Summary

• With only four days left before the next Bitcoin halving, cryptocurrency veterans are positioning for the next bull run.

• The supply-demand balance will change after May 12.

• Previous halvings were followed by price increases of over 10x.

• QE infinity by the Fed coupled with shrinking supply of new Bitcoin points in only one direction, and that is up.

• Public focus on COVID-19 and stock markets will make Bitcoin’s bull run stealthy until it reaches new all-time highs, just like it happened in previous cycles.

Introduction: Bitcoin is Not Tulip Bulbs

First, I would like to debunk a myth that is often brought in discussions whenever Bitcoin is mentioned: the tulip bulbs comparison.

Many investors that are not very familiar with Bitcoin think the digital asset is just another tulip mania that will end in tears for Bitcoin holders. Their argument rests on the meteoric raise of the price (which mirrors previous asset bubbles) and the famous “no intrinsic value” of Bitcoin.

While the price raise is obviously reminiscent of other asset bubbles, what I am going to challenge here is the concept that BTC has no real value and resembles the famous XVII century tulips.

Bitcoin’s value derives from three pillars which I call the UBS:

• Utility
• Brand
• Scarcity

Below I will describe them in more detail.

Utility

Bitcoin’s utility comes from the ability to store and transfer value at very low costs and with properties that no other asset or money transfer system has.

When it comes to storing, Bitcoin has many advantages no other asset possesses (except for other cryptocurrencies):

– Zero cost of storage with unlimited capacity

– Anonymous storage possible

– No special infrastructure needed, and it takes no space

– Anyone can store it safely, with no limitations

Transferring value is the other huge utility of Bitcoin. With the possibility to divide it into minuscule units (up to one Satoshi which equals 100 millionth of a Bitcoin) one can transfer parts of his/hers BTC holding to others. The costs are low and the transfer times are small compared to wire transfers or checks, which are the equivalent forms of transfer when it comes to fiat money.

Many people criticize Bitcoin’s transfer capability because they compare it with credit cards which process huge numbers of transactions per second, but the comparison is misguided. The two transfer modes have different purposes.

Bitcoin’s transactions resemble wire transfers, because they are unlimited in size and have no restrictions. Anyone can send and receive Bitcoin. You cannot say the same about receiving credit card payments (99.9999% of the world population cannot receive credit card payments). Compared to wire transfers, BTC is cheaper, faster and has fewer limitations (you don’t need a bank account for it).

Some may argue that this is not enough for Bitcoin to function as an efficient payment method for day to day transactions, but the Layer 2 payment protocol (known as the Lightning Network) will solve this issue.

While there is a lot to be said about Bitcoin’s capabilities as a payment channel with advantages and disadvantages, there is no doubt that there are unique characteristics of cryptocurrencies that no other payment methods have. This gives them a real world utility that in unquestionable.

Brand

Bitcoin is undoubtedly the strongest brand among all cryptocurrencies. Many critics argue that other cryptos are similar or better, and they can be replicated in perpetuity, so there is no real value in Bitcoin. This is countered by the brand power. By being the original thing and the most used cryptocurrency, Bitcoin has built a brand power that will defend its position as the leading digital currency.

Brands have huge value. You cannot say Coca Cola has no value just because anyone can create a new soda.

Scarcity

This is where Bitcoin derives its potential for continuous growth, and it is the reason why most people are attracted to it. This is also highly related to the investment thesis of this article based on the next halving.

There is a limit on the total amount of Bitcoin that will ever exist, and that limit is 21 million. At the time of writing this article, there are 18,356,425 BTC in existence, of which many have already been lost forever. This means there are only 2,643,575 BTC left to be mined.

The current rate of mining is 12.5 BTC every 10 minutes. On May 12 the mining rate will be halved to only 6.25 BTC every 10 minutes.

The halving will greatly reduce new supply of Bitcoin going forward, and another halving will happen in four years, and so on.

Unlike the US dollar or other fiat currencies, Bitcoin supply is limited and this makes it deflationary in nature, which means its value is poised to go up in time.

The counter many people bring when it comes to the scarcity part is that Bitcoin copies can be created in perpetuity. This idea is invalidated by the Brand value. One may copy a bottle of Coke, but that won’t make it Coca Cola. There are already many Bitcoin clones (Bitcoin Cash or Bitcoin SV are among the most famous) and they have no effect on the value of Bitcoin. They don’t affect its scarcity.

