It all starts with Bitcoin, a (₿TC) ‘cryptocurrency' based on blockchain distributed ledger technology (DLT).
The first-ever decentralized payment network meshing all noble elements of an open-source electronic cash.
From October 31, 2008 (Satoshi Nakamoto whitepaper release date) to January 3, 2009 (Bitcoin software system launch), to a decade plus and counting later in 2019 (all time high $19, 893 BTC/USD exchange rate value); little-b bitcoin ($BTC currency) and big-b Bitcoin (network protocol) are growing stronger daily. This bitcoin guide's goal is simple; educate users (via awareness) and inform investors* (with insights).
MTC is carefully-crafting the best knowledge base building blocks of the emerging ecosystem of bitcoin's era.
The two biggest questions Master the Crypto gets on the borderless, permissionless, P2P cryptoasset are:
1) what is Bitcoin?
1a) how Bitcoin works?
And yes, of course the proper acknowledge of the 24/7/365 real-time reality-based question:
2) what is the price of bitcoin? <insert #whenlambo memes.gif> (see predictions + history)
It's time to break down these quintessential questions to separate fact from fiction (even ^folklore^).
There is a lot of hoopla, hype and hysteria hovering around in a congested cryptoverse, it's easy to get lost.
Let's look at how bitcoin stands on its own “two fees” apart from ETH, LTC and its distant token cousin, BCH.
Digesting a full slice of humble BTC pie ingredients baked with upfront fundamentals will be invaluable.
Bitcoin may be lightning in a bottle, but the category creating crypto coin requires user-adoption at its core.
MTC's resourceful flagship review on bitcoin contains five different facets and factors to press play on.
- What is Money (Bitcoin's durability, acceptability, divisibility, portability, limited supply and uniformity)
- The Economics of Bitcoin (The Who, What, When, Where, Why and How on bitcoin) [*here]
- How Bitcoin's Price Works (driving forces determining the value of BTC) [*here]
- Bitcoin Halving (May 2020 BTC Mining Block Reward Chart History) [*here]
- What's Next for Bitcoin? Hopeful Bitcoin Price Predictions or Will It Die? [*here]
The archived bitcoin price predictions along with many other relevant components of the leading cryptocurrency, will all be saved for other outline overviews. Buying bitcoin and smart custody must go hand-in-hand, however, the aim is for all crypto connoisseurs to walk away knowing more than you do right now.
Many wonder will bitcoin die by an epic crash and collapse or see the bubble pop soon? or will btc go back up again? These forecasts on whether bitcoin is a one-hit wonder or not is for another time and place, for now it's back to the day-one bitcoin blueprint basics before turning into a bonafide bitcoiner (and believer).
By now, bitcoin deserves a bedtime storyline of the who's who to the what's what. Any crypto investment is a gamble, but a true master's starting point is taking the time to unscrabble the financial future of bitcoin.
Money: Before Bitcoin, How Did it All Start?
The disrupting new dawn of programmable money and trouble of B.T.C. spawns from the ‘new-age' blockchain technology model.
Bitcoin, under the guise of trustless distributed ledger technology – from a seed (whitepaper), to a sprout (software) – has grown into a sexy new emerging asset class as a full four and five figure cryptocurrency that is responsible for a $200 billion industry today (as high as over $820 billion). But before we can beef up the bitcoin ecosystem and talk about mining for block rewards or studying crypto market chart analysis every week, day, hour, minute and even second for some – it's time to trace back the roots of money and formulate an understand of its meaning and mass-use acceptance. Before any hodl gang lingo or store of value digital gold 2.0 convo, it's start on square one.
- 1 Money: Before Bitcoin, How Did it All Start?
- 2 What is Bitcoin? The Ideal Currency for Today’s World:
- 2.0.1 Is the Idea of a Global Currency Feasible?
- 2.0.2 How Efficient are Today’s Remittance Systems?
- 2.0.3 How Do Digital Currencies Fit Into All This?
- 2.0.4 “Power tends to corrupt, and absolute power corrupts absolutely.”
- 2.0.5 Bitcoin to the Rescue
- 2.0.6 Bitcoin’s Utility as Electronic Cash Explained
- 2.0.7 Bitcoin is TRUSTLESS
- 2.0.8 Some Downsides Associated with Bitcoin
- 2.0.9 Bitcoin’s Potential is Limitless Basically
- 2.0.10 Chew on This Before You Buy Bitcoin
- 3 How Bitcoin's Value Works: The Economic Factors
- 3.0.1 Why is Bitcoin so Volatile?
- 3.0.2 Some Historical Events Surrounding Bitcoin
- 3.0.3 The Mechanics of it All
- 3.0.4 Supply and Demand: Bitcoin
- 3.0.5 What Drives the Demand for Bitcoin in Today's Market?
- 3.0.6 Scarcity
- 3.0.7 BTC Supply: How it Affects the Currency’s Price
- 3.0.8 Speculative and Intrinsic Value: What’s the Link Here?
- 4 How the Bitcoin Halving Works
- 4.1 Bitcoin Mining is Halving Soon, Here's Why it Matters
- 4.1.1 First up: the First Halving of 2012 and the Associated Retail Cycle
- 4.1.2 The Venture Cycle: Bitcoin's Second Halving
- 4.1.3 The Institutional Cycle: The Third Halving Phase
- 4.1.4 The Mining Halving Cycles: The Shape of Halving Cycles
- 4.1.5 Supply and Miner Revenues
- 4.1.6 The Daily Amount of Bitcoin Mined
- 4.1.7 Reduction in Bitcoin Liquidity With Halving
- 4.1.8 Transaction Fees and its Impact on Marginal Supply
- 4.1.9 Price, Supply and Demand
- 4.2 2020 Bitcoin Mining Halving Explanation Recap
- 4.1 Bitcoin Mining is Halving Soon, Here's Why it Matters
- 5 The Ongoing Revolution of Bitcoin
Money 101: The Early Days of Value Exchange
To understand the importance of digital currencies, we should first start to look at how money has evolved over the years. Historically speaking, the use of physical currency is quite a recent phenomenon — mainly because the first monetary trades between humans consisted solely of barters. For example, a few millennia ago, the most prominent mediums of exchange consisted of things like cowrie (sea snail) shells, beads, etc. In fact, recorded evidence from back in the day shows that countries like India, China, and Africa had strong trade markets where people were regularly exchanging goods with one another.
