2012 and 2016: What do they both have in common?
Bitcoin underwent what is referred to as the “halving,” where the yearly bitcoin inflation was algorithmically reduced by 50 percent. This is part of bitcoin’s deflationary monetary policy and why Austrian economists refer to bitcoin as “hard money.”
If you look at the bitcoin price chart, you will notice that these two years have one more thing in common. The bitcoin price increased significantly the year leading up to the halving. Furthermore, the rally leading up to the halving was in both cases followed by a brutal parabolic move just a few weeks after the halving.
With the next bitcoin halving expected to happen in May 2020, the time has come for investors to start paying attention to this pattern. Historically, the halving starts getting priced in approximately one year before it happens, which would result in bitcoin bottoming out in early 2019 followed by a rally starting in May 2019.
But what if this time is different? It won’t be, let’s explore why.
Bitcoin, Gold and Hard Money
Gold is the oldest form of money in existence.
Unlike ancient money like cattle, seashells or salt, gold can be said to have a hard-coded economic policy: there is a finite gold supply, and only a small portion of the gold supply can be extracted on a yearly basis, effectively setting a cap on its inflation.
This inflation has historically been oscillating between 2 and 3 percent, and the entire global gold supply can fit within the confines of an Olympic Swimming Pool, thus making it a relatively scarce asset. The scarcity, combined with an established history and durability are some of the main factors why it has become the reserve asset of the world, ballooning its market capitalization to $7 trillion.
At the time of writing, Bitcoin’s inflation rate is ~3.8 percent, and it will be reduced to 1.8 percent in the third block reward halving somewhere around May 2020. This will make bitcoin the first asset in the world to become a harder form of money than Gold, while at the same time improving on all of the downsides of gold, mainly portability, divisibility and verifiability.
The brutal algorithmic deflationary model of bitcoin, coupled with its other advantages over gold, will start turning it into an interesting asset for large institutions and eventually central banks. As bitcoin’s deflationary curve becomes more aggressive after the 2020 halving, it will inevitably start evolving into an asset with all of the qualities that large institutions and central banks look for in a reserve asset.
Buy the Event
‘Buy the rumor, sell the news’ is decades-old Wall Street wisdom that works across all markets.
A particular event, like for example a hyped press conference by a public company, gives speculators a date to speculate on, often pushing up prices leading up to the event. After the event concludes, even if the event was positive, the price usually falls because there are no short-term price catalysts for speculators to look forward to.
Due to the inefficiency of cryptocurrency markets, this effect can be observed even stronger in bitcoin and cryptocurrency prices.
A beautiful example of this phenomena was the launch of bitcoin futures by the CME Group. The narrative in late 2017 was that the launch of regulated bitcoin futures would open the gates to institutional investors and elevate bitcoin to unprecedented highs. This narrative was one of the main catalysts that propelled bitcoin to nearly $20,000 at the end of the year.
However, as we know now, the launch of the CME bitcoin futures on December 17, marked the exact top of the 2017 bitcoin bubble.
As data of the last two bitcoin halving clearly shows, the same “Buy the rumor, sell the news” pattern can also be observed in the 12 months prior to the halving. In November 2011, one year prior to the first halving, bitcoin initiated a rally that ended the day of the halving after a 300 percent price increase.
Then again, in July 2015, one year prior to the second halving, bitcoin also started a rally that ended the day of the halving after a 178 percent price increase.
Like it or not, this is how markets work. Speculators will speculate leading up to an important date, the same will be true for bitcoin’s third halving.
Panic Buy the Fundamentals
Miners are currently earning 12.5 bitcoins per block, or approximately 1,800 bitcoins per day.
Although some miners hold a portion of their mined coins, most sell the coins immediately at market price to cover electricity costs and to lock their profit. After the halving in May 2020, miners will now only earn 900 bitcoins per day, reducing the daily bitcoin supply on the market drastically.
As decreasing supply meets constant (or increasing) demand after the halving, prices will inevitably rise to find equilibrium again. The combination of market inefficiency together with the supply reduction shock is what has caused two of bitcoin’s largest parabolic moves.
After the 2012 bitcoin halving, it took the market two months to start feeling the effect of the inflation halving and for bitcoin to initiate a parabolic move that propelled its price from $12 to $142. Interestingly, after the 2016 halving the market felt the inflation reduction even sooner, this time bitcoin started a rally that would bring it from $582 to $20,000 just one month after the halving.
With the third halving less than 18 months away, It’s time to start paying attention to bitcoin’s killer application again: algorithmically enforced monetary policy. The disruptive power of this monetary policy will start getting priced-in in 2019, and when it does, you want to be here.