The Halving and the Supply-Demand Balance

The supply and the demand of Bitcoin are the forces that shape Bitcoin’s price. In the last year, the two have found some sort of balance, as the price has been very stable (on Bitcoin terms) ranging between $6,000 and $13,000. This is a very tight range if we look at Bitcoin’s price history.

But what are the supply and demand of Bitcoin made of?

To put it simply, the demand is represented by all the people who want to purchase Bitcoin, and the supply by all those who own it and want to sell it.

While the demand is not going to dramatically change after May 12, there is a completely different story when it comes to supply.

The current supply comprises three main groups:

1. BTC holders who bought it in the past as an investment and want to sell at the current price
2. People who receive Bitcoin as payment for their work and want to convert it in their local currency to spend it (a small amount that is compensated by those who buy BTC in order to pay them for their work, so this group is not very important when it comes to the supply-demand balance)
3. Miners who need to convert their Bitcoin into fiat money in order to fund their operations

The third group is what matters here, because mining rewards will be halved starting May 12. This will have lasting effects on the bitcoin price going forward.

When demand stays flat and supply shrinks, the price must go up until there is a new balance. The current price is kept in check by the continuous flow of 75 BTC per hour the miners receive for securing the network that is converted into fiat currency. When the mining reward will be halved, the supply will be reduced.

In order to find a new balance, the price must go up to entice more holders to sell, and to reduce the purchasing power of new buyers.

The current price of Bitcoin is $9,900, so the miners dump $742,500 worth of Bitcoin every hour. This is the amount of new demand that the miners absorb.

When rewards will be halved, the miners will dump only $371,250 per hour assuming the same price, so the demand they currently satisfy will need to find new sellers. In order to unlock more Bitcoin on the sell side, the price must move up and entice more people to convert their BTC into dollars.

For the miners to dump the same dollar value amount of Bitcoin per hour after May 12, the price of Bitcoin must double.

How Bitcoin Supply and Demand React to Higher Prices

Supply Analysis

When the price goes up, more owners of Bitcoin will be willing to sell their holding because they will be able to realize a higher profit, or to finally sell without a loss for those who bought at the height of the previous cycle. The $12,000 level will be the first major resistance because people who bought during last year’s summer rally may be tempted to sell and get out after being underwater for almost an year.

Once $12,000 falls, the next target is the December 2017 all time high of $20,000. When the price will get closer to that level, more sellers will appear as many people bought at the top, and some of them may still hold with the hope of recovering the losses. There will also be many people who bought lower but failed to sell at the previous top that will be happy to mark their profits when given a second chance.

Demand Analysis

The interesting thing about Bitcoin demand is that it increases when Bitcoin’s price grows (because most people buy it for speculative reasons and an uptrend is a buy signal).

While Bitcoin is keeping a low profile in the media, the demand is comprised of cryptocurrency traders who participate actively in the market. They tend to follow technical analysis patterns when there is no fundamental event to influence the price.

But “The Halving” is the most awaited event in the cryptocurrency world. All Bitcoin traders know about the halving and its effect on the price, and this is the moment they have all been waiting for. When the halving approaches, experienced traders start to buy Bitcoin in the expectation of price increases. Like a self fulfilling prophecy, the halving attracts buyers because traders know that bull cycles start after a halving event. This means that demand increases before and immediately after the halving.

This demand increase coincides with the supply decrease caused by the halving. How could the price react to increased demand and reduced supply?

As you can see from the above charts that analyze previous halving events, Bitcoin’s price skyrocketed following the halving. Please keep in mind that the charts are in logarithmic scale, so the price increases are huge.

If this year’s halving will have a similar effect with the previous two, the chart projections show real potential of reaching the $100,000 level by 2022.

All Time High Demand Boost

Bitcoin grows in cycles. The past shows us that cycles start after the halving. But what fuels the exponential increase in price every cycle?

What makes Bitcoin very interesting as an asset is its relation to the media. The Bitcoin cycle follows a very clear pattern when it comes to media coverage, and this has a huge influence in its demand.

