What will affect bitcoin price more?
Thoughts on bitcoin price post halving - April 2020
 | By: nithinkrishh April 24, 2020, 4:43 p.m. |
I recently read this very insightful analysis on the — "Vulnerabilities in the Price of Bitcoin Driven by Miners".
I highly recommend it.
Here are some key takeaways, quoted from their analysis.
The assertion that there is a price floor in Bitcoin created by the breakeven price of a Bitcoin Miners' cost of production is inaccurate. Price support is actually established by miner capitulation and a net reduction in hash power on the network-favorable difficulty adjustments.
Impact of halving
Near-term
Improvement in Demand Side Economics due to Halving Induced Positive Sentiment — The Human Psychology of the Bitcoin Market Participants, prior to Halving, is to lean bullish. This creates a positive sentiment on the demand side of Bitcoin.
Medium-term
Improvement in Supply-Side Economics — Miners are the main driving force of sell pressure on the Bitcoin Network. Post-Mid-May, 50% of the potential daily sell pressure from miners will be removed from the market.
Long-term
Opportunistic Environments Capitalized on by Access to Debt — Post-halving after sustained periods of trading below the average cost of production, there will be an inevitable capitulation and difficulty adjustment leading to only the more efficient miners with healthier balance sheets surviving. The surviving miners now receive a higher proportion of the mined bitcoin than previously at a cheaper cost of production; creating a more profitable environment for miners to operate in. Now miners can hold their Bitcoin rather than selling thus reducing more of the sustained daily sell pressure from the network.
— Follow me at @nithinkrishh, Magizhchi.
Great find Nithin!
My sense on this is two-fold:
- Bitcoin is a risk asset that will first and foremost be affected by people who fear losing money.
- Bitcoin is easy to disconnect from macro-fundamentals like output and consumption.
Given how uncertain the global economy is, it will be difficult to manufacture greed in an environment where—across the board—folks are afraid of losing money. Moreover, it is likely this sentiment of fear will continue through the first part of the halving.
Until traders feel confident that all weak hands have been shaken out—the fear of broader market capitulation will lurk.
Moreover, given that many believe the stock market has yet to reflect the economic damage caused by COVID19 lockdowns, it will be harder than usual for folks to feel confident that a bottom has been established, regardless of technicals (or other fundamentals like the halving).
Currently the stock market has bounced back to mid-2019 levels, but most economists think it will be 12-18 months before the economy is functioning at it's previous highs of January 2020.
If that's the timeline and criteria investors are looking at—as a proxy for value in equities—then it is safe to say equity markets have not yet priced in the true economic reality of the situation today.
Once it is clear that a broader macro-bottom has been established, I think it will be easy for Bitcoin to disconnect from macro-indices, and it will thus be easy to manufacture greed—especially so with the halving.
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I agree with that near term prediction. Anticipation by enough people of increased price will be self-fulfilling.
In the medium term, I think the reality that will set in that miner selling is insignificant compared to daily trading volumes, so the halving itself won't actually have much impact. The key question then is... what do all those earlier buyers do?
Of course this is still just looking at BTC in isolation of other macro events...
I learned some from the article about the cyclical interactions between miner profitability, hash rate, and miner selling though. Thanks!
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A lot of the bullish sentiment I see on twitter and other social media around halving is due to the protocol induced negative supply shock. However, I still think the impact of macro-trends (like COVD-19 and US monetary policy), and speculator action on bitcoin price will far outweigh the impact of a halving induced negative supply shock from a lower issuance rate and miner capitulation.
Let's indulge in some conjecture.
The 30-day average daily bitcoin trade volume is around 50k BTC. Right now ~1800 BTC is mined per day. Even considering that all miners sell all of their bitcoin instantly post-mining; this accounts for just 3.6% of the total daily transaction volume. Post-halving when the daily block rewards drop to ~900 BTC (1.8%), the reduction in new bitcoin injected into the market from miners should be of minimal significance in terms of price.
There's no good way of knowing the total bitcoin held in miner reserves and hence no accurate way of estimating the total amount of influx from bankrupt miners during the process of capitulation. Let's say a reasonable upper bound on the size of miner reserves is 1 year worth of production; a 50% capitulation rate would mean around 320k bitcoin would flow into the market through the period of turmoil. If this period is long and drawn-out (say a year) as I believe it would, the daily trickle-in from capitulation should be just ~1.7% in total daily transaction volume, again minimal significance in terms of price.
— Follow me at @nithinkrishh, Magizhchi.