Wake Me Up for the Bitcoin 2020 Halving Party

By Edward Wong on The Capital

Published in

The Capital

10 min readMay 8, 2020

May 12, 2020 AD. The greatly anticipated Bitcoin 2020 Halving is soon to be in the books. The number of crypto wallets have grown about 5x¹ since the last 2016 halving event. How will this affect the price of Bitcoin in both the short and long-term?

Harry looks at his watch nervously, 5:17AM. Just two minutes since he last checked it, and probably just two minutes before he will check it again. Amidst the long queue of autos encircling the block, he idles his car along. He can feel the anxiety ratcheting up second by second. By now he has settled into a familiar pattern. He counts the cars ahead of him. He repulses the next pan handler. He takes a sip of coffee from the Greek blue and white paper cup. He looks across the street to scan if his friend Alex has arrived. He checks his watch. Rinse. Repeat.

Alex pulls alongside the Bowery in his Olds 88. Perfect timing. A quick greeting and the two men unscrew their semi-rusted license plates in the dark, cold, blustery, winter morning. But at least there were no fist fights that day, a common sight of the odd-even plate policy during the gas shortage crisis. You categorized your friends based on the last digit of their plates in case you ever need to rotate a gas favor way back in the pre-app days. But gas is gas. It is the lifeblood as depicted in the post-apocalyptic Mad Max series. Turns out Mel Gibson is actually madder than Max. Life is stranger than fiction.

The Great 1973 Oil Shock Embargo Crisis

The Great 1973 Oil Embargo was the perfect storm of its day. The fixed currency exchange framework after World War II, known as the Bretton Woods system, would ensure global stability and prevent participating countries of purposely gaming their own currency in order to artificially bolster exports. Since the US was by far the major economic power and held about three-quarters of the world’s gold reserve, the system initially worked fine as the US dollar pegged gold convertibility at $35 an ounce. But by the 60’s Europe, led by Germany and Japan, were economically rebuilt becoming more competitive to US and lowering its share of the global economy. Bretton Woods, being a fixed structure, started buckling under the weight of global trade re-balancing. Under the pressure of high unemployment and inflation, Nixon decided to make a pact with the devil in 1971 that would be the abandonment of the gold standard, which allowed the dollar to float. But, since oil trade is denominated in US dollars, and hence the name black gold, oil producers became upset by their income losses. The dollar is now backed only by trust — in the US government. With the central hub of the Bretton Woods system displaced, the other fiats soon followed. Gold now floats completely free from any fiat. That is why during times of crisis, gold has always been the standard for safe haven as evidenced by nearly a 30% jump since mid-Nov due to the Covid-19 crisis.

The actual crisis started in 1973 when Egypt and Syria attacked Israel prompting a quick response by Nixon to support Israel by sending weapons and supplies. This was the justification that Arab-dominated OPEC waited for to immediately target an oil embargo against the US and other Israeli-supporting nations, using oil as their foreign-policy weapon of choice. The message was clear and the shock was felt, but in the end, Israel did not retreat, leaving the legacy of the Palestinian conflict in its current wake while the US and Saudi remain in an ever-cautious alliance.

The Factors of Production

Oil production strategy is very sophisticated. Maximizing the ultimate recovery of your reserves versus maximizing return on investment from the field, while not contradictory, may not always align. Usually the plan goes astray. What about balancing short and long-term objectives? What are the opportunity costs forgone to convert more oil for other cash investments? What are the current and future market scenarios? What about economic factors? Will inflation be low or high? Global GNP? What are the chances that a new super economic power, like China, will emerge and spike the thirst for oil? Likewise on the supply side what if new, undiscovered, super-giant oil fields are found? Are new extraction technologies in the pipeline such as the post-2000 fracking? And oil extraction costs are not uniform, ranging from a high of around $83 per bbl for shale (fracking) to about $3 for the Saudi Aramco fields.² Different fields in Saudi Arabia will also have wide variance in costs, and even the same field will become increasingly more expensive once the low hanging fruit of the primary recovery gives way to different methods needed for the secondary and tertiary recoveries of the more mature fields. This is why the Saudis shroud the estimates of their proven reserves as a national secret, choosing instead to disclose only dubious unverifiable figures.

Remember, these are just the domains that an oil producer knows about. Discovery of an entirely new energy source would really throw another monkey wrench. Then there are new technologies. For an example, AV vehicles, developed out of recent advancements in AI and LIDAR, are serious threats to big oil. Self-driving smart cars, directed by an app, can almost completely eliminate the need for individual car ownership. Private cars are used on average only one hour per day. A simple extrapolation would eliminate about 23 out of 24 cars on the road today freeing up traffic, phasing out needless chauffeurs to drop off kids at soccer practice, and reducing the wastefulness from parking and auto manufacturing. Then there is always the geopolitics, the cartel permutations, and the never-ending squabbles to keep everyone up at night. It’s enough to make the Saudis buy 3 of the top supercomputers humming along to do production optimization, exploration, and what-if scenarios.³ One can assure that new algorithms with virus pandemic fallouts are being programmed into these systems as we speak.