1. In the first phase of the cycle, in the period following the halving, the price starts to climb from the “new normal” range that resulted following the previous cycle. This increase in price is caused by the reduced supply caused by the halving and the increase demand from Bitcoin veterans who know how the market works. The media doesn’t pay much attention during this phase, because there is nothing sensational about it. This makes it a stealthy period when only those actively following Bitcoin profit from the price increase.
2. The second phase starts when Bitcoin breaks its previous All Time High. This is when the media suddenly rediscovers Bitcoin, because it can generate sensational headlines again. A new wave of spectacular stories about Bitcoin millionaires and broken records emerges. It is the time when the media is full of investing experts who predict the demise of Bitcoin (because they compare it with the Tulip Mania every time it reaches new highs) along with tech savvy young people who explain how they became rich with Bitcoin and that the next stop is the Moon. The “HODLers” begin to ridicule the naysayers again for “missing out” while conservative investors warn “HODLers” about the inevitable price collapse to zero, because Bitcoin has “no intrinsic value”.
3. The media frenzy and the get rich quick stories attract new people to Bitcoin. New wallets are created, and new money pours into Bitcoin. The newly created demand pushes the price higher to levels never seen before. The more Bitcoin’s price grows, the more spectacular the media headlines about the “biggest bubble ever” that will soon pop and destroy people’s savings. New highs bring in new sellers, as old owners start to cash out of their positions and lock in huge profits. Scammers and fraudsters are attracted by the new wave of novice investors who pile into “Altcoins” in the hope of finding the new Bitcoin while it’s still cheap. This generate a huge rally in Altcoins and Bitcoin reaches its cycle All Time High. The new high can be as much as 10x higher than the previous one if the past is to be repeated.
4. The scammers generate bad publicity for Cryptocurrencies and government regulators are quick to threaten to regulate or even prohibit their use. Bad publicity, the threat of regulation and the increased number of voices talking about Bitcoin’s demise and the inevitable bubble burst make Bitcoin veterans wary, so they start to dump large amounts of Bitcoin to lock in the huge prices. There comes the inevitable quick drop of the price from its ATH, and as more and more people who got in late because of Fear Of Missing Out (FOMO) start to sell, the price keeps dropping.
5. A floor is found when long term bitcoin investors who sold at the top decide it is time to start accumulating again to get back their Bitcoin reserve to previous levels. This usually happens after the price has dropped around 80% from the cycle top. Bitcoin starts to recover some of the losses and stabilizes in a “new normal” range, awaiting the next halving. The media forgets about Bitcoin because there is nothing spectacular about it again. No new highs, and no drop to zero make it uninteresting for the media.

Other Price Catalysts

QE Infinity

The current environment provides the perfect ground for another Bitcoin bull market. The Covid-19 recession has forced central banks to increase Quantitative Easing to levels never seen before. The huge increase in government deficits coupled with record central banks balance sheets will ignite new fears about a debt bubble, MMT, helicopter money and hyperinflation. Many people will see Gold ETFs (GLD) and Bitcoin (BTC) as alternatives to dollars that are created at an unprecedented pace.

Market Volatility

The high volatility experienced by markets this year will make investors less fearful to try the highly volatile Bitcoin. People will get more accustomed to large swings in asset values, and Bitcoin will be an easier pill to swallow.

Potential ETFs

The new Bitcoin bull market will reignite interest for a Bitcoin ETF. If such a product finally gets regulatory approval (an ETF baked by real BTC holdings), there will be an unprecedented level of new demand that could drive the prices to new highs.

Final Thoughts

Bitcoin is a very volatile investment, and it is definitely not for everyone. While I would never recommend anyone to allocate a large part of his/her capital to Bitcoin, I consider it a very good option for diversifying one’s portfolio with huge potential upside and little correlation with traditional assets.

Gaining exposure to Bitcoin can be done by purchasing and holding the asset itself (this is the best option for tech savvy people who know how to secure their Bitcoin and are not at risk to lose them or have them stolen), or by trading Bitcoin futures from CME Group.

For trading Bitcoin short term, the best option is through Prime XBT, the platform that allows you to trade Cryptocurrencies with very low spreads and with leverage.

Feel free to share your opinions about this article, Bitcoin and the coming halving in the comments section.

Disclaimer: This article does not constitute investment advice. It represent only the opinion of the author. Trading cryptocurrencies involves risks and is not suited for everyone. Never invest money you cannot afford to lose.