Bitcoin Issuance Halving

And what that means for Ethereum

As a built-in mechanic, Bitcoin cuts issuance in half every four years. There have been two issuance halvings since BTC’s creation in 2008. The first “halving” caused a bull run that ran for an entire year. The gains were ludicrous by any standard and peaked out at +9200% — from $12 to $1200. In the following three years before the next halving BTC remained relatively stable after a -84% correction. In a similar move, the second Bitcoin halving catalyzed the all-time-high bull run of nearly +3000% — from $650 to $19,981. Again, the following three years have been relatively stable after a large correction. The next halving will occur on May 13th, 2020. This is all shown elegantly in the chart below.

If the previous two halvings tell us anything about the next, it is reasonable to expect a Bitcoin bull run into 2021. One would be tempted to think that BTC halvings should be “priced in” already, but such an assertion assumes a rational, efficient crypto market. This is not the Dow Jones. This is a speculative market in which knowledge is low and investors have all but forgotten about since the 85% BTC correction in 2018. Worldwide Google Trends data shows Bitcoin searches have returned to levels not seen since just after the 2nd halving in 2016. After a 9200% bull run following the halving in 2012, one would expect better market efficiency before the next halving in 2016, but that never occurred. Therefore, it is reasonable to think Bitcoin will remain undervalued as we approach the next halving in May.

Of course, two is not a pattern, but it’s all we have to work with thus far. The 2nd halving bull market was approximately 33% of the first. If the next halving follows suit, we could expect a 1000% bull market into 2022. At the time of writing, BTC is hovering around $8000. Doing the math, $80,000 per Bitcoin may seem insane. However, most people would have considered you clinically insane for thinking Bitcoin was capable of $1200 in 2012 or nearly $20,000 in 2018.

Miner Profitability

The following should make sense even if you don’t understand what Bitcoin “miners” are. Click here for a primer if needed.

The cost to mine a single Bitcoin is an important metric for miner profitability and subsequently Bitcoin price. By most estimations, China accounts for 65% or more of the world’s miners. A 2018 report by Elite Fixtures approximates the cost to mine a single Bitcoin in China is around $3200. It stands to reason that if Bitcoin price dropped to $3200 or lower, miners would start to hold their Bitcoins instead of sell at a loss. This assumption seems to be validated by the fact that in December of 2019, Bitcoin declined to its lowest price in 3 years: $3200. When the halving occurs on May 13th, the issuance will reduce from 12.5 Bitcoins every ten minutes to only 6.25. As a result, the cost to mine a single Bitcoin doubles to about $6400.

You may be thinking that a new theoretical price floor of $6400 per Bitcoin isn’t that impressive since a single Bitcoin is already worth around $8000 today. However, we have to consider the fact that miners are now only making about $1600 per Bitcoin rather than $4800. It’s not that miners are going to stop selling their Bitcoins altogether, but it is safe to assume that the $3200 cut to their bottom line will make them less eager to sell at $8000. In addition, miners are now conditioned to expect a bull run after a halving event. The resulting effect on the market is a simple decrease in supply.

Due to inefficiencies in Bitcoin markets such as liquidity and investor knowledge, such a drastic decrease in inflation has an equally drastic effect on price. A chain reaction of sorts is formed and the resulting price rise reaches escape velocity — a massive speculative bubble arises until the 85% correction returns us to reality.

What about Ethereum?

A look at the log chart shows that, especially over the last 3 years, Ether and Bitcoin are fairly correlated. Year-to-date data from Coinmetrics.io shows that ETH and BTC have held a .81 correlation or greater. If that trend holds into 2021, there is no reason to believe ETH won’t benefit from a 10x BTC run.

Ethereum has been making real headway into Ethereum 2.0, but the full capabilities of 2.0 won’t be online until 2021 at the earliest. The confluence of Eth 2.0 and an ongoing Bitcoin bull market makes the next couple of years promising for Ethereum. From a speculative investing standpoint, I don’t know of any other asset with such an asymmetric upside. At a minimum, Ethereum should ride the coat-tails of Bitcoin into 2021. If Eth 2.0 comes to fruition at the same time, a 10x increase seems more than possible by 2022. Additionally, it is not too late to rule out ETH forming a coup d’etat if 2.0 is as potent as the current testing suggests. It’s not hard to imagine an environmentally friendly cryptocurrency with infinitely more use cases and lower fees taking the top spot from Bitcoin.

In summary, my thesis remains the same. I’m long Ethereum until Eth 2.0 before I reevaluate. $3000 per ETH by 2022 is my educated guess.

Thanks for reading. I’d love to hear other opinions or thoughts so please leave any comments or feedback here or email me directly.