Bitcoin, born from the Global Financial Crisis (GFC) of 2007-08, is now outperforming stocks and gold. With the bitcoin halving event scheduled to take place in 5 days, all eyes are heavily focussed on bitcoin, an asset that has only 21 million bitcoins in existence.
During the bitcoin halving, block rewards are cut in half from 12.5 to 6.25. To recoup the block reward reduction price loss, bitcoin miners postpone selling their bitcoins in order to sell them at a more profitable price several months, up to a year later.
In effect, supply is reduced on a month-by-month basis and each month after the halving, bitcoin becomes extra scarce. As a consequence, assuming that the demand stays the same, then the price of bitcoin will naturally increase each month. And, this is exactly what happened during the 2 previous bitcoin halvings.
- First bitcoin halving: During 2012, the price of bitcoin increased from $11 to $1,000.
- Second bitcoin halving: From 2016-17, the price ballooned from $700 to $20,000.
- Third bitcoin halving: Scheduled on May 12, 2020 (the price impact is still yet to be seen).
It is expected that the price of bitcoin will reach an astronomical all-time new high. Dan Morehead, the CEO of Pantera Capital believes that there is a 50% chance that bitcoin could go up, and go up big, predicting that it could hit a whopping high of $500,000 by August 2021.
Why is this bitcoin halving different?
Whether or not Morehead is correct, that is still yet to be seen. One thing is for certain, bitcoin is bitcoin, meaning that anything could happen. That said, the third bitcoin halving is unlike the previous 2 halvings due to the following factors in play:
- A major recession that could eclipse the Great Depression.
- Another stock market crash.
- A second wave of COVID-19 outbreaks.
- The Fed continues to print/inject trillions into the economy.
- Deflation that results in hyperinflation.
- Banking and political instability, I.e. It has been reported that in Lebanon, the local currency recently lost 60% of its value—citizens took the streets in protest, set fire to banks, causing some citizens to flock to cryptocurrencies like bitcoin as a safe haven.
- Digital dollars (eg. the Digital Yuan) and the impact of Libra.
- The devaluation of the dollar.
- War, the economist Ray Dalio hinted at the possibility of this during an interview on Bloomberg.
- Crypto legislation on stablecoins, bitcoin ETFs, etc.
The Federal Reserve has just announced new plans to print $3 trillion to bankroll the economy. According to the U.S. National Debt Clock, U.S. debt is about to hit $25 trillion. If the Fed continues to print money, then trust in money in the near future might very well be eroded.
Nikolay Shkilev, the CEO of Zelwin says, “Now, a lot of people believe that the ‘issuance of new money’ is not provided with anything of value—which violates all economic laws. In fact, the printing of money could be equated to printing new candy wrappers. This is why it is inevitable that people will start looking for alternative sources of financing like crypto.”
In response to the Fed’s actions against corporate debt, Warren Buffett says, “I think in general they’re the right thing, but I don’t think they’re without consequences, and I think they could be of extreme consequences if pushed far enough. But there would be kind of extreme consequences if we didn’t do it as well.”
Stablecoins and crypto-dollarization
Not long ago, the Financial Stability Board (FSB) published a report with recommendations for “Global Stablecoin” (GSC) oversight. As a result, the wider crypto community has interpreted this to mean that there could be a potential upcoming ban on stablecoins due to the complexities of fiat-collateralized and crypto-collateralized stablecoins.
Stablecoins are vital to the crypto ecosystem, especially for unbanked countries and crypto traders. Unbanked countries are using stablecoins to combat local inflation; whereas, crypto traders are using stablecoins for liquidity, to buy cryptocurrencies like bitcoin during dips.
Fredrik Johansson, the founder Libonomy says, “Stablecoins are like a transitional stage between cryptocurrency and fiat. They are still on the blockchain, they are easy to use, and they are pretty anonymous. At the same time, the stablecoins price is stable, and they are more reliable for short-term capital storage.”
Johansson adds, “The government is afraid that soon more and more people and companies will start using stablecoins or other cryptocurrencies, which means they will get out of control. But I think that this process still cannot be stopped. The crypto community is growing every year, and prohibitions cannot solve this problem.”
Nobel Prize winner and renowned American economist Professor Milton Friedman famously once said, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash.” Could this be bitcoin, or perhaps something else? Here are some big questions to think about:
If the Fed continues to print money in the next 1-2 years, at what point (I.e. Printing 10, 50, or 100 trillion dollars) could make people lose faith in the dollar? How will the current economic climate impact the bitcoin’s price during the halving? Could the bitcoin halving event, combined with intense economic uncertainty result in a new class of millionaires?