I’d been keeping an eye on Bitcoin since I stumbled across it by accident sometime in late 2013, but next year, somewhere around May, will be the first Bitcoin halving that I will personally experience with ‘skin in the game’. It’s also the first one where the level of general awareness and institutional involvement is setting new records daily. This is going to be interesting.
There are numerous posts on what people think the Bitcoin price will be based on all kinds of assumptions, extrapolated historical data and good old fashioned gut feel. They vary enormously and, statistically speaking, the answer has probably been correctly predicted somewhere. But that doesn’t really help us much in terms of planning does it?
This article, however, is simply about the maths behind the numbers. I like maths, although my secondary school teacher would be extremely surprised to hear that based on my performance at that time. Sorry about that, Mr Fitzpatrick, and thanks for your patience.
You see, while the markets are based on emotion and our collective confidence, the numbers that work behind the scenes are absolute, emotionless and — for the most part — predictable. Let me demonstrate:
Currently, around 1,800 new Bitcoin are produced every day. We know this because the block time is set to ten minutes and the reward is currently 12.5 Bitcoin. So, we know that every hour 12.5 x 6 (ie blocks of 10 minutes) or 75 Bitcoin are produced. Times that by 24 hours, and we get our magic number of 1,800 Bitcoin. True, it varies slightly as the block time can vary due to fluctuations in difficulty, but it’s as close as dammit.
We can take this number as a constant, because it doesn’t matter what happens to the Bitcoin network in terms of computing power, the algorithm will adjust to accommodate and ensure that the block time always remains ten minutes. It’s very clever like that.
We’ve also in one of the most stable price periods in Bitcoin’s recent history. Over the last few weeks, it has been trading in a consistent range in the $10,000 — $10,500 range. Applying basic economic laws of supply and demand, this means someone — or more probably a collection of ‘someones’ — is buying this Bitcoin up and holding it. Otherwise, the constant arrival of new coins to the market would simply depress the price. Bitcoin may be a relatively new phenomenon, but it still obeys those demand and supply laws.
At the current price, this means that 1,800 BTC x $10,200 is coming into the sector every day, or $18,360,000. It’s impossible to say where this is coming from for sure, but we know that some of it is is retail buyers like you and me, some is institutional, some is OTC (Over The Counter) and some will be exchanges or funds, a sector that is becoming more relevant by the day.
So, if we’re running at a steady $18.36m per day and we assume that there is no increase in demand (ie no physical backed ETF approvals, no impact from Bakkt, no new retail boom etc), then what happens when the supply rate reduces by 50%?
We know in May 2020 that there will only be 900 new Bitcoin a day, so if the market continues to hoover up everything it produces at the same rate, there’s not going to be enough to go round. That same rate therefore produces, at a theoretical level, a new stable price of $20,400 per BTC.
There’s a lot of assumptions here of course and we can safely conclude that a movement of that level would lead to extra speculative money coming in, but there’s no arguing with the maths at a basic level. There WILL be less Bitcoin available and the only way the price won’t change is that demand will have to reduce by 50% from what it is now at the same time. Of course it’s possible that those buying it will simply keep their original budgets the same and buy proportionally less, but that doesn’t seem likely to me either.
When talking to people about Bitcoin, something I do regularly, I always make that particular point. There’s no question, mathematically and economically speaking, that something will change around the point of the next halving and historically it has been before as demand tries to take advantage of the comparative higher availability before it happens. This is Bitcoin’s third halving, so we do have some historical data on it and this has clearly been the case before, although there’s nothing to say definitively it will happen again.
But there’s more maths. Behind the scenes, the difficulty is rising at an incredible rate as an estimated 600,000 new ASIC mining machines have come online, according to an article released just today by Coindesk. Even if you don’t agree with their assumptions, you can create your own scenarios because, again, we know the numbers are absolute and entirely transparent on the network. You can simply apply your own parameters. Bitcoin is beautiful in that respect.
But however you cut the numbers, it’s clear there is HUGE investment right now in the Bitcoin network. The bigger the network, the more secure it is and the more interested parties there are. Again, any mathematical calculation tells you that the price can only increase from here.
But that’s just mathematical certainty and what does it count for in the end?
The trouble is, we humans are rubbish at following logical courses. We like to throw a few curveballs into the mix. Collectively, we like to try and cheat a steal a bit if we can. We like to say one thing and do another. We like to make announcements that may or not be entirely true or have no chance of actually happening. We like to do stuff secretly.
We also like to spread FUD (Fear, Uncertainty, Doubt) about security, scaleability or even basic real world application if it serves our own agenda well. We like to doubt new things until they are completely and utterly proven to our own standards.
All of this means that the markets will remain driven by emotion, levels of confidence and new developments, especially where volumes are so low, comparatively speaking.
Which means, in turn, we actually have no idea what’s going to happen with any certainty when the halving comes.
And that’s why I feel very confident in predicting that the Bitcoin price will be somewhere between $1 and $1,000,000 at that point.
And you can take that to the bank.