As of March 2020, the hottest topic surrounding Bitcoin investments is the halving.
Some people say that the value of Bitcoin will skyrocket after the halving, while others disagree.
In this article, I use the supply and demand curves of economics to explain how its value will increase because of the halving.
Derivation of Supply Curve
In Bitcoin mining, the break-even point for miners is said to be more or less around $7,000 (as of February 2020).
This estimate is for the ‘average’ miner, and so it’s not the break-even point for all.
Some can mine 1BTC at $4,000, while for others it can cost $10,000.
To make it simpler to explain, let’s say that the world's miners are composed of these four people:🐶🐭🐱🐼
The price will then vary from person to person:
🐶‘It costs me $4,000 to mine 1BTC.’ 🐭‘It costs me $6,000 to mine 1BTC.’ 🐱‘It costs me $8,000 to mine 1BTC.’ 🐼‘It costs me $10,000 to mine 1BTC.’
(*Mining costs vary depending on the cost of electric and rent, as well as the amount of capital investment.)
In other words:
🐶‘If 1BTC is worth more than $4,000, I’ll make a profit from mining. ’ 🐭‘If 1BTC is worth more than $6,000, I’ll make a profit from mining.’ 🐱‘If 1BTC is worth more than $8,000, I’ll make a profit from mining.’ 🐼‘If 1BTC is worth more than $10,000, I’ll make a profit from mining.’
We could even look at it in yet another way:
🐶‘If 1BTC is worth more than $4,000, I want to sell.’ 🐭‘If 1BTC is worth more than $6,000, I want to sell.’ 🐱‘If 1BTC is worth more than $8,000, I want to sell.’ 🐼‘If 1BTC is worth more than $10,000, I want to sell.’
This is illustrated in the graph below.
(*Read this vertical to horizontal axis, not horizontal to vertical axis)
Here, the line which connects the points showing the price level (Price) and the total amount of Bitcoin to be sold (Quantity) is the ‘Bitcoin Supply Curve’.
[Bitcoin Supply Curve]
The above situation is in regard to those selling Bitcoin.
Derivation of Demand Curve
On the other hand, let’s now look at the situation for buyers.
The world's Bitcoin users are composed of these four people:🐰🐻🐷🦁
In this case, the maximum amount we are willing to pay will vary from person to person.
🐰‘I’d buy 1BTC if it’s less than $8,000.’
🐻‘I’d buy 1BTC if it’s less than $10,000.’
🐷‘I’d buy 1BTC if it’s less than $12,000.’
🦁‘I’d buy 1BTC if it’s less than $14,000.’
The difference in amount that each of these four people is willing to pay comes from their different expectations regarding future Bitcoin prices.
This is illustrated below.
(*Read this vertical to horizontal axis, not horizontal to vertical axis)
Here, the line which connects the points showing the price level (Price) and the amount that people are willing to buy (Quantity) is the ‘Bitcoin Demand Curve’.
[Bitcoin Demand Curve]
Equilibrium Price
The point where these supply and demand curves intersect is the equilibrium price (E).
[Equilibrium price of Bitcoin]
The Effects of Halving
Bitcoin halving refers to the date when the reward for mining this cryptocurrency is halved.
On this day, miners will only receive half the amount of bitcoins they would have previously received in return for the effort and cost of mining.
The fact that the amount you can get is reduced by half means that if the price of bitcoins doesn’t double, you won’t be able to make a profit.
As such, the miners thought process will change.
🐶‘If 1BTC is worth more than $4,000, I want to sell.’
🐭‘If 1BTC is worth more than $6,000, I want to sell.’
🐱‘If 1BTC is worth more than $8,000, I want to sell.’
🐼‘If 1BTC is worth more than $10,000, I want to sell.’ ↓
🐶‘If 1BTC is worth more than $8,000, I want to sell.’ 🐭‘If 1BTC is worth more than $12,000, I want to sell.’ 🐱‘If 1BTC is worth more than $16,000, I want to sell.’ 🐼‘If 1BTC is worth more than $20,000, I want to sell.’
