Chang Yong: Bitcoin halving and the 2021 bull market

Editor's note: This article comes from Changyong (ID: changyongBC), author: Changyong.

The so-called Bitcoin halving refers to the halving of the speed of new Bitcoin issuance, from the current 12.5 every 10 minutes to 6.25, and the daily issuance of new Bitcoins is reduced from 1,800 to 900.

At the current price, the new coins issued every day before the halving are worth about 100 million yuan. Since the issuance mechanism of Bitcoin is POW, the energy consumed every day is also close to 100 million yuan, and the difference is the profit of the entire mining industry. This also means that the market must have nearly 100 million yuan in funds every day to purchase these new coins, most of which are used to pay electricity bills. If it exceeds the limit, there will be a shortage of supply and the price will rise. If it is insufficient, there will be a surplus of supply and the price will fall.

After the halving, the value of new Bitcoin coins per day will only be 50 million yuan. If the market was balanced before, that is, the supply and demand were both 100 million yuan, then after the halving, the supply will be only half of the demand, so the price will rise. This is the basic logic of the so-called halving market.

However, the actual price change will not be so simple, and the price will not double immediately on the day of halving. This is because before the halving, the market has already anticipated the impact of the halving, and the price has risen in advance. This is the origin of the so-called halving market in early 2020. When the halving actually comes, the price will not double as expected.

In addition to expectations, the halving has another adverse effect: a blow to the mining industry. The entire mining industry originally had a daily income of 100 million yuan. Assuming that the profit is 20 million yuan after deducting the cost, after the halving, the total income is only 50 million yuan, and the profit becomes -30 million yuan. This means that a large number of miners in the mines are losing money.

Before the halving, miners had profits and could hoard some coins to reduce the market supply. Now, miners cannot pay the electricity bill even if they sell all the coins they have mined, and they have to sell their previous deposits to pay the electricity bill. Therefore, the supply of coins in the market will not be halved immediately as the output is halved.

Moreover, as a large number of miners and mines are facing losses and closures, market sentiment will be very low, bringing negative expectations and causing prices to fall. After the halving, a number of mining machines will shut down, and the cost of the remaining mining machines will also drop rapidly, profits will recover, and mining sentiment will recover accordingly.

Therefore, although the halving has not yet occurred, the anticipation of the above factors and the business adjustments made in preparation for a rainy day have already caused the ups and downs of Bitcoin prices. Short-term price changes are difficult to accurately predict.

In general, before the halving, if positive factors are emphasized and expectations are too optimistic, then expectations will fail after the halving and prices will fall; if expectations are already too pessimistic, prices will rise after the halving. There are also unexpected shocks from other factors during this period. Therefore, the halving should not be regarded as a simple short-term price doubling opportunity.

The short-term impact of halving is difficult to determine, but the medium- and long-term impact is clear, and it will provide continuous support for Bitcoin prices. Because, in the medium and long term, the daily supply of new coins will decrease by 50 million yuan, which is 1.5 billion yuan in a month and 9 billion yuan in half a year. Other short-term factors offset each other, and the supply of new coins will decrease by 9 billion in half a year, which is a strong price support. In the second half of 2020, the price will generally rise.

However, from the perspective of halving the issuance of new coins, a doubling of the price of Bitcoin can completely offset the impact of halving. The supply quantity is halved, the unit price doubles, the value of the total supply is restored, and the total supply and demand are restored to balance when the demand remains unchanged. The doubling of prices is common for cryptocurrencies and cannot be considered a bull market. However, the continued price support of the halving can indeed be a catalyst for a bull market.

The bull and bear cycles are common characteristics of all assets in the market economy. The main reason is that society’s perception of asset value fluctuates cyclically. It is a social psychological movement based on economic changes.

The value of Bitcoin is mainly supported by expectations of future value, so it is more affected by social sentiment and its cyclicality is more obvious.

When more and more people expect Bitcoin to be valuable and exceed a certain threshold, the spread of social optimism will accelerate and a bull market will be initiated.

In the late stage of the bull market, expectations were overly optimistic, forming a bubble. As the price of the currency rose, the mining cost increased, and those who believed in it held on to the currency and waited for the price to rise, while those who did not believe in it did not believe in it. The funds to take over could not keep up, and the bubble would burst. At this time, more and more people began to devalue Bitcoin, and the bear market began.

When most people excessively depreciate the value of Bitcoin, the price of the currency is very low, the mining cost is also low, a small amount of funds can take over the supply, the supply and demand are balanced, and the market sentiment returns to stability.

The true value of cryptocurrency still exists in a bear market, and development is more cautious, resource prices are cheaper, progress in supporting value continues to accumulate and is gradually recognized by society. Optimism will gradually arise, and a new round of bull market will begin to brew.

In 2018, cryptocurrency experienced a major bear market. 2019 was a period of steady recovery of market sentiment. Entering 2020, the social and psychological foundation for a slow bull market was in place.

After the halving of Bitcoin, the continuous reduction in supply will provide continuous support for prices, which is very conducive to the continuous stimulation of social sentiment. Simply put, in the second half of 2020, people will gradually find that it is difficult for prices to fall and easy to rise. When everyone discovers this, social sentiment will rise and the bull market will come.

Therefore, the short-term impact of Bitcoin halving is difficult to predict due to expectation adjustments, but it will continue to support prices in the second half of 2020 and is likely to catalyze a new bull market in 2021.