Every four years, this number is cut in half. The day the amount halves is called a "halving" or "halvening".
In 2012, the amount of new bitcoins issued every 10 minutes dropped from 50 bitcoins to 25. In 2016, it dropped from 25 to 12.5. Now, in the 2020 halving, it will drop from 12.5 to 6.25.
The halving decreases the amount of new bitcoins generated per block. This means the supply of new bitcoins is lower.
In normal markets, lower supply with steady demand usually leads to higher prices. Since the halving reduces the supply of new bitcoins, and demand usually remains steady, the halving has usually preceded some of Bitcoin's largest runs.
This leads to a strong expectation that the bitcoin price will surge in the next year:
After the first halving, which occurred in November 2012, bitcoin’s price increased from $12 to more than $650. After the second halving in July 2016, the price accelerated to almost $20,000 in late-2017 … [Stock-to-Flow] models the price of bitcoin based on the so-called “stock-to-flow ratio,” which, initially, was used to value gold and other raw materials. By relating the “stock” – i.e., the quantity issued – to the “flow” – i.e., the annual issued quantity – the model derives a prediction of a bitcoin price post-halving of $55,000 to $100,000.
Time to buy some more BTC and time to HODL.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...