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  • With Supply and Demand Taking a Shock – What Next for Bitcoin?

    What will supply and demand affect BTC?

    With the Bitcoin Halving been and gone, and with the newly minted bitcoins now set at 6.25 for every new block, what next for the main cryptocurrency?

    The Bitcoin Halving only happens every four years or so, or every 210,000 blocks to be precise. Coded into the protocol by Satoshi Nakamoto, and it’s obvious the pseudonymous Bitcoin creator had this supply squeeze in mind.

    Each Halving cuts Bitcoin’s inflation rate, and now with Bitcoin’s set at 1.8% it’s below that of most western countries’ average inflation rates.

    This Halving was the most highly anticipated occasion in Bitcoin’s short history, but now with the new stockpile being cut in half, what effect will this have on the supply and demand side of things?

    Which way will the BTC price go

    Supply and Demand

    The laws of supply and demand defines the interaction between the sellers and buyers of a resource, in this case Bitcoin. It will determine what effect the relationship between the availability of Bitcoin and the desire for it will have on its price. If there’s a low supply, and a high demand then that will reflect in a higher price.

    And with the Bitcoin block reward being cut in half, although it isn’t a 50% cut in the whole supply, it’s led many believe a potential increase in the price. Less supply should have a positive effect on the price, no?

    But a supply shock doesn’t necessarily reflect in an immediate boost.

    Miner Capitulation Might Have More of an Effect

    The main thing in the short term is the cost of mining a bitcoin. All of a sudden it has gone up to an average of $12,500 to mine every single bitcoin, depending on a miner’s location and cost of electricity.

    But even the miners using the cheapest of electricity will be mining at a loss for now. And the solo miner who doesn’t have a deal with a power station, will feel it the hardest. It’s expected, therefore, that most solo miners will capitulate and hang up their mining rigs for now.

    Could Miner Capitulation Threaten Bitcoin’s Security?

    Most solo miners usually sell their block reward to pay for electricity costs, and it’s expected that as these switch off, it will affect the Bitcoin hashrate.

    Bitcoin hashrate has dropped after the halving

    We can see in the image above with the hashrate peaking at 148 EH/s yesterday, it has now dropped to 118 EH/s.  Source: coinwarz

    And because of the immediate drop in price it’s expected that miner capitulation will continue. This is likely to have the biggest impact in the short term, with many arguing this loss of decentralization could affect the security of the Bitcoin network.

    With only bigger mining firms remaining in the game, or at least a higher percentage of bigger firms, it does put the security of Bitcoin in the hands of fewer, at least for a short while.

    While the hashrate isn’t a problem, there are concerns this makes it easier for mining firms to join forces and try a 51% attack. However, this is absolute nonsense, disseminated by the anti Bitcoin media.

    After all, why would a company who’s invested a lot of money join forces with other companies who’ve also invested a lot of money, try and destroy the value of something they’re trying to make their business from? They wouldn’t.

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    Miner Capitulation Could Have a Positive Effect on the Bitcoin Price

    The bigger the miner capitulation gets, however, it could adversely have a positive effect on the BTC price. As stated earlier, solo miners are the ones who sell their block reward to pay for electricity costs.

    Therefore, because miners selling is a regular capital outflow from the Bitcoin network, this constant downward pressure on the price will be relieved as long as solo miners are switched off, which should have a positive effect on the price.

    What About Bitcoin’s Long Term Price?

    There are many price analysts predicting different outcomes for Bitcoin in the long term. With everything from zero to millions of dollars in the coming years, it’s hard to choose who one should follow.

    From the bearish Gold bug Peter Schiff, who vociferously opines every time BTC corrects. Obviously he has his agenda, and doesn’t want the value of gold to be affected by the rise of Bitcoin, which no doubt has stunted gold’s growth since its inception.

    But there are many respected legacy macro analysts like Raoul Pal, who tweeted his view of  a ‘perfect wedge’ . When used on a log chart he says it has the ‘potential’ for a $1 million dollar price.

    It’s hard to believe, but the Wall Street veteran and Real Vision front man is a highly respected analyst, and although he emphasized it has the potential for $1m, he is still putting his reputation on the line if it was to fail miserably.

    More believable but still a staggering prospect, Plan B’s stock-to-flow (S2F) model has now been revised with a higher price target of $288,000.

    S2F is a model usually used for precious metals, but Plan B put it to use while quantifying the possible medium outcome for Bitcoin’s price.

    In the S2F model, stock is the total amount of Bitcoin that already exists, while flow is the amount that is produced every year. And the S2F ratio is the number of years needed to reach the current supply. Therefore, the higher the number the longer it takes to reach that supply, the scarcer it is.

    And with Bitcoin’s scarcity hard coded and capped at 21 million, and the flow being reduced every four years, it guarantees Bitcoin’s stock-to-flow will rise over time, which should positively affect the value.

    There are many who argue against Plan B’s model is flawed, but even author of The Bitcoin Standard and Austrian School economist Saifedean Ammous says Plan B has actually made him question the Austrian school of economics now.

    Speaking on the Steven Liveira show, Ammous explained how he was extremely skeptical of Plan B’s S2F model at first, because everything he has learned in Austrian economics belies any model that uses human interaction.

    But the more he looked into the S2F model, the more it actually made him question Austrian economist Mises’ theory  that there cannot be constants in human action.

    S2F BTC

    Ammous went on to say, that Plan B had blown his mind. ‘It’s amazing. It’s absolutely mind blowing. I can’t stop thinking about it,’ he said.

    Now of course Saifedean Ammous is also extremely long term bullish on Bitcoin, but he is a highly respected figure, as is Plan B, and he is also a man of serious nature, who wouldn’t bow down to any pressure, especially one that questions the thesis of Mises.

    In Summary

    With miner capitulation a high possibility, the short term effect on the price could go either way. However, the security of the Bitcoin network needs no question.

    Sure, miners who can’t compete will stay away for the time being, but miners whose business doesn’t depend on short term gains might expand their mining capabilities. This won’t necessarily decentralize mining more, but it will strengthen the network.

    For the long term price, one has to be bullish. Bitcoin is gaining traction and brand recognition among many in the financial industry. It is following traditional cycles to a tee, and many trading veterans predict huge gains in the coming years.

    Will they be right? They very well could be, but they could also be early. Only time will tell, but hodling Bitcoin is the best opt out of the great fiat ponzi scheme.

    Author: Tommy Limpitlaw


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