The halving effect of BTC: how to price it?

Original title: "the halving effect of BTC: how to price it?"

Blue fox notes

With more than 30 days to go before bitcoin halves in value, bitcoin's historic moment is slowly approaching. And the collapse of the cryptographic market in mid-march gives good reason to question both:

Bitcoin's "digital gold" narrative and its haven character

The halving effect of bitcoin

Blue fox notes has explained his views on "bitcoin digital gold" in a previous article (Is bitcoin a safe haven asset?Today, let's move on to the second problem mentioned above: the halving effect of bitcoin.

What is the halving effect of bitcoin? To put it simply, the reward for every 210,000 bitcoin blocks is halved, roughly every four years, and has halved twice in history, in 2012 and 2016. The total supply of bitcoins is 21 million, and the next block to be halved is 630,000 in height, which is expected around May 14, 2020.

(37 days to halve, source buybitcoinworldwide)

At the half point, block bonuses will be reduced from 12.5 BTC to 6.25 BTC, representing a reduction from 54,000 BTC per month to 27,000 BTC per month. At the current price of BTC, the selling pressure will be reduced by nearly $200 million per month, that is, from $400 million to only $200 million. This means a significant reduction in supply, and as long as demand remains constant, it means an increase in the value of BTC.

It is based on this expectation that in the cryptographic market, there is an endless stream of articles about the "halving effect" of bitcoin, and everyone hopes that halving the bitcoin will increase the energy of the market and lead to higher prices. However, the plunge in mid-march surprised many. The cruelty of the market is clear. It has never had a "it's got to be this way" predictable outcome.

So what about the halving effect of bitcoin? Is it a "metaphysical" or a real "effect" that will have a real impact on the market? There are two issues of highest concern:

Has the bitcoin halving effect already been factored into the price of bitcoin?
Why is bitcoin always so volatile?

Whether the halving effect of bitcoin has been factored into the price of bitcoin

Many believe that with the halving, the halving effect has already been priced into bitcoin. At one point in mid-february, bitcoin was trading above $10,000, which some thought meant the halving effect had already been priced in. But the subsequent slump has left the price hypothesis looking in trouble, particularly the so-called efficient markets hypothesis, which says that with the expected halving of bitcoin, the price has already been priced in at halving.

If you look at it historically, there is a halving effect. The halving effect has different results in different time scales. Because people's emotions tend to be susceptible to short-term price fluctuations, it is difficult to view bitcoin's halving effect on a longer time scale, generating all kinds of controversy.

According to CMC, the price of bitcoin on July 9, 2016 was 666.52 usd. In the year before the halving, bitcoin's overall trend had been upward, with a lot of volatility, which is the norm. Nevertheless, before halving, or a little highlights the halving effect. For about a month and a half before halving, there was a significant pull up and subsequent slide, followed by a flat period of more than four months.

The apparent rally lasted nearly a month, starting around May 20 and ending around June 17, 2016. The price went from $438.72 to $763.78, up more than 70 percent in less than a month. However, more than half a month before halving on July 9, 2016, the price adjusted downward to $666.52. Even so, it is up more than 50% from a month ago. However, after the halving, bitcoin has been in a relatively stable and gradual state of rise, and did not break through the previous high of $763.78. It was not until the end of 2016, five months later, that it started to break through the new high of $1,000 level. According to the historical track after this halving, the bitcoin market only started to enter the bull market after halving, and it will take nearly a year and a half to reach the peak of the bull market.

So on a larger time scale, halving 2016 is the start of a bull market in 2017. That was a small gain for nearly a month before halving, but it was a blip in a bull market that has been framed for more than a year.

In other words, judging from the halving in 2016, the real price of bitcoin halving effect is not a matter of two months, but may be more than a year. One of the most important reasons behind this is the sharp decline in the supply of bitcoin. However, it is not immediately reflected in the price of bitcoin, and it will take more than a year to fully absorb the underlying impact on the market.

Of course, the 2016 halving effect is not the first. The first was the halving on November 28, 2012. There was also a rise before halving, but the increase was not very significant. After halving, the sideways trade lasted about 5 months, which was partly similar to that in 2016, and then there was a significant climb. However, the bull market reached its peak in a shorter time than that in 2016, which took more than a year. (halving in 2016 took about a year and a half to reach the peak of the bull market, thanks to a large price base.) Assuming, by this logic, that halving in 2020, the market as a whole, could take longer to digest the halving. If it takes two years, this means that the upward cycle from May 2020 May not start to pick up significantly until the end of the decade, with new highs likely in 2021 and 2022.

The year before the first halving on November 28, 2012, the price of bitcoin rose by more than 300%, but did not reach the previous high. The year after the halving, the price rose by more than 1,000%, completing the largest price jump in the history of bitcoin, from $10 bitcoin to $1,000 bitcoin. The second halving, on July 9, 2016, followed a year in which bitcoin rose roughly more than 100%, and a year after that it rose more than 280%.

Of course, each half of the face of the market environment and factors are different, from the point of view of the blue fox note, this change will not follow the "script" of the forecast, all the predictions are naturally water. So we can not fully predict according to the historical drama, to adjust their views according to market changes at any time.

To sum up, from the perspective of a year's time scale, the overall upward trend of bitcoin is positive before and after the halving. From the perspective of blue fox's notes, even so, two characteristics can be seen from the historical data:

1. The halving effect of bitcoin is mainly shown gradually after the halving, rather than cashed out before the halving. Both the first and second time, the price of bitcoin has increased more after the halving than before.

