Noelle Acheson is a veteran of Business Analysis and Director of Research at CoinDesk. The opinions expressed in this article are those of the author.

The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter devoted to institutional investments in cryptographic assets. Sign up for free here. To learn more about cryptography evaluation metrics, download our free report here.


Whether you call it "halving" or "halving", one of the few things we can be sure of in crypto is that the conversation around the upcoming reduction of the bitcoin mining reward will intensify over the next few years. next six months.

Why? Because the previous halings triggered bull races. And who does not like bullfights?

Many are convinced that the next halving will have the same effect on the market and it is not just a question of history repeating itself: models have been developed to support this theory.

But if the bull is expected, why has not it already happened? Why is halving not already taken into account?

Because halving is much more than an event – it's also an unclear narrative and narrative.

What and why

First, review what halving is and why it happens.

To control inflation, the Bitcoin protocol has been programmed with a strict limit of 21 million euros. New bitcoins have entered the system to drive network processors (the "miners") at a progressive and controlled pace. The speed at which they are created is halved every four years, clearly to mimic the growing difficulty of gold mining. On November 28, 2012, the initial reward of 50 new bitcoins was halved to 25, and since July 9, 2016, miners received 12.5 bitcoins for each block successfully processed.

The next reduction, after which the network incentives will be 6.25 bitcoins per block, is expected in May 2020.

(source: Digital Asset Research – statistical model, no price prediction)

The graph above shows that the price (represented by the light blue line) began to rise before each of the previous losses and continued for a while. However, the dataset is limited – the market has experienced only two of these events and it might be exaggerated to assume that the pattern will repeat itself.

This is where a fundamental analysis of supply / demand comes into play.

Shock of supply

Tuur Demeester, Bitcoin Analyst and Investor recently pointed out thatIn order for cryptocurrency to maintain a price of more than 8,000 USD until the next halving, the market would need an investment flow of 2.9 billion USD to compensate for it. Deflationary effect of the entry of new bitcoins into the system. Even assuming that investment growth remains constant, reducing sales pressure after halving (fewer new parts hitting the market) would drive up prices.

Plan B pseudonym negotiator went even further and used the stock-flow ratio (S2F), which divides current stocks by annual output, to create a model for retroactively predicting past price movements of bitcoin with a high degree of accuracy, using gold and silver as landmarks. This model predicts a bitcoin price of nearly $ 60,000 after the next halving (the black line in the graph above).

While this model has his criticshe has undergone rigorous cross-examination, and it seems that the regression holds up. It also has an intuitive meaning: a reduction in supply should increase value, all other things being equal. So why has not the price already reached this level?

It is here that the story comes in.

Technically, halving is not a "fundamental" event, in that it does not represent a factor of value creation in terms of traditional investment. The term "fundamental" in the analysis of assets refers to variable but quantifiable characteristics that may lead to an evaluation, such as profit, market size and balance sheet. In this sense, the preprogrammed scarcity is not fundamental, it is factual.

We can hope that the facts themselves are not subject to interpretation, but their impact is almost always the same. Nobody doubts that the division by two will occur – yet, the narrative around his influence is unclear.

Let's see why.

Reasons for skepticism

first, some argue that half is already planned. The change from $ 3,300 to $ 12,000 earlier this year? That was it. The market is relatively efficient in terms of information dissemination, so savvy investors would obviously have integrated supply adjustment into their models and taken positions accordingly.

Second, models tend to adapt until they do not. The bitcoin ecosystem today is very different from previous haulers: four years ago, cryptographic derivatives markets were in their infancy, institutional participation was thin and valuation frameworks virtually nonexistent. It is not unreasonable for investors to believe that "this time is different".

Some industry experts have suggested that halving could be negative if it reduced the profitability of miners and forced many of the smaller companies out of the market. While this could be offset by higher prices, if this did not prove to be proportionate, increased centralization of the network could raise security concerns.

Moreover, in traditional markets, the price is rarely a function of supply. It is more influenced by demand, which the S2F model does not take into account. In the absence of a basic and widespread (yet) fundamental use case, the demand in the cryptography markets is based on narrative.

Bull running in front?

Yet, in the recursive logic, the demand could be affected by the narrative in half. The widespread expectation that it will influence price could stimulate the demand for bitcoins as an investment will to influence its prices, especially when new investors – attracted by supply models and historical correlation – enter the sector.

And the asymmetric risk comes into play: the probability that the models are wrong and that I lose everything will have less impact on my portfolio than the possibility that the models are correct and that I realize a return of 500%.

Thus, even if supply-driven models attempt to rewrite traditional investment principles, this does not mean that we will not see price rises.

If this happens, the story will assemble around the confirmation that the supply-based models were correct, even if they were not the cause. We could end up with the cycle that makes the head of a speech influencing the price, and a narrator influencing the price.

Even then, it will not be the only feature that will drive the cryptography markets over the next few months. The buzz around Bitcoin's supply schedule will highlight its unique economic characteristics, which should spark even more investor interest.

If this translates into an increase in inflows just as the new supply declines, the charts predicting a rally after halving will have been accurate from the beginning.

Again, the stories can be voluminous and brave is the investor who assumes he will hold. Moreover, they rarely grow in isolation – and, let's face it, many events can have a significant influence on the price of bitcoin.

Be that as it may, it's hard to deny that the emergence of forecasting models is a positive step that will help us understand the dynamics of the market and the role of bitcoin in a broader financial market. Well-informed investors will no doubt appreciate them and will treat the underlying assumptions with a good deal of skepticism.

Disclosure: The author holds small amounts of bitcoins and ether, without short positions.

Image of the persimmon fruit of Rodrigo Argenton via Wikimedia Commons

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