Happy Thanksgiving to our American readers!
With a possibly long and gloomy crypto winter slowly settling upon us, the focus will inevitably shift towards a search for catalysts that can potentially trigger the next bull run in cryptos. While many are pinning their hopes on the launch of the Bakkt exchange to resuscitate crypto bulls, any price rally in anticipation of Bakkt’s launch will subsequently be vulnerable to a steep correction; This will be similar to what we saw with the mega bull run around the time of the launch of BTC futures at the end of 2018 and the subsequent nosedive in valuations.
In our view, the impact of most price catalysts, such as institutional adoption and new fund inflows will be very hard to measure, subject to various uncertainties, and will ultimately be transitory. For example, the pace and the timing of institutional investments in cryptocurrencies is largely a function of crypto prices. If the prices are too high, investors will wait on the sidelines to buy the next dip. If the prices are in free fall like they are now, investments will be deferred to the point where there is more conviction that the prices have bottomed out.
So, what then do the metaphorical tea leaves foretell for the cryptomarket?
If there is one catalyst or major event that has a tangible impact on the ecosystem at the core level and is immune to price reflexivity, it is the process of block reward halving. In addition to death, taxes and Murphy’s law, another certain thing in life is Bitcoin’s Block Reward Halving.
For beginners, Bitcoin’s miner reward, which is the reward that miners get in return for performing expensive computations to mine a block, drops by half every four years. In May/June 2020, Bitcoin’s miner reward is scheduled to be slashed by 50% to 6.25 BTC per block (from 12.5 BTC per block). Barring any changes in difficulty, Bitcoin miner revenues are going to drop by half due to the drop in block rewards. The effect of a drop in block rewards is that, ceteris paribus, there will be palpable scarcity on the market as miners will have fewer BTC to sell to fund their operating and capital expenditures. We might expect some reorganising amongst the miners as some unprofitable miners exit, but largely, miners will stay invested and hope for a BTC price increase to subsidise their shortfall in mining revenue.
If one studies the previous two halvings, the price of BTC has risen in the period following the halving both in 2012 and 2016. However, the price increases have transpired into full-blown bear markets subsequently on both occasions. Traditional finance guys, especially proponents of any form of efficient market hypothesis, will of course argue that the certainty of halving will be priced in way before the event and we won’t see a price fillip, following or in the run-up to the event.