Ouch! Bitcoin hasn’t had a very good week. With cryptocurrency down by about 30% from its year-to-date peak of $14,000, there has been growing bearish sentiment once again. Investors are speculating whether it’s time to brace for another crypto winter. Not all is doom and gloom. There are some experts who predict Bitcoin’s price will start climbing higher in coming months and hit $15,000 by May 2020 when Bitcoin halves again. This may sound too good to be true, especially considering the harrowing sentiment being tossed about; the counterweight of the $15K bullish prediction is the $3K bearish prediction.
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So, which direction are we headed and is the lead up to the Bitcoin halving going to be the true indicator of the market?
Let’s consider the machine learning-based price model created by Twitter user “Data Dater” and what it predicted: that Bitcoin will soon begin its recovery.
Analyzing Bitcoin’s stock-to-flow ratio, Bitcoin may rally by as much as 25% to $10,000 by mid-November; hit a local peak of $11,500 by January, and then dip back down to $11,000 going into Q1 2020, but according to the bot prediction, Bitcoin will rally by 90% from the current price of $8,000 to hit $15,500 by the approximate date of the halving in May 2020.
This seems like a far cry from the $3K bottoming predictions by some analysts, but the market is volatile and investors aren’t sure which way the wind will blow.
Certainly, it’s likely that Bitcoin creates a new all-time high, which spurs a lot of excitement. however, it is equally likely that the halving won’t catapult us into a bull run. Just because the block reward of the Bitcoin Network will reduce doesn’t automatically imply that the market will rocket higher.
As miners potentially capitulate, which they did after the Litecoin halving, prices may crash faster and in a short period of time. On studying Bitcoin’s previous halving events, it is clear that halvings don’t have a material or consistent effect on the cryptocurrency markets after block reward reductions. As a result, Bitcoin’s price will be derived based on its inflation rate, not the influence of halving. With this in mind, is Bitcoin’s implied fair price going to be in the ballpark of $50K to $100K?
While this is the opinion of a few in the crypto community, the conversation around Bitcoin’s upcoming reduction in its mining reward will intensify as we get closer to halving day. Previous halvings have actually triggered bull runs. Many people are convinced that the next halving will have the same market effect. But this is not based on hope alone. Models have emerged to support this theory. Let’s review what the halving is and why it happens.
To keep inflation under control, the bitcoin protocol was programmed with a hard limit of 21 million, with new Bitcoins entering the system as an incentive for network processors (miners) in a gradual and controlled rhythm. The rate at which Bitcoin is created is reduced by half approximately every four years, ostensibly to mimic the increased difficulty of gold mining.
On November 28, 2012, the initial reward of 50 new Bitcoin was halved to 25, and it halved again on July 9, 2016, with miners receiving 12.5 Bitcoins for each block they’ve successfully processed. The next reduction, after which the network incentives will be 6.25 bitcoins per block, is expected in May 2020. Some fundamental supply/demand analysis comes in, when we consider the effects of halving on Bitcoin’s price.
Bitcoin investor and analyst, Tuur Demeester recently pointed out that, for the cryptocurrency to maintain a price of over $8,000 until the next halving, the market would need to see $2.9 Billion of investment inflow to offset the deflationary effect of new bitcoins entering the system. Assuming investment growth remains constant, the reduction in selling pressure after the halving would lead to a price boost. Now factor in the stock-to-flow (S2F) ratio which divides current inventory by annual production. This creates a model that retroactively predicts past price movements for Bitcoin by using gold and silver as benchmarks, garnering a fairly high degree of accuracy. This particular model predicts a Bitcoin price of almost $60,000 after the next halving.
While this model has its critics, it has undergone rigorous cross-examination, and it seems that the regression holds up. It also makes intuitive sense: a reduction in supply should enhance value. In essence, the market will articulate based on supply and demand. So why isn’t the price already heading up to that lofty level already?
This is where narrative comes in.
Technically, the halving isn’t a price driving event, meaning that it doesn’t represent a value driver, nor does it affect profit, market size or balance sheet in traditional investment terms. Bitcoin’s pre-programmed scarcity (halving) is simply factual. It is what it is. Facts are facts, but one’s interpretation of the facts is what leads to volatility, adoption or rejection, and market sentiment. The halving is coming. The narrative leading up to it will be the driving force. The question is: Which way will the narrative go?
Why the skepticism?
Some experts argue that the halving is already priced in. The move from $3,300 to $12,000 earlier this year was the low and the high. The market is relatively efficient in terms of information distribution, so smart investors would obviously have incorporated the supply adjustment into their models and taken market positions in accordance to their research.
Secondly, models tend to fit until they don’t. A square peg can fit into a round hole if you whittle it down enough, right? So, the Bitcoin ecosystem of today is arguably very different from previous halvings. There is history to analyze. We’ve seen crypto derivatives markets mature by four years; institutional involvement has gained interest, and it’s not unreasonable for investors to believe that “this time’s going to be different.”
Some industry insiders have hinted that the halving could have negative effects because the reduction in miners’ profitability may force smaller entities out of the market. True, this could be offset by a price increase, but if that turns out to not be proportional, increased network centralization could trigger concerns about security.
Price has rarely been a function of supply in all traditional markets. It is driven by demand and the S2F model does not take it into account. In the absence of an established and widespread fundamental use case, demand in crypto markets is narrative-driven, but there is still a possibility that demand will be driven by the halving narrative. The widely held expectation that it will influence the price could stimulate demand for Bitcoin as an investment asset, which will influence its price, especially as new investors, who are attracted by the supply models and historical correlation, enter the sector.
Naturally, there is a chance that these models are wrong and the halving may have less of an impact on your portfolio than expected or hoped for. Even if the supply-driven models are trying to rewrite traditional investing principles, it doesn’t mean that we won’t see a price rally. Bitcoin’s unique economics have awakened more investor interest than any other cryptocurrency. While narratives may not be complete in themselves, most investors follow their own predictions based on their due diligence.
While 2019 has been a relatively good year for Bitcoin among its major peers, September brought a U-turn within a 24-hour period, seeing Bitcoin collapse under $9,000 and losing more than 15% in a two-week period.
Another contributing factor is the current geopolitical tensions. Bitcoin saw tough times but altcoins from the list of top 20 cryptocurrencies suffered even more. Altcoins were bleeding heavily with top-traded cryptocurrencies, including Ethereum (ETH), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH), EOS and others experiencing double-digit losses.
The total cryptomarket capitalization dropped by $10 Billion to around $250 Billion. Still, top analysts believe that Bitcoin’s value will continue to grow into 2020 despite the fact that Bitcoin is currently trading below $9K. What does this mean? Well, it could become an attractive investment opportunity for those who want to buy the dip.
How do you feel about the crypto predictions? Are you an optimist that believes we’re sitting on a rocket ready to moon, or do you believe Bitcoin will drop off and take our Lambo dreams away?
At the time of writing Bitcoin was priced at $8681.
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