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How will Bitcoin halving impact Bitcoin Price and Crypto Markets?

How will Bitcoin halving impact the Bitcoin Price and the Crypto markets? Less supply means higher price. But are there other factors too?

Bitcoin halving was on the 11th of May 2020. What are the impacts of this halving on the Bitcoin price and Crypto markets? The first comments are always that Bitcoin halving means less new supply for the Bitcoin. This would then automatically translate into a higher price of the Bitcoin. 

Following key questions are analyzed in this article:

  • How will Bitcoin halving impact the Bitcoin price?
  • What will be the impact on the crypto markets?
  • Are there some factors in the current economic environment, which influence the Bitcoin Price?

This topic is analyzed in the following way:

  • First, you can watch the webinar presentation
  • After that, the analysis of the Bitcoin halving and the impact of the Bitcoin halving the crypto markets will follow

Recording of the Webinar

What is Bitcoin halving?

Bitcoins are created by the miners, who receive them as rewards for maintaining the network. The only way to create the Bitcoins is via the mining, there is no other way to create the Bitcoins. Bitcoins are created every 10 minutes (that’s called a block) and assigned to one of the miners. After the last halving on the 11th of May, it’s 6.25 Bitcoins per block.

The Bitcoin creation rate was:

  • initially 50 Bitcoin’s per block
  • Then it was 25 Bitcoin’s per block
  • After that, it was reduced to 12.5 Bitcoin’s per block
  • And now it’s 6.25 Bitcoin per block

The Bitcoin price and the Bitcoin halving’s are described on the following chart:

Bitcoin halving
Bitcoin halving

Bitcoin halving occurs every 210’000 blocks. The following chart describes the total number of Bitcoins and monetary inflation, which is defined as the number of Bitcoins created divided per year divided by the total number of Bitcoins in existence. The last Bitcoin halving on the 11th of May 2020 was not the last one – there will be many more to follow. The result of this upcoming halvings is declining Bitcoin’s monetary inflation, which means declining additional supply of the Bitcoins.

Bitcoin-Halving-Chart
Bitcoin halvings and the total number of Bitcoins

Declining supply means the increasing price of the asset – when the demand is constant, but the additional supply shrink, then this leads to the price increase. However, the demand is not constant, the demand is growing – we look for the respective reasons later in this article.

How does Bitcoin halving impact the Bitcoin price?

The best model to describe the Bitcoin price dependency from the halving is the stock to flow model developed by the twitter user @100trillionUSD. The model is based on the observation that the total Bitcoin market capitalization has a very strong correlation between the Bitcoin’s stock to flow ratio.

Stock to flow indicates is the ratio of the yearly production of the asset to the total amount of the asset. For example, golf has stock to flow ratio of 62. This means one needs 62 years to mine the same amount of gold, as it exists today. Silver has stock to flow ratio of 22 – it would take 22 years to produce the same amount of silver, as it exists today. The intuitive correlation is that the higher the stock to flow ratio of an asset, the higher the price of the asset.

Bitcoin had before halving the stock to flow ratio of 25 and after the halving, it’s 50. The relationship between the market capitalization and the stock to flow in the past and the forecast is described in the following chart. Both axes are logarithmic. The R2 (coefficient of determination) of this correlation is 95%. Please note, this chart was created before the halving of the 11th of May.

This model confirms the intuitive hypothesis that the higher the scarcity of an asset, the higher the resulting price of the asset. Bitcoin scarcity will increase after every 210’000 blocks. This implies a continuous increase in the Bitcoin valuation.

Bitcoin stock to flow model
Bitcoin stock to flow, model,

How does Bitcoin halving impact the crypto markets?

Let’s look at first at the short term picture of the relative market capitalization (Source: https://coin360.com/ ).  The Bitcoin dominance of the total crypto market cap is 66%.

Bitcoin domination
Bitcoin domination

When Bitcoin is the main driver of the crypto market. When the increasing scarcity results in the increasing Bitcoin price, then this will translate into the all crypto ecosystem.

The long term view of Bitcoin dominance (source: https://coinmarketcap.com/charts/)  is the following. There are ups and downs, but Bitcoin is and remains the key determinant of the crypto market:

Coinmarketcap - Bitcoin dominance
Coinmarketcap – Bitcoin dominance

Which other economic factors influence the Bitcoin price?

The scarcity model / the halving model does not relate to the general Bitcoin demand. It is our thesis, that the current macro-economic environment will increase the demand after Bitcoin even more. Why is it so? It’s because the demand after the non-manipulatable safe-haven assets will grow.

Here is the Federal Reserve Balance Sheet with the total assets since the inception. The last 2 months mark the increase from the 4.5 trillion USD to the 6.93 trillion USD (more than 50%). The next money printing of 4 trillion USD has been announced already…

Total assets Federal Reserve
Total assets of the Federal Reserve

This means the debasement of the existing fiat currencies. These are significant debasements, which will lead to the shockwaves through the worldwide economy. On top of this – most of the economies have introduced their massive fiscal stimulus programs. We have analyzed this situation in the article Coronavirus and Bitcoin Price – What’s next? and Coronavirus Economic Crisis – Where to invest now? We have analyzed this situation in our webinars too – see the links at the beginning of this article.

Our key thesis is the following roadmap for the upcoming months:

Phases of the coronavirus crisis
Phases of the coronavirus crisis

The economy will run through the following phases:

  1. Declining Revenues of the companies
  2. Failures of the “zombie companies”
  3. Bank Failures
  4. Monetary reset

The developing economic crisis will increase awareness about how the monetary systems work. This will translate into the increasing demand for Bitcoin and Gold.

Summary

Bitcoin price can be forecasted with the Bitcoin stock to flow (scarcity model). However, it’s not only the scarcity, which will drive the Bitcoin price. It’s the general demand for the non-manipulatable assets; for the safe-haven assets – which will grow significantly in the upcoming months.

From one side the scarcity of the Bitcoin will continuously increase. From the other side, the demand after the Bitcoin will continuously increase because of the macro-economic environment. This will result in a massive price appreciation of Bitcoin and other crypto-assets.

Our Webinar Series

We started with the regular webinar series with the focus on the blockchain, crypto lending, and coronavirus economic crisis.

Additional information

For more information check out the related articles from the SmartCredit.io blog:

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