As people all over the world witnessed the dawn of the Bronze age, more and more metals started to be used for currency creation. This was because metals are way more durable, portable, fungible, and divisible when compared to seashells and other similar mediums of exchange. With that being said, there is one severe downside to using metal coins — i.e. their weight. Centuries ago, when merchants had to lug their goods halfway around the world, they were forced to carry massive loads of metal coins on their mules, thereby making the process of facilitating barters quite expensive, impractical and time-consuming. To rectify this problem, Chinese rulers from the 11th century started to issue banknotes to make internal as well as global trades easier. This idea then caught the attention of many foreign emperors, particularly in Europe — thereby ushering in a new era of finance.
The scenario then stayed the same for centuries on end up until the early 1970s when President Ronal Raegan abolished the gold standard. In this regard, it needs to be pointed out that for most of their history, paper bills have been directly redeemable for precious metals such as gold. Under the gold standard, monetary units of trade being used across the planet could be redeemed for a specific amount of gold. The point of this system was to essentially curb the power of governments by keeping inflation levels in check, however, since abolishing this standard, modern-day fiat currencies are essentially backed by nothing more than a person’s trust in his/her local government. In the words of ex-Chairman of the Fed Reserve, Alan Greenspan:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Simply put, if the gold standard was still in place today, the need for Bitcoin would probably have not arisen in the first place. For those interested in learning about how centralized monetary systems — that are in place in over 97% of all nations around the world today — work, it could be useful to check out an article written by Nick Szabo where he covers a host of such pertinent topics. What should start to click in the conversation about bitcoin and Bitcoin shooting for the stars is when all of the major ‘money characteristics' (limited supply, portability, divisability, durability, uniformity and acceptability) are met in grand (golden) style and financial fashion.
Approaching Bitcoin can seem like a daunting task at first, especially the word ‘crypto-currency' only went mainstream two years ago. In this regard, some of the richest folks in the world have shared their stories of how they eventually sifted through all the noise surrounding this domain. Then, using but a twitch of the thumb to do a light-switch flip turned on, a bitcoin epiphany clicks. It's true disruptive power is finally discovered. In this guide, we will dig deep into a host of concepts related to this space including blockchain, altcoins and see how revolutionary these technologies really are.
Trying to grasp the immensity of Bitcoin from a purely technical standpoint can be quite an arduous task so it would be better to look at the term ‘digital currency’ in terms of its utility and importance. For starters, individuals who can grasp the basics of BTC are already ahead of the curve when compared to most people. Even seasoned investors like Warren Buffet and Mark Cuban have, in the past, slighted BTC without really comprehending what makes the digital asset tick. Buffet, in fact, has likened Bitcoin to ‘rat poison’, so that sort of gives one an idea of how traditional players view this market.
What is Bitcoin? The Ideal Currency for Today’s World:
Before we delve deeper into what Bitcoin has to offer, it can be quite helpful for our readers to envision what they think an ideal currency for today’s world should look like. For example, while technology has shaped how we interact with one another (smartphones etc), it has not been able to provide us with an economic platform that makes international payments and transfers really streamlined and economically viable. In this vein, it bears mentioning that a tx of 1000 dollars on Paypal can cost users anywhere between $70-$75 plus conversion fees.
Is the Idea of a Global Currency Feasible?
People who have traveled abroad are painfully aware of the fact that their local fiat assets are subject to so many peripheral exchange costs that they end up losing a lot of their hard-earned money along the way — be it via credit card conversion rates, tx costs, VAT, etc. Additionally, as things stand, there exists a total of 21 nations (including Australia, the USA, and Canada) that make use of dollars. However, all of these different assets (USD, AUD, SGD) are independent of each other and cannot be used interchangeably. To be even more specific, the individual currencies that exist across the globe — of which there are over 180 — fluctuate in value relative to each other, thereby making it impossible for conversions to take place for free.
With that being said, digital assets such as Bitcoin do offer a possibility wherein people can use a unified currency to facilitate their payments all over the world in a completely hassle-free, streamlined manner. In addition to this, cryptocurrencies eliminate several peripheral costs that one has to encounter at airports and city centers — where customers are provided with exchange rates that are far from an asset’s true market value.
How Efficient are Today’s Remittance Systems?
When analyzing today’s remittance platforms, we can see that migrant workers these days send anywhere around $574 billion back to their families every year. Not only that, this market is projected to keep growing as urbanization trends continue to flourish. However, most of these platforms are quite non-user friendly and the fees involved with facilitating such tx's can exceed 10% of the total value transferred — while processing times can range anywhere between 1-4 days.
Now, from the context of crypto, we can see that using digital assets, migrant workers can send the same amount of money back to their loved ones within a matter of seconds, that too at a total tx cost of less than 2% of the total transaction value. So, when it's all said and done, it seems as though having a global currency makes international travel and cross-currency payments significantly easier for everyone.
How Do Digital Currencies Fit Into All This?
In today’s day and age, most people actively make use of digital payment platforms such as Venmo, Apple Pay, Paypal for sending and receiving money. Even in countries where digitization is still happening slowly, people are beginning to see the advantages of not having to carry their physical assets everywhere they go. A poll from the Economic Times clearly shows that approximately 92% of all global currency reserves exist purely in a digital form. This number will most likely continue to grow as we move into the future.
Also, if a global digital currency was to enter the picture, governments all over the world would have their ability to implement expansionary or refractory powers greatly reduced. And while in certain circumstances, one could argue that centralized currencies have their advantages (such as reducing the chances of a recession), by and large, the counter-arguments outweigh all of the pros by a big margin. In this regard, we can mention examples such as Venezuela where the local currency witnessed hyperinflation of such insane proportions that it became almost worthless within a decade (at least for daily trade purposes).
“Power tends to corrupt, and absolute power corrupts absolutely.”
When a government or any other centralized entity (think big-name banks such as JP Morgan, Goldman Sachs, etc) can print money out of thin air, one has to think of all the potential craziness that can ensue. For example, back in 2008, bankers were able to reel in billions of dollars in taxpayer money as “bonuses” for essentially causing the housing crisis that saw many hard-working people (across the globe) lose all of their money within 12-18 months.