The supply curve then shifts upwards to determine the new equilibrium point.
[Supply Curve Shift]
Notice how the equilibrium price rises.
The next Bitcoin halving is in May 2020, but there will be three more halvings thereafter.
Notice how the equilibrium price rises.
The next Bitcoin halving is in May 2020, but there will be three more halvings thereafter.
This is why the world's most renowned fund managers recommend that investors HODL (long-term holding) until 2030 as an investment strategy for Bitcoin.
I still have 3 more halvings left in me… Do you understand what that means?–BTC
The above situation is for sellers in regards to the halving.
Let’s look again at the situation for buyers
Regardless of sellers’ expectations, the situation for buyers could drastically change as well.
As an example, it’s quite possible that governments issuing legal currencies such as dollars and euros will, for the most part, ban Bitcoin.
This is because for these existing authorities, the existence of Bitcoin is a constant hindrance that affects their own interests.
In this case, these mighty powers will be hard to beat and Bitcoin will be reduced to ‘electronic waste’.
Bitcoin users will then start to think differently.
🐰‘Even if it’s 1 dollar, I don’t need 1BTC.’
🐻‘Even if it’s 1 dollar, I don’t need 1BTC.’
🐷‘Even if it’s 1 dollar, I don’t need 1BTC.’
🦁‘Even if it’s 1 dollar, I don’t need 1BTC.’
For buyers, there will be a sudden decline in the loss of Bitcoin value.
Taking Other Factors into Account
The impact of both positive and negative factors are already taken into account and reflected in the prices of financial products.
This concept of taking other factors into account is the biggest issue with regards to the Bitcoin halving, as the line of thinking is that all factors have been considered and that current prices have already taken into account the shift in the supply curve for the 2029 halving.
In fact, there are many among speculative buyers who expect market factors which have been announced and which are certain to come into effect to have been taken into full consideration beforehand.
Personally, I believe that around only 60% of the effects from future halvings have been taken into account.
This is because the factors taken into account for financial products like stocks are mainly based on buyers’ expectations, but in the case of Bitcoin, price fluctuations from halvings are mainly due to the sellers’ circumstances.
Even if buyers can quickly start making purchases in anticipation of future price increases, it looks to be somewhat difficult as in order to guarantee working capital, sellers hold back in anticipation of future price increases.
There’s also the aforementioned fear that Bitcoin regulations will be tightened which poses the biggest risk factor of all, and although there is a significant risk, it’s impossible to factor this in completely. Since individual expectations are different, the equilibrium price is not an accurate forecast of the future.
Therefore, if regulations on Bitcoin aren’t tightened by 2029 and the situation instead moves in the opposite direction towards acceptance, then the price of bitcoins will rise.
So, how should you buy?
A good option is to use the so-called Dollar Cost Averaging strategy, where you allocate around 1-3% of your monthly savings to Bitcoin investments.
Do this at a daily rate with the same amount being saved at the same time each day. This is the best way to go about it with confidence.
It’s not too late to start making this kind of savings investment in Bitcoin.
Incorporating just a few percent of Bitcoin into your asset portfolio has been mathematically proven to improve the risk of your entire portfolio, despite the paradox of Bitcoin being a high-risk product.
I myself am a gambler, so I allocate more than half of my monthly savings to Bitcoin purchases.
This is because although there’s the possibility of a big loss, there’s also that glimmer of hope for becoming a millionaire.
In 2030, on the day I become extremely rich and my worries are gone, I want to tell this to my wife with a look of great triumph.
You must seize every golden opportunity.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Author Profile
Takayoshi Kimoto
Born in 1973. Graduated from Keio University, Faculty of Commerce, and Nagoya University of Commerce Graduate School of Management (MBA). Kimoto operates a consulting company supporting overseas expansion in Thailand. Currently invested in Bitcoin, Kimoto has experience with Altcoins and is also skilled at Forex.