Finite Supply: A Rarity Factor
Bitcoin’s genesis defined the ultimate limit of 21 million coins to be created. This inherent scarcity inherently contributes to its perceived value stability. Unlike traditional currencies like the euro, which central banks can print in abundance, Bitcoin’s fixed quantity hampers any possibilities of creating additional units, thereby curbing inflation—a rise in general price levels—typically observed when more money floods into circulation.
Economics of Supply and Demand
The rising value of Bitcoin finds its roots in the economic principle of supply and demand. Bitcoin’s supply is capped, while the demand for these coins is soaring. Major exchanges like Coinbase boast over 75 million users, with continuous user growth witnessed daily. Institutional investors, too, are increasingly drawn towards Bitcoin, making it more accessible to the public at large.
Bitcoin Halvings: Engine of Price Rise
Bitcoin halving events play a pivotal role in driving up prices. Initially, miners were rewarded with 50 bitcoins for discovering a new block. However, as per Satoshi Nakamoto’s design, every 210,000 blocks see the block reward halve, occurring approximately every four years. For instance, in 2012, the reward dropped from 50 to 25 bitcoins, in 2016 from 25 to 12.5, and in 2020 to 6.25 bitcoins. This diminishing rate of Bitcoin production over time suggests an eventual surge in prices due to the reduced inflow of new coins into the market.
In contrast to commodities like oil, where increased demand typically spurs augmented production, Bitcoin follows a predetermined supply trajectory unaffected by changing market conditions. This fixed production growth aids analysts in foreseeing price movements without having to estimate supply changes, offering a unique dynamic compared to conventional markets.
Bitcoin Halvings: A Supply Surge Contender
A Bitcoin halving event catalyzes a supply shock by halving the daily production of Bitcoin. This gradual reduction in new Bitcoin contrasts starkly with central banks’ continuous creation of euros and dollars, further elevating Bitcoin’s perceived value compared to fiat currencies.
Miners, integral in maintaining the network, sell portions of their block rewards to cover operational expenses, contributing to the supply influx and occasional price pressures. However, as Bitcoin halvings reduce the supply of newly mined coins, the price pressure from miners is anticipated to decrease, fostering an environment where reduced supply correlates with elevated prices.
Halving and Price Volatility
The Halving Effect: A Price Odyssey
Glancing back in time unveils an intriguing pattern surrounding Bitcoin halving events. The price tends to ascend in anticipation, often culminating in a dramatic surge post-halving, followed by a significant correction—a phase popularly dubbed the ‘crypto winter.’ Subsequently, this cycle repeats itself.
The graph below illustrates these halving moments indicated by vertical blue lines. Every crypto winter is shown in a red ellips.
1. November 2012 Halving: Over 500 days before the event, Bitcoin hit a price low of $2, embarking on a rally that soared to $900.
2. July 2016 Halving: Pre-halving, Bitcoin’s price hit approximately $164, 500 days before the halving. This led to the famous 2017 highs, peaking near $20,000. After that we saw a brutal crypto winter and Bitcoin bottomed at $3,200 in mid-December 2018.
3. May 2020 Halving: Following this halving, Bitcoin surged to almost $68,000. After that, we found ourselves in another crypto winter and the bottom was made at the end of 2022.
4. Next Halving: The next halving is expected somewhere around April 2024.
Wild Swings and Fixed Supply
Bitcoin’s fixed supply mechanism, unresponsive to demand fluctuations, is an intrinsic characteristic. As new investors pour into the crypto market, the supply of new Bitcoin remains unaltered, causing a surge in its price per coin. This frenzy leads to an exaggeration phase where Bitcoin’s rapid ascent dissuades new investors from entering the market. Consequently, the demand for Bitcoin diminishes while its production continues unaffected. This mismatch results in a supply surplus, exerting downward pressure on prices, sometimes leading to steep crashes.
Riding the Bitcoin Wave: Volatility Alert
This unceasing supply-and-demand imbalance defines the market’s erratic nature. Bitcoin’s landscape is a pendulum swinging between sharp ascents and abrupt declines. Its volatility can test the nerves of investors, making Bitcoin an unsuitable investment avenue for everyone. As an investor, navigating this roller coaster requires a strong stomach and an appetite for risk.