On the subject, Mr. Greenspan was quoted as saying:
“Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession … It was limited gold reserves that stopped the unbalanced expansions of business activity before they could develop into the post-World War I type of disaster.”
In closing out this segment, we can say that while it is almost impossible to revert to the gold standard we had back in the day, it is still not too late to eliminate the need of third parties from the scene.
Bitcoin to the Rescue
Having discussed the history of money in quite a lot of detail, we can now start to look at the proposition that Bitcoin puts on the table. In its most basic sense, BTC can be thought of as an all-encompassing solution that addresses many of the problems that come inherent with fiat currencies. To start with, it can serve as both digital gold as well as an electronic cash medium. If that wasn’t enough, the digital asset is completely trustless and cannot be controlled by any third party authority or institution. These three features in and of themselves make Bitcoin a much better financial vehicle when compared to any other currency available in the market today.
Going back to how fiat money works today, we can see that following the abolishment of the gold standard last century, future installations of governments all over the world were given complete power to print money in a completely random, uncontrolled manner. However, there's a massive catch here, i.e. central banks don't necessarily print new currency notes to create money, instead, they manipulate interest rates to influence economic activity and control inflation.
So for example, if a central bank reduces interest rates, people are provided with a massive economic incentive to borrow and spend money from various banking institutions. This, in short, was also the core reason for the 2008 recession that shook the world quite heavily. Similarly, when interest rates are increased, people generally tend to avoid making investments and usually look to cut back on their monetary consumption.
Another point that needs to be highlighted here is that when the Federal Reserve (or any other central bank) reduces interest rates, the supply of money increases quite quickly while the supply of goods and services grows more slowly.
Here’s where Bitcoin’s real utility starts to stand out and shine because unlike every other fiat asset in existence today, BTC has a fixed supply — i.e. there will only ever exist a total of 21 million BTC. This makes the premier crypto asset a scarce commodity (much like gold) and also makes it immune to a host of refractory and inflationary issues. Also, when a particular asset is hard to source, people tend to value it more. This concept can be better highlighted by thinking of paintings by artists such as Monet, Dali, Mundi that often are sold for hundreds of millions of dollars — primarily because there exists just one copy of the original artwork.
Bitcoin’s Utility as Electronic Cash Explained
While gold and other such precious metals are good SOVs, they are quite impractical for facilitating daily transactions. They are not only heavy and difficult to move around but they are also incredibly inconvenient to use in one’s day-to-day life (because they are not easily divisible). In this regard, Bitcoin offers a host of advantages to its users such as:
- The crypto asset is infinitely divisible and can be stored on several digital platforms such as a flash drive, laptop, cold wallet or even a piece of paper.
- It can be transferred anywhere across the world within a matter of moments.
- It is a highly secure tx medium and cannot be easily traced by nefarious third-party agents.
- It is unforegable and is the first scarce currency to enter the mainstream (since we abandoned the gold standard back in the 1930s.)
- It is fully transferable.
Bitcoin is TRUSTLESS
As mentioned previously, one of the biggest advantages of using Bitcoin is the fact that the currency is completely decentralized and therefore trustless. What this simply means is that while the BTC network keeps track of account balances and tx’s much in the same way as banks and other similar financial institutions do, it allows anybody to participate and supply computing power to the network — thereby allowing for enhanced security and faster transactions.
To be even more specific, the BTC ecosystem makes use of a niche architectural system that incentivizes anybody who participates in the network. As a result of this, participants who act honestly and go by the rulebook can make a lot of money. This explanation, however, is very simplistic and if one is inclined to learn more about the technicalities of BTC, they can read a paper published by Andreas Antonopolous a few years back.
Key Points Worth Bearing in Mind
- Legacy outfits pretty much work in the same way as Bitcoin, barring the fact that they use a closed-door approach. What this means is that they don't allow users to verify and validate their transactions/dealings. Not only that, but they also have the power to completely freeze out an individual and refuse them service if they happen to have a poor credit score (or even if they haven't done anything wrong as such).
- Owing to the fractional lending model being used by most of the world’s reserve bans, a person’s money ceases to be his/her’s once they have deposited it with a bank.
Some Downsides Associated with Bitcoin
Even though on paper Bitcoin’s framework seems pretty flawless, in real life the currency does have its fair share of limitations. For example, to make the BTC network completely secure, its inventor Satoshi Nakamoto had to sacrifice certain aspects such as high tx throughput and scalability. To elucidate further on this point, we can see that when compared to legacy payment solutions (such as Visa, Mastercard, etc.), Bitcoin’s TPS (transactions per second) is quite poor. Similarly, due to certain scalability issues, if a lot of people start to make use of the flagship digital currency for various payment purposes, the network might get overwhelmed and start exhibiting certain technical issues.
Bitcoin’s Potential is Limitless Basically
Many of our regular readers may recall that back in the '90s, many people assumed that the internet was just a fad and that the technology would fade completely from people's minds in the coming few years. In this regard, it should be pointed out that back in 1995, a Newsweek article contained the following lines:
“Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make governments more democratic.
Baloney. Do our computer pundits lack all common sense? The truth in no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”
With these words in mind, it should be highlighted that while the BTC network currently has its fair share of scaling-related issues, it does not mean that in the future these problems might not be rectified completely. For example, there already exists something called the Lightning Network (LN), a second-layer protocol that allows users to process thousands of BTC transactions per second. Not only that, but the technology also allows transactions to be processed in an almost instantaneous fashion (while charging users little to no processing fees).
In the future, many experts predict that we may have a system that connects people to the LN using only their smartphones. If this vision were to come true, retailers all over the planet will be able to save on humongous amounts of annual fees that they currently have to dole out to various payment service providers.
In closing out this section, we should point out that there currently exist certain technical issues with the LN which make it not quite ready for commercial use.
Chew on This Before You Buy Bitcoin
In closing out this segment, we need to be clear that while BTC as a financial investment option is extremely enticing, it does come with its fair share of economic uncertainty. So, when deciding to buy Bitcoin, there are a few questions that we should bear in mind so that one can get in the mindset of a seasoned investor.
- Have currency options stop evolving or have they constantly been adapting to the tech developments that have been taking place around them (throughout history)?
- Why do human beings tend to value commodities that are scarce a little more when compared to those that are not?
