Bitcoin half-life is called 'halving' or 'halving'. The words may be different, but this one is certain when it comes to bitcoin half-life. The debate over diminishing mining rewards due to bitcoin half-lives will be intense over the next six months.
Why? Bitcoin's price has surged since the previous two half-lives. Who would not like the price surge?
Many are convinced that the same will happen in the market in the next half-life. It's not just because you believe that history is repeated. Price prediction models continue to emerge to support the theory that prices soar after half-life.
But if the price goes up, that should reflect the price of Bitcoin in advance. But as you all know, Bitcoin's price has not risen sharply thanks to a half-life six months ahead. Why, then, is the half-life effect still not reflected in the bitcoin price?
The reason is that the effect of the predicted half-life is not a single event, but rather a series of stories surrounding the half-life, becoming a huge "narrative," and the reality of the rumor is still uncertain.
What is half-life and why does it happen?
Let's start with what the half-life is and why it occurs.
The Bitcoin protocol has set a total of 21 million bitcoins to prevent inflation. The new Bitcoin is rewarded each time a network processor (miner) processes (mines) a block at a moderately controlled rate. Mining compensation is cut in half every four years. The rate at which Bitcoin is supplied to the world is halved every four years. The more the mining, the more the scarcity increases and the more difficult it is to mimic the characteristics of gold mining.
Initially, every time a Bitcoin block was stacked, the miner was rewarded with 50 Bitcoins. Bitcoin's mining rewards, which had their first half-life on November 28, 2012, fell from 50 to 25, and on the second half-life of July 9, 2016, they halved from 25 to 12.5.
The next half-life is expected in May 2020, and mining rewards will be reduced from the current 12.5 to 6.25.
The graph above shows that bitcoin prices (sky-scraps) began to rise before the first and second half-lives and continued to rise for some time after the half-life. However, this data has obvious limitations. The market has only had half the lifespan so far. Therefore, the conjecture that the same pattern will repeat in the next half-life is weak.
Therefore, further analysis is needed based on fundamental supply and demand.
Supply shock
Bitcoin investor and cryptographer Tour Demister recently analyzed that if Bitcoin is to maintain its price above $ 8,000 by the next half-life, its investment in the market must be at least $ 2.9 billion. This is because the deflationary effects of newly issued Bitcoin should be offset. However, he said, even if the investment does not increase, prices will rise due to less selling pressure after the half-life (because the number of newly issued Bitcoins entering the market decreases).
The famous Bitcoin trader, under the pseudonym “Plan B,” went one step further. We used a "stock-to-flow ratio" (S2F), which divides our current inventory by its annual output to create a model that predicts Bitcoin's past price changes backward. Using gold and silver as a reference, this model has high accuracy. Plan B predicts that after the next half-life, Bitcoin will cost nearly $ 60,000. (The black line in the graph above)
Of course, this model is not without criticism. However, this model has undergone a thorough case analysis, and the backward forecast graph also draws a trajectory similar to the actual price fluctuation graph of Bitcoin. It also corresponds to the intuition that, when all the conditions are the same, the price rises when supply drops.
Then it becomes more and more curious. Why aren't Bitcoin prices still going up?
To resolve this question, we need to reconsider the rumors surrounding bitcoin half-life.
Strictly speaking, a half-life is not a “fundamental” event directly related to value investment. In asset analysis, the term “fundamental” refers to a volatile, but quantifiable, value-generating characteristic, such as revenue, market size, and balance sheet. However, half-life does not mean value creation in traditional investment terms. Therefore, it is not a case directly related to value investment. In this respect, the half-life, that is, the scarcity of Bitcoin already planned as a program is not a fundamental event directly related to value investment. A half-life is a fact-based event that is supposed to happen anyway.
The facts are likely to be interpreted in only one way, but the effects of the facts can be interpreted in almost all cases. When compared to Bitcoin, no one doubts that a half-life will occur, but there are many stories about the effects of half-life and what will happen.
Let's see why.
Reasons skeptical about rising half-life prices.
Those who do not believe that prices will rise in the next half-life can fall into two broad categories.
First, those who argue that the effects of half-life are already reflected in the price. Do you remember that Bitcoin's price rose from $ 3,300 each to $ 12,000 this year? These increases are all part of the price rise due to half-life. Because markets share information relatively efficiently and are moving along, they claim that smart investors have already calculated the supply to be adjusted after the half-life and bought it ahead of time.
Second, those who argue that the bitcoin price prediction model previously worked well, but may not fit the next half-life. Today, Bitcoin's ecosystem is very different from the previous two half-lives. Four years ago, cryptocurrency derivatives had just begun, and few institutional investors had entered the cryptocurrency market. Also, there was virtually no framework for evaluating the value of cryptocurrencies. Therefore, it is not unfounded that investors believe that this half-life will be different.
Some industry officials say that if miners' profitability is reduced and many small miners are pushed out of the market, their half-life may have a negative effect. Rising Bitcoin prices can counteract these negative effects, but if the negative effects are greater than the price increases, the network will be more centralized, raising concerns about security.
Also, in traditional markets, prices are hardly affected by supply. Rather, it is more affected by demand. The S2F model does not consider demand. At the moment, there is no recognized model widely used, so the demand for the cryptocurrency market is influenced by rumors.
Will prices soar?
According to recursive logic, demand may be affected by half-life "rumors." Many people's expectations that demand will affect prices can stimulate demand to buy Bitcoin as an investment asset. In particular, new investors, fascinated by the supply model and the previous two price hikes, can enter the market and stimulate demand. This can lead to price increases.
When this happens, the so-called asymmetric risk-compensation concept comes up. This concept means that the value is very likely to rise and, on the contrary, the risk is low. In other words, it's more likely that you'll miss 500% of your predictions than the risk of losing everything you've got due to the wrong predictions in the model.
Thus, even if supply-based price forecasting models make new predictions based on traditional supply and demand principles, there is always a chance that prices will rebound as long as Bitcoin is affected by rumors.
If prices rebound, the rumors will come together to strengthen the conviction that the supply-centric model was right. Even if the supply model is not right, that doesn't matter. This is where rumors affect prices, and prices are trapped in an endless cycle of rumors.
But this may not be the only loop in the cryptocurrency market in the coming months. The loud debate over Bitcoin's supply schedule will make Bitcoin's unique economic system more prominent, which will further stimulate investors' attention.
If this situation led to an increase in investment after a decrease in bitcoin supply, the models that predicted price spikes after half-life would eventually prove right. But as mentioned earlier, rumors are capricious and rumored investors are brave. Furthermore, many factors can significantly affect bitcoin prices in addition to rumors.
Whatever factors affect bitcoin prices, the emergence of multiple price forecasting models is positive in that it provides a deeper understanding of Bitcoin's role in the broader financial market and the market landscape. Smart investors will welcome this forecasting model but remain critical and watch what the forecasts mean.