Bitcoin

Why am I cynical about Bitcoin halving?

In recent months, the blockchain community has been on everyone’s lips that Bitcoin (BTC) has halved in May. Against the background of the current coronavirus pandemic, Bitcoin has developed very well, especially compared to products such as oil or gold, which are traditionally used as a safe hedge against market volatility. Part of the conversation that is driving Bitcoin’s price up is “halving.”

Two weeks to halve, What exactly is it and why should investors pay attention to its existence? If what they’re saying is true – with some predictions that Bitcoin will hit $ 30,000 by the end of the year due to halving, is this the time for investors to enter the market? Before we look at the halving and importance for the market, Two Prime’s investment thesis here is: “Halving will fuel the next rally.”: 50% up, 30% sideways and 20% down. This vision is heretical.

Effects of Bitcoin Halving on Bitcoin Price

Why am I cynical about Bitcoin halving?
Why am I cynical about Bitcoin halving?

Bitcoin halving refers to reducing payments to Bitcoin miners when they mine a block. In the financial area, we talk about inventory and flow. Using the bathtub analogy, inventory is the amount of water in the tub and flow is the amount of water that flows into the tub. Halving would mean halving the flow of water into the tub. This means two things: First, this is a slowdown in the rate at which new Bitcoin is added to the market. Second, because there are no endogenous cash flows, Bitcoin is not subject to a discounted cash flow analysis.

The Bitcoin price is almost exclusively psychologicale, with some necessary cost constraints such as labor, hardware and energy by miners. It is only supply and demand that determine the price. Halving is a supply-side limitationHere we have the rate at which the new Bitcoin is being launched and we are reducing their inflow by half. The market is very optimistic about halving. In the past, other halving has led to rallies in Bitcoin, so this is obvious. Why should it be different this time?

Halving doubles the cost per bitcoin – half the reward for the same cost to miners. Essentially, miners are located in factories where the cost per bitcoin essentially doubles overnight. If prices don’t go up, miners’ margins will be affected.

This is a problem that only occurs with Bitcoin. If it happened to another industry, those margins would get them out of business overnight. We don’t have to look beyond OPEC’s supply and oil prices in the 1970s to understand how supply crises can wreak havoc in the real world.

Historically Miners had the greatest control over Bitcoin’s current supplybecause they have control over how the Bitcoins get on the market. Like the former OPEC, Bitcoin providers were able to influence their market price by controlling the offer and holding Bitcoin until the price was correct. To understand the power Bitcoin miners have over their price, we need to examine the relationship between existing and new offerings as follows: dS (newly created asset) divided by S (existing asset).

Bitcoin's mining needs

The main argument of the Bitcoin bulls is that each of the previous halving has led to a price increase. According to the table above, miners must bear both their surveillance costs and their fixed costs. As a result, they will maintain and limit the new offering of Bitcoin until the price is right to cover those costs. This requires treasury, influence and patience. Miners probably have all three.

However, if the math is followed, the dS-S ratio starts at infinity (10 million divided by zero) and ends at zero (almost zero divided by 21 million). This ratio moves towards zero with every halving. If the ratio is high, a highly correlated group of miners can determine the price, just as OPEC was able to determine the oil price in the 1970s When the ratio is zero, miners have no electricity and can no longer determine the price of Bitcoin. It is as if Iraq is throwing a tantrum over its remaining barrel of oil when cheap gas and nuclear abundance flood the United States. In other words, what the miners want doesn’t matter.

In addition, the price specified by the miners depends on the costs invested, since the Bitcoin has already been mined. If Bitcoin’s price drops below operating costs, the entire system would experience tremendously rapid and potentially catastrophic changes.

The theoretical argument here is simple: There is a turning point at which Bitcoin possession by miners doesn’t matter at all. The price manipulation trend by miners should double at this point and possibly reverse. We like to call this turning point “Bitcoin tip”.. The only question is when this will happen.

At this point, it may sound like we’re pessimistic about Bitcoin, but that’s actually not true. We are bullish, if a bit cynicaland that is the reason:

There is still a lack of understanding among the general population about how all of this works. A bit of naivety mixed with financial illiteracy still dominates the cryptocurrency markets. In addition, most Bitcoin maximalists are suicidal regardless of the techniques and restrictions behind the asset.

As we know, Bitcoin’s price is almost purely psychological. The dynamics of the crowd keep pushing the price up, and there’s no point fighting it. But someday The influence of the halving disappears. And at this point we have nothing left but a supply-side cost shock. And unlike oil, which is fundamental to the functioning of modern society, Bitcoin is not..

So what can be done? Investors need to hedge by looking for other types of crypto assets that don’t correlate with Bitcoin’s price. Hybrid stable coins are created. These hybrid stall coins are able to hold the price without being bound and influenced by fiat currencies, and some can even have an incremental cumulative value.

Until now Bitcoin provides a safe haven for cryptocurrencies and accounts for around 65% of the overall market valuation. However, Bitcoin’s dominance can also cause catastrophic damage if the price goes down. There is an urgent need to find alternatives to Bitcoin. If we see the price cut in half, this should be the canary in the coal mine (pun intended) and few miners will survive its operation. At this “Bitcoin Peak” point, we have three years to find alternatives before the entire cryptocurrency market implodes. Cryptocurrencies need to find a way to survive without being so dependent on Bitcoin.

The views, thoughts and opinions expressed here are only those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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