- Who is the real benefactor when a financial offering becomes popular: the first investors or the folks who cashed in when others were joining in on the fun as well?
- Which currency model is better suited for the 21st century: one that is controlled by third-party entities or one that is governed by hundreds of local peers?
- Will the world’s financial elite store at least a fraction of their wealth in an asset such as Bitcoin? What incentive would they have to do such a thing?
- Are business owners likely to start using cryptocurrencies in the future? If so, why would they do such a thing?
- The internet did not become a mainstream fixture overnight, so who’s to say that Bitcoin does not have any future potential?
- There are only 21 million BTC in the world and over 8 Billion people, so what fraction of BTC can each person in the world theoretically own?
In regards to the entire matter, well-known investor John Pfeffer wrote an op-ed piece sometime back in which he was quoted as saying:
“… the potential value of a winning monetary store of value protocol can be measured in relation to the total value of gold bullion and foreign reserves, suggesting a potential value in the USD 4.7–14.6 trillion range. If Bitcoin were to become that monetary store of value (and it currently appears to be the strongest contender by some margin), it could be worth USD 260,000–800,000 per BTC, i.e., 20–60x its current value. If one places a higher than ~5% chance of Bitcoin succeeding in this way, it is a rational and attractive investment for a long-term investor before considering other potential upsides stemming from payments and unit of account utility.”
While the aforementioned quote was written at a time when the price of a single Bitcoin was hovering near the 20k mark, if for example, Bitcoin does indeed become a mainstream store of value, it would not be surprising to see the value of the asset surge anywhere between 70–230 times. Thus, for an asset with such a crazy financial upside, how much should a person ideally invest in such a commodity is entirely up to them. Pfeffer points out in his paper that if BTC has more than a 1.4% chance of becoming a long term SOV, one should go straight ahead and invest a portion of their portfolio in the premier crypto offering.
How Bitcoin's Value Works: The Economic Factors
Since its inception, predicting the future of Bitcoin has been a daunting task for traders and economists all over the world. Despite people coming up with a variety of unique analytical techniques to accurately assess the financial future of the flagship cryptocoin, Bitcoin’s position as an investment vehicle has remained quite controversial, to say the least.
In this section, we take an in-depth look at the various fundamental factors that play a large role when it comes to determining the price of BTC as well as learn certain methods that can help investors have an upper hand when investing big in crypto. Additionally, we will also look at the core concepts of crypto economics and the brief history of what has impacted the behavior of Bitcoin over the past decade or so.
Why is Bitcoin so Volatile?
Anytime a conversation regarding Bitcoin pops up, we often see the term volatility popping up more than usual. From a purely technical standpoint, we can see that economic volatility measures the “intensity of changes in security over a given period of time”. In layman's terms, the more volatile a particular asset is, the more rapidly its price will change over a certain period of time. To further elaborate on this point, we can see that on the 15th of November last year, the price of a single Bitcoin lay around the $6,300 mark, however, within just 10 days, the asset’s value dropped by nearly 40% (to around $3,700). Such a dip for a traditional asset would be considered a crash but in BTC’s case, the swing was viewed as nothing out of the ordinary.
Also, it is important to remember that while people tend to correlate the volatility of an asset with a corresponding level of risk associated with it, this line of thinking is a bit incomplete since it only focuses on the negative aspects of volatility. And even though by owning a relatively large amount of a highly volatile security, an individual might be exposing him/herself to huge monetary swings. We need to understand that crypto purchases should be thought of as long term investments and thus temporary ups and downs are part and parcel of the game.
Another way of looking at the situation could be that by owning a volatile security offering, one has the potential to yield massive rewards (given that a trader can accurately read events surrounding a particular market.)
Over the past decade, Bitcoin has exhibited signs of high volatility, as a result of which the asset’s value has mostly been based on speculation surrounding its immense future potential. However, now that we have a 10-year tx history to work with, we can see that the many BTC oscillations that we witnessed (in the past) make more sense as we start to analyze all the events that have directly impacted the currency in the past.
Some Historical Events Surrounding Bitcoin
To gain a better understanding of what makes Bitcoin tick, it can be useful for us to look at a brief history of the premier crypto asset.
BTC came into existence in 2009, a time when the value of a single coin lay around the $0.0001 mark. Since then, the cryptocoin has seen insane high’s — with its price even breaching the $20,000 threshold — thereby making it the best performing financial asset of the past decade. However, the first time BTC started to draw a lot of mainstream attention was back in 2013, when the Cyprus banking crisis had just ended. During the same year, some Chinese investors put in a lot of money into the offering, thereby forcing its value to rise by over 1000%. This golden run did not last long because a few months later, the world bore witness to the Mt. Gox hacking scandal — an event that saw third party miscreants make their way with a huge sum of stolen BTC (touted to be worth hundreds of millions of dollars).
To put things into perspective, back in 2013, Mt Gox was responsible for facilitating about 70% of the world’s Bitcoin trades and as a result of the hack, the entire crypto market was hit hard — with the total market cap of this space dropping by over 40%. Following this rollercoaster ride, the market stayed cold for a few years before steadily starting its financial ascent once again. By the end of next year, not only was the crypto market experiencing unparalleled levels of investor interest, even other associated products such as ICOs (Initial Coin Offerings) started to gain a lot of momentum. Things were so crazy for a little bit that even blockchain startups that had no experience were able to raise millions of dollars within a matter of days.
As the market started to gain more and more hype, some of the scalability issues surrounding BTC started to become increasingly prominent. For example, people had to start paying increased transaction fees as well as face insane wait times. These factors eventually led to the downfall of the asset, causing Bitcoin to plummet from a price point of just under $20,000 to just over $3,400 within a timeframe of just16 months. If that wasn’t enough, ICOs too witnessed a steep decline in their popularity levels — with the fundraising method essentially disappearing from the face of this planet within a few years.
The point of learning about these key events is to understand the long term trends associated with BTC and how certain factors can be used to gain leverage within this burgeoning market sector.
The Mechanics of it All
It is important to understand that volatility and other such events related to Bitcoin should be viewed as indirect influences rather than the currency’s core defining features. To expound further on the subject, we can see that the true mechanisms which determine the value of BTC are very rarely talked about by a vast majority of all mainstream media outlets.
