Will we see $50,000 Bitcoin? Not half....

Just last week I was asked by a journalist if I thought it was realistic to expect the value of Bitcoin to climb to $50,000 by 2021.

Bitcoin reaching a landmark figure is always headline-grabber, particularly among the mainstream media, where there is often a lack of space or willingness to delve into the nuances of price movement and driving forces, so, my response was short and sweet - and exactly what the reporter wanted to hear.

I said I thought that, not only was $50,000 BTC by 2021 realistic, I believed it to be conservative. That was all she needed and follow-up questions were thin on the ground. So, please, indulge me while I explain myself. 

In short, my confidence is based around the next Bitcoin halving. History has shown us that halvings have a dramatic affect on the price of Bitcoin but why is that the case. I’ll do my best to explain. 

First, we must cover some basic precepts of Bitcoin.

One - there are only 21 million Bitcoin ever to exist, making it a deflationary asset.

Two - in order to secure newly released Bitcoin, one has to ‘mine’, the process of using computing power to secure the network and process every Bitcoin transaction, achieved by solving computational problems which chain together blocks of transactions.

Three - every 10 minutes, a “block” of bitcoin transactions is solved by miners and added to the bitcoin blockchain (ledger of transactions) and the ‘block reward’ of 12.5 BTC is released to miners.

Four - at the time of writing, the circulating supply of Bitcoin is 17,867,487 (85.08%) of all Bitcoin to ever exist. 

With this noted, in May 2020 the block reward will halve to 6.25 BTC. This process of halving the block rewards is predetermined, has happened twice before, and will finish when the last bitcoin is mined sometime in 2140.

So why does this affect the price?

Just like any market, the price of BTC fluctuates based on supply and demand. If holders and miners flood the market, the price decreases. If the market is awash with demand, the price increases. 

Miners themselves are businesses, in most cases due to the expense and complexity of the equipment, extremely sophisticated, expensive to run businesses, dedicating capital expenditure for the reward of Bitcoin which is sold to the market. 

The effect of a halving is that with fewer bitcoins being generated, scarcity is increased making them more valuable, but history shows us this doesn’t happen right away and we also need to look deeper into the market cycles, and miners sell pressures.

Market cycles - the rule of thumb is when Bitcoin rises, Ethereum follows and many alt-coins thereafter, but it is this alt-coin section we need to consider. In Q3 and Q4 2017 the price of Bitcoin and Ethereum was skyrocketing and a new concept of funding blockchain business and acquiring users was flourishing, the Initial Coin Offering (“ICO”). Many early Bitcoin adopters exited during this period, others got caught reinvesting into highly speculative token offerings, or purchasing early participation tokens for projects which have subsequently failed, expedited by the long bear market. 

With a long bear market, we have found those caught in holding highly speculative alt-coins forced to sell premium assets such as Bitcoin. 

In any event, the natural cycle of a market in its infancy is for a certain level of boom and bust based on sentiment and we have now moved on from the bear market to a phase where the media coverage is more positive, investors are confident and preparations are being made for various key events such as the Bitcoin halving and technological developments across various blockchains.

Miners sell pressures - Given miners earn 12.5 BTC per block and approximately 4,674 blocks are mined per month, at the current BTC price of $11,807.39, miners are generating roughly $689,846,760 in revenue per month. After a halving this reduces to $344,923,380, so the likely result is large mining companies store bitcoin until the price increases to above the cost of mining plus target margin (which is likely to be enormous). 

As most bitcoin mining is controlled by a small number of companies, one does not have to agree to manipulate the market; the effects of any moving in the markets can be monitored, although market manipulation remains a serious concern in the cryptocurrency markets and will remain until such time global governments agree to engage and regulate the core pillars of the sector. 

Coupled with the increase in usage and distribution, withholding the new supply ensures that over time demand increases to a point we see the post halving bull market. Miners will use this phase to offload to a buoyant market.

What does history teach us?

The previous Bitcoin halvings resulted in new ATH (all-time high price per BTC). After the first halving it took 369 days for BTC to go from $12.31 at the day of halving to $994.21. From the second halving it took 526 days for the price to go from $650.63 to $19,535.70, culminating in the much publicised bull-run of Q3/Q4 2017.

There has been a lot of discussion about when we are likely to see the direct and indirect effects of the 2020 halving. Indeed, many commentators mark Q4 as the likely ATH quarter pre-crash, but if history is to be taken into consideration, perhaps 2021 in more realistic. Of course, new factors are providing meaningful variables, such as institutional investors and availability of banking services, improved security, insured custody and numerous other factors not prevalent during previous port-halving periods, which may lead to a stabilisation of price, or perhaps just as likely, increase the attractiveness, public perception and add meaningfully to the new ATH. 

One should also monitor developments with Facebook’s Libra, which has the potential to have a stratospheric effect on the price of bitcoin and potentially leave the alt-coin market a wasteland of illiquid tokens.