Bitcoin got a crack in 2021, and if history is any indication of that, we should expect Bitcoin to continue well past the six-digit mark and to $ 200,000 and beyond in 2021.
The dynamic, programmatic price action of the halving cycle
While the typical skeptic shouts from the rooftops: “Bitcoin is nothing more than a speculative bubble!” and like there is “No intrinsic value, Bitcoin is just tulips!” these critics obviously haven’t done much critical thinking or research on the subject.
To be fair to the naysayers, on the surface it is hard to understand how something that has appreciated 711 percent in the past 365 days could have done so without benefiting from pointless speculation or a bubble affecting everyone Moment will burst. The answer is simple, however: care is programmatic.
The Bitcoin protocol has a programmatic issuance of offers. Hence, price is a function of increasing or decreasing demand for holding the asset. There is no variability on the supply side. This is a monumental breakthrough in the money economy and a concept that is poorly understood even by so-called “economists”.
Every 210,000 blocks, or roughly every four years, the Bitcoin protocol is subjected to a so-called “halving” process, in which the new supply of Bitcoin that is put into circulation is reduced by 50 percent. This event creates an imbalance in the supply and demand dynamics to which the market has adjusted over the past 210,000 blocks.
Check out this thread from Croesus_BTC for a great picture of the dynamics of the halving:
Once is a coincidence, twice is a coincidence, the third time is a pattern
While the halving events in the future are known, it is literally impossible to price in a supply shock on any monetary asset.
In March 2019, Plan B, a pseudonymous Twitter user, released a model that quantified the relationship between relative Bitcoin scarcity and price. Interestingly, he found that there was a pretty significant correlation between Bitcoin’s stock-to-flow ratio and the asset’s price movement.
The stock to flow can be quantified as the existing supply of an asset / commodity divided by the annual flow of the new supply.
Plan B later revised the model to take into account likely lost coins. The updated model is shown below:
“All models are wrong, but some are useful.”
-George EP Box, British statistician
While the price movement cannot be said to be directly due to the halving and the inventory to flow ratio, it is extremely obvious that this is simply not a statistical anomaly or is simply a random occurrence.
The model predicts a spike to over $ 100,000 in 2021, and in my opinion, this is just the beginning. As seen in previous halving cycles, the rise in the price of Bitcoin is creating a wave of new users and users who understand the monetary properties of Bitcoin. This works in a reflection cycle. New users are entering the space competing to acquire Bitcoin, which increases the unit price, increases media attention and miners profitability, increases network security, and gives the asset more perceived legitimacy. This process has been reflexive and cyclical for over 12 years, and it would be a bad choice to bet that it will stop soon.
The catalyst for more than $ 200,000 bitcoin
What is fundamentally different in this halving cycle is the monetary devaluation that occurs in the old financial system. Large global central banks, mainly the Federal Reserve and the European Central Bank (ECB), have pulled into a corner. After decades of cutting interest rates to stimulate the markets, interest rates are stuck at the bottom of zero so they don’t have an essential tool in their tool kit.
Quantitative easing of a previously unfathomable order of magnitude, manifested in a parabolic rise in central bank balance sheets. Without the ability to cut interest rates any further, quantitative easing, buying bonds and securitized debt with newly “printed” cash, was the first choice. This has brought a boon to global credit and stock markets and has served as absolute rocket fuel for Bitcoin price. Recent statements from both the Fed and the ECB have shown that they are determined to ease further.
What the rest of 2021 has in store
In the late months of 2020 and the first few months of 2021, corporate and institutional interest in Bitcoin as a monetary asset exploded. The insurance industry, corporate treasurers, Wall Street banks, and sovereign wealth funds are all preparing to enter the space on a massive scale.
The bad news? Much of the 18.6 million Bitcoin in circulation is not for sale.
The good news? Much of the 18.6 million Bitcoin in circulation is not for sale.
This wave of new demand from large capital allocators has to pass through a gap in available supply, which will lead to an skyrocketing price of Bitcoin as Bitcoin makes the transition from a predominantly individual / retail-driven asset to a global monetary asset with geopolitical implications. A $ 200,000 bitcoin would equate to around $ 3.7 trillion in assets, which is still only a fraction of the current market value of gold, its closest monetary competitor.
While nothing in this world is a guarantee, it is a good bet that politicians and central bankers will continue to operate after their basic incentive to “print money”, and there is an extremely high probability that the Bitcoin network will Keep attracting additional users as more rational individuals around the world recognize that a set of rules is preferable to a ruling system. Given all of these factors, $ 200,000 bitcoin is not only in the cards, but very likely in my opinion.
Regardless of what the Bitcoin price movement brings in the coming months of 2021, it’s important to remember:
“History shows that it is not possible to protect yourself from the consequences of others who hold money that is harder than yours.”
-Saifedean Ammous, the Bitcoin standard