At the very crux of things, BTC can be thought of as a direct benefactor of the supply/demand model — a fundamental principle of economics which clearly states that the value of a good is directly correlated to two of its core properties:
- The amount of commodity that exists in circulation.
- Demand for that particular commodity
So, when the demand for a particular asset is greater than its market supply, its price starts to witness an upswing. Conversely, when the supply is more than the existing demand, the price of the asset starts to go down. For visualization purposes, we can consider the following example.
Say the production of apples was to drop by over 50% overnight, this would have a major impact on the price of the fruit — i.e. the value of a single apple would shoot up considerably. Not only that, as the price of apples continues to increase, the number of people who can afford the fruit will continue to drop. This same analogy can also be used in the case of Bitcoin.
Supply and Demand: Bitcoin
As mentioned in the previous section, the aforementioned supply-demand framework is used pretty much across every service sector in existence today. But in the case of Bitcoin, we need to understand that there are two different currencies involved — i.e. BTC vs USD. To further elaborate on the matter, we can see that on one side we have individuals who are trying to offload their BTC in return for US Dollars while on the other side we have people who are trying to acquire the premier crypto coin using their USD. Also, the dollar amount at which buyers and sellers agree to facilitate their deals determine the price of Bitcoin at any given time.
What all of this essentially means is that the “volume of sell orders relative to buy orders” is what helps drive the value of BTC on a day to day basis. So if the sell volume is more, there will be an increase in supply — which, in turn, will result in a price decrease if demand remains steady. Similarly, an increasing number of buy orders (while sell orders remain constant) results in the price of BTC going up.
Therefore, for an individual to accurately predict the future value of BTC, he/she will need to know all of the various factors influencing the supply/demand ratio of the flagship crypto asset — a task which is almost impossible in real life. However, there are still many drivers that investors can constantly keep a tab on to understand BTCs supply/demand chain more clearly.
What Drives the Demand for Bitcoin in Today's Market?
Some of the key factors which determine the demand for BTC as well as other altcoins in the market include:
- The price of complementary goods such as fiat currencies, precious metals, and digital currencies.
- The purchasing power (as well as median income) of consumers operating within a particular market segment.
- The subjective expectations of people looking to buy Bitcoin — which is determined by the speculation surrounding Bitcoin’s future.
- The flexibility of supply chain delivery — i.e. how quickly BTCs supply ratio can change.
- The currency’s market utility and requirement.
As a general rule of thumb, demand curves tend to have a negative slope, which means that the more a particular commodity is priced at, the less demand it will intrinsically have. One can also see that in most cases, the correlation between quantity and price is inverse.
Lastly, financial assets for which the demand function is positive are referred to as Giffen goods. And while casual readers might categorize BTC as one of these goods — mainly because the demand for BTC can increase as the price of the asset goes up (as was seen during the 2017 market surge) — the fact of the matter is, BTCs total supply and its actual available supply are two different things altogether.
As we have already pointed out earlier, Bitcoin’s total token supply (at any given time) is a matter of public knowledge — which basically means that anybody can access the BTC ecosystem to see how many tokens are in circulation. Not only that, in all, there can only ever exist a total of 21 million coins, as a result of which Bitcoin has unforgeable scarcity.
- While governments all over the world have the power to increase their fiat supply (as and when they see fit), no such thing can be done when it comes to Bitcoin.
- The total number of tokens has been predetermined in the Bitcoin protocol and thus there is no possibility of this figure being altered in the future.
- The total number of new coins being added to the BTC supply chain can be predicted quite accurately by anyone.
- The reason why Bitcoin’s price is so volatile is because its supply can’t be adjusted as per market demand — as a result of this, shifts in demand tend to show up as variations in price.
BTC Supply: How it Affects the Currency’s Price
When talking about Bitcoin’s available supply, we are referring to the volume of BTC that people are willing to offload at any given price. Thus, a clear distinction needs to be made here between the currency’s available and circulating supply — with the latter basically referring to the amount of BTC that has already been mined but is not available for commercial purchase.
From a mathematical standpoint, we can make sense of the entire situation by looking at the following equation:
Available supply = Circulating supply – BTC that are being held or are lost
In short, the core factors that drive the price of Bitcoin are it’s bought and sold volume — i.e. if the sell volume exceeds the buy volume at a particular price point, the value of BTC is bound to drop. In the same vein, if the currency’s buy volume exceeds its sell volume, it’s value will shoot up.
Speculative and Intrinsic Value: What’s the Link Here?
The intrinsic value of an asset is essentially its true financial worth (as attributed by the market). It is determined by several factors such as its cost of production, market utility and functions, and scarcity. For example, in the case of fiat, their value is directly related to the social contracts they possess. However, in the case of BTC, the currency is not affiliated with any government entity and thus many people seem to keep harping on the same question again and again: “Does Bitcoin have any real, intrinsic value as a currency?”.
For any currency to have intrinsic worth, we need to assess whether it fulfills the following three functions:
- Does it serve as a legitimate medium of exchange?
- Can it be used as a store of value?
- Can the currency be used as a unit of measurement?
With this information in mind, let us try and see if Bitcoin fits the aforementioned criterion:
- Bitcoin as a means of exchange: As things stand, there are currently many retailers/merchants across the globe that accept payments/remunerations in the form of Bitcoin and other similar cryptocurrencies. And while the scalability aspect of BTC is still a little questionable, several developers are working to create solutions that will help rectify this problem. For example, Schnoor signatures are designed to allow for multiple transactions to be grouped and processed as a single tx — thereby allowing for more efficient value exchanges.
- Bitcoin as a long-term SOV: A lot of people tend to highlight BTCs volatility as a major deterrent when it comes to its use as a store of value. However, because the premier alt-asset makes use of a decentralized framework that is not controlled by anybody, it serves as an attractive option for any person looking to transfer their wealth internationally.
- Bitcoin as a unit of measurement: For an asset to serve as a unit of measurement, it needs to be stable. This is the only feature that BTC does not satisfy in its entirety.
Additionally, the strength of a financial commodity keeps on increasing as the number of people using the asset goes up. In the same breath, the strength of an SOV rises as more and more people start to trust that commodity. Lastly, as with any new currency, the people who enter the market first are usually the ones who can gather the maximum amount of profit. Thus, for people who believe Bitcoin is destined for big things in the coming few years, it would not be a bad move to invest some of your savings in the premier crypto offering.
