Winter is here

So we can focus on changing the world

Hi all, Tomer here ❤ hope this blog post finds you well.

And welcome to the winter of 2022, woo hoo! (said by no one ever).

It’s not the first winter for me, and it’s not the last, but each winter brings its learnings, In this blog, I’ll share a bit of why I believe Crypto winters are coming.

The below analysis is not novel or originally mine, it’s a common perspective I agree with, and I am publishing it here in my own words as an open invitation for people to ask questions and open a discussion.

Why do (I believe) winters come?

I believe it’s the market that drives the innovation and not the innovations that drive the market — in other words, it all comes down to Bitcoin’s “halving” cycles.

What’s Halving?

Bitcoin mining is the process of verifying new transactions to the Bitcoin digital currency system and the method by which new bitcoins enter circulation.

Miners verify transactions, are rewarded with BTC, and typically immediately sell most of the BTC rewards received to cover costs (e.g., electricity), creating a steady supply of new BTC.

Bitcoin halving is the process of cutting in half the rewards of mining Bitcoin after each set of 210,000 blocks is mined, which takes about four years.

So in the first four years, 10,500,000 BTC were minted

second 4 years, 5,250,000 BTC were minted

Third four years, 2,625,000 BTC

And so on…

Halving creates a dual effect:

1. Miners’ BTC rewards are cut by half, thus
2. New BTC supply is cut in half

This creates immediate upward price pressure for BTC

So how does halving affect market cycles?

Here’s the full BTC feedback loop

1. Miners secure the network — rewarded with BTC
2. Miners sell BTC (to sponsor the electricity cost)
3. When Miners are profitable, more miners join the network
4. This makes the network more secure* which leads to more demand for BTC
5. Eventually, equilibrium is reached where there’s no profit margin for more miners to join the mining pool
6. Halving restarts the cycle by cutting in half the BTC rewards received by miners and thus the BTC supply, creating upward price pressure
7. Higher BTC prices encourage new miners to join the network

*Bitcoin security level is measured in Hashrate the network's total computational power to process transactions. To attack Bitcoin you need at least 51% of all the hashrate in the world, now that the miners produce 100 quintillion hashes per second that’s becoming a very expensive and unlikely scenario.

In the last bear cycles, we have seen that the least efficient miners cease to operate, and the miners who survive expand their work, bringing back the security levels of the networks.

The combination of reduction of the BTC supply and improving the security level usually brings the prices of BTC up. As prices start to rise, expectations of the market can bring BTC prices even higher.

BTC is the reserve asset of the crypto market (most pairs are XXX: BTC) so they are all highly correlated. Rising BTC prices bring all other crypto assets prices up, making mainstream media find interest in BTC/crypto again, attracting retail and speculative investors. Here you go you have a crypto summer: uncorrelated exuberant demand.

The winter starts when the retail investors stop “pouring” money into the market. Sophisticated investors (e.g. whales) track this and start taking profits, which, coupled with miners’ consistent supply of new BTC creates an oversupply and prices start falling. Once triggered, a selling frenzy begins, accelerating the price drop. The collapse of the Ponzi schemes who took advantage of the summer euphoria further routs BTC since BTC is the common pair for the rest of the crypto market. Mainstream media jumps on the new cycle and amplifies the effect. Welcome to crypto winter.

So, when’s the light at the end of the tunnel?

The next Halving is expected around May 2024. In the last cycles, we have seen interest levels in BTC go up about a year before the halving, and a bull market starts to kick in about 6 months after. Historically bull runs have started earlier and earlier (market expectations!) and last longer and longer: As the market matures, halving cycles and their effects are built into BTC prices and we get less volatility, a sign of BTC’s permanence.

Changing the World

The big problems & opportunities of why I joined web3 are still here: financial inclusion, climate and new governance systems, and the technology still offers the best platform for transformative solutions. The only thing that has disappeared is the noise. Let’s use this as an opportunity to focus on doing (and investing in) the long term work that will help us build a better world.