2. The bitcoin halving effect takes longer to digest, and the first halving took a year to reach its peak, over $1,000. The second took a year and a half to reach its peak, nearly $20,000. And the third half? What's going to happen?

Why is bitcoin always so volatile?

Bitcoin was above $10,000 in mid-february and $5,000 by mid-march, down 50% in a month. It may seem like a lot of volatility, but this is the cryptographic market, and it's not surprising that this has happened over and over again in history.

How to understand the volatility of bitcoin fluctuations? With so much volatility, why is there such a thing as "digital gold"?

There must be more than one or two factors causing the volatility of the bitcoin market, including the macroeconomic environment, the attributes of bitcoin itself, the manipulation of the market by speculators, and the imperfect structure of the cryptographic market. The major factors that cause it to fluctuate in each stage may not be exactly the same, sometimes one of them dominates, sometimes multiple factors compound at the same time.

For example, the black swan in mid-february was related to the broader economic environment, such as the outbreak and the oil price competition, as well as the overall structure of the encryption market. The economic environment at that time led to a liquidity crisis around the world, and neither bitcoin nor gold could avoid being involved. The trigger of these crises led to the decline of the encryption market, and at the same time, due to the excessive leverage of the market, triggered the liquidation, and then led to a rapid decline, and the rapid decline made the imperfect structure of the encryption market manifest. The current infrastructure of cryptocurrencies, particularly throughput and speed, simply cannot support large-scale cryptographic trading in a short period of time, and the natural fragmentation of cryptographic trading venues has exacerbated this crisis, making clearing impossible and leading to irrational price collapses.

Meanwhile, participants in the bitcoin market, including investment funds, currency holders, short-term traders, and arbitrageurs, were unable to remain rational in the face of the plunge, which further exacerbated the decline. A combination of factors directed the perfect storm for the black swan on March 12.

After the black swan, more than $1 billion in USDT and USDC stable COINS lay quietly on the cryptographic exchange. Part of that is safe-haven money. It can also be seen that, at present, as a safe haven for assets or stable currency. (it is worth noting that, at current prices, these funds would be sufficient to absorb five months 'worth of new scrip after halving. This potential energy is still sufficient.

(data source tokenanalyst)

Leaving aside these almost unpredictable market conditions, black swans and other factors, why is bitcoin volatility always volatile? The fundamental factor here is that bitcoin's own design mechanism determines its volatility.

Bitcoin's game mechanism is an important factor in determining its price volatility. The ultimate goal of bitcoin is whether it is digital gold, a haven for assets, or a clearing house for the world. Until it reaches its ultimate goal, the volatility of bitcoin's price is bound to follow. In a sense, this is a property of its own, not a defect of its own.

Bitcoin's monetary policy has two most important designs:
One is a fixed ceiling of 21 million.
The second is to halve the reward for every 210,000 blocks.

Bitcoin's currency issuance mechanism determines that all miners can only compete for a fixed number of tokens, which is a complete zero-sum game mechanism. The gain of one miner means the loss of others in the market. Such a game mechanism, on the one hand, leads to the miners in order to get the reward, desperately improve the computational power, in order to get a larger share of the reward. But at the heart of the calculations are the efficiency and electricity costs of mining equipment. In particular, electricity costs account for most of the cost of mining. In a sense, the competition over the cost of electricity determines the survival of miners.

So mining has always been a brutal cost battle for miners. This is determined by the game mechanism of bitcoin itself. The inelastic mechanism of bitcoin issuance has led to an incentive competition among miners.

Bitcoin is very rigid on monetary policy, it doesn't have any flexibility, and interestingly, bitcoin is very flexible on the other side. Adjusting the difficulty of bitcoin gives it enough flexibility. The difficulty adjustment itself is also the necessary mechanism design to realize the fixed token issue. Either way, the difficulty adjustment is one of the greatest designs in bitcoin's game mechanism. It provides bitcoin with constant security and the resilience to continue its upward spiral.

The game mechanism of difficulty adjustment is essentially a self-adjustment of bitcoin price itself. When the price of bitcoin is high, the miners who mine it, including many inefficient miners, flock in, and they can make money because the price of bitcoin, relative to its cost, is enough to support inefficiencies.

But in order to achieve its fixed circulation, bitcoin makes it harder for miners to compete, which results in losses for previously profitable miners. To keep mining costs afloat, inefficient miners have an even greater need to dump bitcoins. If, at this time, there were other triggers, such as the black swan event of March 12, which caused the price of bitcoin to fall by nearly 50%, the inefficient miners could not survive at all, so they had to sell and shut down. This further led to a downward correction in the market. The market for bitcoin is bearish. As inefficient miners exit the market, bitcoin becomes too difficult to get out of the way, creating demand for a difficulty adjustment. As the difficulty adjustment comes, the force ratio is redistributed, and the surviving efficient miners get more of the BTC benefit. There was no strong selling demand from these miners, which helped stabilize the price of bitcoin.

It can be said that as a market subject that can generate 400 million dollars of selling pressure every month, the fierce game will bring continuous fluctuations of bitcoin price, which will further accelerate the market fluctuations if coupled with other factors in the market, such as macroeconomic adjustment and excessive leverage of speculators.

In short, before bitcoin reaches its final mission, its nature dictates that it will be accompanied by volatility.

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