Now that we have revisited a trip down memory lane on all of the historical bitcoin talking points, let's talk about the biggest future catalyst to help drive Bitcoin's value to all time highs.
How the Bitcoin Halving Works
May 2020 is the estimated timeframe for the bitcoin mining block rewards to split in half. Let's review how bitcoin works and the BTC halving phenomena.
Bitcoin Mining is Halving Soon, Here's Why it Matters
The best kinds of events happen every four years, it seems. We need only look at the sports world to get some testaments to that effect. The World Cup taking place every four years, same with the Olympic Games.
For the blockchain world behind Bitcoin – its supporters have something to look forward to – which is the halving block rewards for miners. This won't be the first time that this has happened; block rewards depreciated for the first time back in late 2012, having dropped from 50 to 25, and then again to 12.5 Bitcoin in 2016. The third halving event will be taking place on or roughly around May 20th, 2020.
This event will see the block rewards halved once again from 12.5 to 6.25 BTC.
It remains to be seen whether it was by pure coincidence, or a pre-meditated design choice, but the last two price cycles have been oriented around the halving of block rewards. So to better understand what we have in store for us, it's important to take a look back at the last two halvings and the kind of impact they both had on the metrics of supply, demand and price of Bitcoin.
The goal of this is to formulate a more empirical explanation for the kind of price cycles that we've previously seen with price cycles. Inevitably, the aim is to offer some insight for investors curious about what's going to be happening in the foreseeable future.
First up: the First Halving of 2012 and the Associated Retail Cycle
So why is it that it gets the nickname ‘retail cycle'? It's mainly because at this time, Bitcoin was still on the veritable fringes of the investment market, managing to obtain its first inches of traction through its adoption from technologists and retail investors. It's at the beginning of this cycle that the entire economy behind Bitcoin remained relatively minuscule in the minds of any investor: and hardly one they would consider as an investment opportunity.
In addition to this, before the beginning of the first halving in this price cycle kicked off, the prior cycle ended with the overall price for Bitcoin slumping by well over 90 percent: plummeting from 31 dollars to hit just 2 – all in the space of 5 months during 2011.
Fortunately, Bitcoin's price managed to get back on track in November of the same year up to the first halving during November 2012, and continued to rise significantly over 2013 to hit a record high of more than $1,200.
If we take a look at some of the candlestick metrics from 2012 to November 2013 – we can see a pretty impressive symmetrical pattern to Bitcoin's performance.
One of the reasons that we see this otherwise impressive surge in the price happen is thanks to the halving which occurred shortly before – with Bitcoin surging up to 13 dollars just before the halving took place, and started reaching startling highs of $1,200 afterwards.
To put this into perspective, the kind of appreciation that Bitcoin endured from late 2011 to 2013 was akin to increasing 350 to 400 times, depending on the price and liquidity you look at. Any multiplying of this value came predominantly after the halving as we can see.
While this made for a pleasant surprise for investors and technologists that newly enfranchised themselves. The rally was followed by a pretty steep recession which lasted for more than 14 months. This saw the underlying price of Bitcoin fall by more than 80 percent, before hitting strong lower supports at 200 dollars. From there Bitcoin's price managed to consolidate around the 200-300 mark through the next 10 months.
The Venture Cycle: Bitcoin's Second Halving
This is where Bitcoin becomes a lot more interesting to the world that previously shrugged it off during its last cycle. Hence why we ought to refer to this one as the venture cycle, predominatly because a number of venture capital firms along . with hedge fund got a first look at the meteoric first cycle that Bitcoin enjoyed.
This resulted in them really buying into the concept of digitalized / decentralized money the Bitcoin espoused. Meaning that far more speculative investors started entering the market during this cycle.
In addition to these individual investors, a good number of crypto-related hedge funds were established and started doing business; and while a good number of these would prosper over this cycle, a large number of them were unable to survive the crash that followed shortly thereafter. Even with the crash, there were more than 150 that continued on to the next cycle at least.
It's over this cycle that Bitcoin managed to substantially rise from the beginning of November 2015 when the second halving price cycle got started. It's during this span of 8 months that this rally continued well ahead of the July 2016, when the halving would take place.
This same cycle and surge continued on for a span of 24 months, much akin to the previous cycle, until Bitcoin managed to reach its all time record high of more than $19,892 in December 2017 (Price Source: Coinbase)
The lion's share of this appreciation, even with the rally before July 2016, came after the halving event. Ahead of this, Bitcoin only managed to reach $650, before managing to go parabolic to $19,000 and beyond.
Once again, Bitcoin's valuation increased only threefold before the halving took place, with the majority being after.
As many of us know by now, this meteoric upward surge was followed swiftly by a year long recession for Bitcoin. This saw its price plummet by more than 80 percent, before hitting a stong lower support of $3,000. Over the next four months, Bitcoin's price consolidated around the $3,000-$4,000 range.
The Institutional Cycle: The Third Halving Phase
Bitcoin's price managed to bravely continue trading upwards, hitting its upper supports of $5,000 back in April 2019, and has since pushed beyond this to reach over $9,000 and peaks of over $10,000 in what can almost be described as the beginning of a brand new halving cycle.
One of the things that makes this (most recent) cycle so unique is the kind of relationship it has with institutional investors compared to previous ones. In prior investment cycles, not a single major name participated in them – until this one. Some of the big examples of this dramatic shift come from businesses like Fidelity, which will be coming out with its own crypto trading solution in the future.
JP Morgan, and its CEO, Jamie Dimon have also been subjected to a pretty interesting ‘about face' on the prospect of involvement with cryptocurrencies. Dimon himself made sure that no-one was unsure of his position regarding Bitcoin in 2017-18, calling it a fraud on a number of occasions. Since then, JP Morgan has begun running tests of its own crypto known as JPM Coin
The likes of Facebook, Google and Twitter also having imposed bans on the advertisement of cryptocurrencies in 2017/18 have made pivots of their own. None more than Facebook which has been planning (and struggling) its own stablecoin solution – Libra – in conjunction with a substantial amount of globe-trotting institutions.
While the solutions brought forward by both JPM and Libra don't directly support Bitcoin. They represent a change in the proverbial winds for investment for cryptocurrencies that were previously at the very edge of the investment fringe just years before.
With this new pool of institutional investors and regulators comes an increasing degree of skepticism when it comes to the wide array of projects, cryptos and businesses out there looking for investment. These same investors are likely taking time to consider whether they should be supporting/investing in a decentralized or distributed currency like Bitcoin, or submit the control of currency to major corporations and financial institutions.
The Mining Halving Cycles: The Shape of Halving Cycles
Here are some of the major findings that we've managed to see from the previous cycles.
First Halving: (28th November, 2012)
Price rally: Increased four-fold before halving before increasing in value by 350-400X
Rally Duration: 12 month rally before halving and increased valuations 12 months after (24 months)
Post Rally Decline: – Yes, Bitcoin declined by 0.83 times its value before accumulating at around 200-300 dollars for around 10 months afterwards.
Second Halving: (9th July, 2016)
Price Rally: Bitcoin managed to increase in value three-fold before the halving took place. After this, Bitcoin's value increased by more than 90 times.
Rally Duration: Appreciation began roughly 9 months before the halving took place. Once the halving happened, price appreciation increased for 16 months after.
Post Rally Decline: – Yes, Bitcoin slumped over a span of 12 months, shrugging off 0.84 times its value before consolidating at a strong range of around 3 to 4,000 dollars; more than 10 times its previous accumulation/lower support threshold.
Third Halving: (Estimated to take place around 20th May, 2020)
While a certain amount of this remains theorizing, we are currently seeing an impressive rally over the course of 13 months; managing to push above its previous lower supports of 3-4,000, hitting upper supports of nearly $10,000.
There are some pretty interesting numbers and recurring patterns from the halving cycles that we've seen so far. But there's one question that remains the most outstanding of them all. And that's why the vast majority of the rally happened after the halving took place as opposed to before?
These occurances are not spontaneous; they're well known and considered deeply by members of the Bitcoin community. As a result, markets are quick to anticipate the kind of impact that it will have on supply and demand. But with that said, you would think that Bitcoin and its associated markets could then consolidate long before the halving; rendering its impact a lot more muted.
One of the more obvious answers to the above-mentioned questions would, however, be that with a cut to block rewards, investors would see this as a critical buy time. With Bitcoin being injected into the ecosystem at a reduced pace, this could cause reactionary buying? But it's worth digging into this a little bit more.
Supply and Miner Revenues
The price of any asset, regardless of what kind of market they're situated in, will always inevitably balance out supply and demand after a while. As previously, and briefly discussed, one of the primary explanations for why Bitcoin's halving results in a higher over time is the fact that it's supply-side oriented, and hinges on miner activities.
These miners play a major role, on account of the Proof of Work consensus system that Bitcoin hinges on; confirming transactions within the network. Having successfully confirmed transactions, these miners are then rewarded with new minted Bitcoin for their efforts.
This effectively makes them marginal suppliers that often hold or sell off the newly minted Bitcoin that they earned, effectively adding it to its total circulating supply. With any halving that takes place, the amount of new Bitcoin that miners contribute to the economy at large diminishes. As a result, users within the community will demand a higher price for it.
This is the same kind of logic behind trading as a whole; if there's a smaller pool of Bitcoin, buyers will shell out even more money.
One of the other components that comes into the equation of supply that isn't the subject of much discussion. These same miners actually provide two kinds of revenue – the new bitcoin that they ‘mine' along with the fees of any transactions that they confirm.
The latter is actually more interesting to discuss – especially considering the fact that once all 21 million Bitcoin have been mined and added into circulation, transaction fees will be the only source of revenue for these miners.
While these transaction fees originate from peer to peer transactions in the existing BTC supply, there's really no difference in the perspective of miners as a source of revenue. Miners are just as likely to sell any Bitcoin that they obtain in order to cover the expenses they accrue over time, such as staffing (if they're big enough), electricity, hardware, etc.
One of the equations that can help to get to the bottom of the matter of marginal supply is likely the following:
Marginal Supply = Miner Revenue = Bitcoin Mined + Transaction Fees
The Daily Amount of Bitcoin Mined
Before the first halving event, there was a daily mining volume of more than 7,500 Bitcoin being mined on a daily basis and added into the total circulating supply. Once the first halving occurred, this decreased to around 4,000 in the same duration. With the having of 2016, this same daily amount decreased to 1,900-2,000. With the next halving, this will depreciate to roughly 1,000 Bitcoin per day.
If we look at the same in terms of US Dollars, and we see a very different kind of pattern and picture. When the first halving took place, the price of Bitcoin was roughly $13, with the daily supply reduced to 4,000 BTC. In Dollars, this equated to a reduction in the supply worth $52,000.
When the second halving took place, the price of Bitcoin was $650 when it happened. Meaning that the supply fell by more than 2,000 BTC (1.3 million dollars).
So hypothetically, if Bitcoin's price remains relatively static up to the beginning of the next halving, meaning that it hangs around the $10,000 mark. At that kind of price, the reduction in daily supply hits 1,000 BTC, which amounts to $10 million
With these kinds of numbers, that's a reduced supply with a price tag of roughly $300 million. And over the span of a year, that's more than 3.6 billion dollars.
Reduction in Bitcoin Liquidity With Halving
This overall drop in marginal supply has a knock on effect to the underlying liquidity. But how do you actually go about measure it? The best way is through an inflation rate for Bitcoin, which directly compares the newly included supply with the total circulating supply, but still doesn't offer a meaningful metric.
This is mainly because a large section of the Bitcoin supply is not technically liquid – they have held in a number if investors wallets for months, even years.
One of the other kinds of metrics we could use is a comparison of the reduced liquidity due to any of these halvings with the daily exchange trading value. Sadly, the trading volume that is reported by cryptocurrency exchanges tend to fluctuate depending on the exchange you're using as a reference point. Meaning that they're not inherently reliable.
One of the studies Bitwise provided for the US Securities and Exchange Commission demonstrated that a staggering 95 percent of the trading volume on exchanges should be treated as suspicious to a certain extent.
With reference to metrics from CoinMarketCap, more than 2 million Bitcoin-related trades on crypto exchanges take place on a daily basis. With the current block reward rates that miners enjoy, the equates to 2,000 BTC being added to the liquid supply of Bitcoin every day. Taking this to over spans of time – that's 60,000 new Bitcoin entering into liquid supply monthly, and nearly three-quarters of a million every year.
What this also means is that the market has all the capability to absorb over 2.75 million BTC into its annual liquid supply. With the halving of these block rewards next year, and the reduction of this circulating supply to 1,000 BTC being mined daily, this would lower the supply to 2.365 million. Roughly, this equates to a 13 percent reduction in annual liquid supply.
Conversely speaking, if we are to regard the reports that 95 percent of reported trading volume is suspicious, then this actual volume would be a lot closer to 100,000. And with the next halving, this would cut down the annual supply from 830,000 to just about 465,000; meaning an annual reduction of 44 percent in the liquid supply.
Transaction Fees and its Impact on Marginal Supply
Let's go onto talk about the second element of miner revenue. Ever since 2015, Bitcoin's accompanying network has been responsible for the processing of more than 100,000 transactions on a daily basis. The network managed to hit an all time high of roughly 500,000 transactions back in December 2017. The transaction volume fell significantly after this peak was reached, before rising steadily once again over the course of both 2018 and 2019.
Bar the 12 month span between 2017 and 2018 when transaction fees exploded over this same time, the underlying chart demonstrates the kind of daily transaction fees have stayed below 200 BTC fortunately. Over the course of 2019, daily transaction fees have averaged at around 70 Bitcoin.
We can theorize that transaction fees also represent a pretty strong correlation when compared to bitcoin's price whenever it rallies – these transaction fees (when measured in BTC terms) have managed to increase with the price of Bitcoin.
When comparing the amount of Bitcoin mined along with the transaction fees allows us to get a better understanding of miner revenue, along with the daily marginal supply they introduce to the community.
Any new bitcoin that's mined has been the primary source of revenue for miners historically speaking. Even now, transaction fees that come from an average transaction volume of 70 BTC per day are still virtual small potatoes compared to the 2,000 new Bitcoin that's mined on a daily basis.
On the other hand, as we begin to see an upward trend in the number of transactions, and block rewards continue to undergo halving, only a few years separate the time when miners will come to think of these transaction fees as their prime source of revenue.
Price, Supply and Demand
We have already managed to dig into the field of supply to an extensive degree. Now we'll go ahead and do the same with demand.
Bitcoin, as it's commonly known as being, is the most popular iteration of a digital, decentralized, monetary network. Unlike any other kind of social network out there that operates with indirect sources of revenue (the most common of which being advertising) – Bitcoin actually has a direct relationship with its miners.
The number of users in the Bitcoin network can be calculated easily by looking at the total number being activated (which rose to more than 40 million with break-neck speed), with a further 8 million users being added in this part of 2019 alone. The network has exploded dramatically since it was first introduced.
According to Metcalfe's law – the value of a network is actually proportional to the square of its nodes.
Considering the fact that there is a limited supply of these coins, it's pretty straightforward to see that Bitcoin's price will continue to rise with relativity to the growth of the network as a whole.
Any kind of asset that has a stable price clearly demonstrates that it has utility as a medium of exchange and more. But with the increasing price of a scarce asset, we see a respective increase in investor interest in it as a store of value. And this is exactly what leads to demand for it exploding.
There has since been more evidence on the influence of demand on a price, with correlations being seen in a correlative fashion with increases to blockchain activity. Transaction activities on Bitcoin always undergo patterns of ebbing and flowing in correlation with price.
It's worth noting that we are looking at the number of transactions, and not the underlying dollar value of these same transactions.
2020 Bitcoin Mining Halving Explanation Recap
So, let's go ahead and use the kind of evidence that we've accrued so far in order to formulate some kind of explanation for these kinds of price cycles.
Considering the growing narrative of Bitcoin as some kind of Digital Gold has gained an increasing amount of momentum, the demand for Bitcoin has risen unsurprisingly. This is demonstrable from the increasing number of digital and physical wallets, transactions, searches as well as media coverage on a broader basis.
According to some of the halvings that we've seen from the Bitcoin community, these cycles have undergone the following phases.
- Pre-halving – The halving event results in an understandable reduction in the liquid supply of Bitcoin (this is still hard to measure due to the trading data being broadly unreliable). Bitcoin price ends up undergoing a sustained rally in anticipation of the halving event.
- After Halving – This increase in the price of Bitcoin attracts an increasing demand from investors of all kinds including VCs, institutional buyers, hedge funds, etc. This increased demand exceeds expectations, as the price continues to surge upwards after the halving takes place. This increase in demand comes from a rising price which was grossly underestimated in prior cycles.
- Pricing Bubble – This increase in prices fosters a broader Fear Of Missing Out (FOMO) among buyers and attracts a higher volume of speculation among investors. A bubble forms around the value as they hit record highs. These speculative prices cross the threshold between the stable and unsustainable, with the bubble inevitably bursting.
- The Crash – This price crash results in a respective reduction in investment demand, much in the same was rising prices lead to a respective increase in demand, with a number of investors leaving the pool.
- A New Base – Bitcoin manages to find a stable price point, consolidate and find equilibrium at the price of this marginal supply. It then forms a brand new base that is otherwise higher than the previous cycle base.
- And Back to Stage One
It remains important to clarify here that this kind of logic hinges on the overt demand that is conjured up by Bitcoin as a kind of Digital Gold in the mind of investors, as well as its already known position as the first crypto asset.
One of the points of contrast to consider is the function of Litecoin, which is a hard fork derivative of Bitcoin. Its own kind of halving is pretty interesting to keep an eye on as it lacks a generally strong narrative and demand, especially in comparison to Bitcoin. As a result of this, Litecoins cycles have not followed the same kind of pattern.
Markets are highly febrile, volatile and yet, highly intelligent things – they learn and evolve – with these two cycles, there are subtle differences between the two. The next halving cycle will be interesting to keep an eye on.
The Ongoing Revolution of Bitcoin
Since the dawn of time, money has been a means of exchanging items and goods of value for a standardized amount in which two or more individuals agree upon. And for the last two decades, digital ecommerce's pipedream reality could phase and upgrade into a new existence of virtual commerce. With just one whitepaper, one piece of software and the world to use – in just one decade Bitcoin changed the game and will continue changing the monetary standard. Programmable money is the next wave in the fight for the future of finance.
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