Is Gold Inherently Valuable

I’ve eaten 24k-gold foil on top of pastries once before at Tabla. Audiophiles swear by the 24k-gold plated cables improving the musicality and tonal sweetness of a pair of Quad-ESL 63’s driven by a vacuum-tube Audio Research SP-3 pre-amp. And although diamonds are a girl’s best friend, you’ll never hear a complaint when gifted with a gold ring or necklace. Native-Americans valued gold, but only insomuch as it was used for decorative purposes as it was easy to work with and it is kind of pretty. Yes it is. But not until the arrival of Columbus and the Spaniards that the value of gold in the New World was elevated to the equilibrium levels of the east. But besides the aforementioned, gold has little to no inherent value. That doesn’t mean I will get upset at anyone dropping a few Kruggerands on my doorstep tomorrow, but please let me know first. Gold is very valuable, but it’s still a man-made construct.

Hypothetically speaking, if superior aliens were to invade Earth tomorrow in order to seek new sources of wealth in the form of, say water, what would happen? Water functions as money in their world, as it is used for means of exchange, unit of account, and store of wealth. They don’t trust fiats. Water is fungible, durable, divisible, recognizable, and scarce in their world. The earthlings ask, yeah but don’t you need water for drinking? No, we have what you earthlings call alcohol for drinking. Give us water and I will show you videos of funny spaceship accidents from our home planet. Enough with the small talk Earthlings, take me to your leader! He’s busy right now, he’s playing golf. Wanna come to our Bitcoin Halving Party? Joking aside, if the planet’s water or oxygen supply were suddenly to be depleted, it would make the 1849 gold rush seem like uh, oil traders scrambling out of the futures pit during the Covid-19 crisis.

The Bitcoin Halving Test Event

Bitcoin shares a lot of similarities with oil as they both have significant mining costs, coupled with supply and demand constraints which are vastly complicated by geopolitics, economics, regulatory, technology developments, capital markets, and unforeseen crisis. The upcoming halving event on May 12, 2020 is going to reduce the supply flow rate from current 12.5 BTC per block to 6.25. This is essentially doubling the cost of production overnight. The Saudis, as the lowest cost oil producer, tried to play this hand against the higher cost frackers. By increasing oil supplies by 25% it would drive oil prices down forcing the other producers, squarely the US frackers, to fold. But it’s a high-stakes game and the other participants played their own hands, namely the inability of OPEC to agree on the numbers. And then the Covid-19 took out the whole table. In Bitcoin, the miners, are akin to the Saudi’s with their oil production. The bulls will say Bitcoin will rise in price to cover the miners increased cost, as demonstrated by the previous two halvings.

One needs to remember two things. Contrasting Bitcoin, oil is a nonrenewable resource. The new supply of 6.25 coins per block is flowed against an every expanding supply of existing stock, and it slowly approaches to zero when the final 21 million limit is reached negating the supply-side effect of the miners. In simple terms, halving puts upward price pressures on Bitcoin but with each successive halving having a diminishing effect on the miner’s hand until the 21 million coin hard limit.

Is Bitcoin Inflationary or Deflationary?

Satoshi Nakamoto created Bitcoin to mimic gold in that both takes energy to mine. While both are scarce, gold is still the historical and reigning de facto standard for store of wealth. Inflation is defined as the increase in the money supply not backed by gold or a decrease in purchasing power. Since Bitcoin is NOT backed by gold its inflation is about at 3.6%. After the halving event, its inflation will be reduced by half to about 1.8%.

But not so fast. If you use the purchasing power definition of inflation, then inflationary/deflationary debate of bitcoin is really a technical term on whether one is bullish (deflationary) or bearish (inflationary) when priced against the US dollar. One should adjust for comparison to real dollars, meaning adjusted for inflation of the dollar itself. In other words for Bitcoin to stay even at $9000/BTC, and if the dollar undergoes inflation of 10%, then Bitcoin would need to rise to $9900 just to maintain the same purchasing power. Satoshi factored this in by hardcoding halving events every 210,000 blocks, or about 4 years, with a hard limit of 21 million Bitcoins. This is why as central banks are relying in massive quantitative easing by printing money, folks are increasingly moving to Bitcoin as the countermeasure to safeguard wealth.

Conclusion

The Sunoco gas station on Bowery and East 3rd Street where Billy Joel would sing “Uptown Girl” to his future wife, Christie Brinkley, is long gone. They’ve since divorced. Starbucks has replaced the once ubiquitous blue and white Greek coffee cups. US oil prices traded below zero for the first time ever, meaning producers or traders were essentially paying other market participants to take the oil off their hands.³ Why can’t we just put it back into the wells? Bless the dear President who is always looking out concernedly after others. If only it was that simple. Euthanized livestock and down-the-drain milk is the result of a complex, global food supply chain. So is trying to pump oil against the back pressure of a well. Who could have even imagined the current scenario when Harry’s hands were being knifed by the bitterly cold wins while swapping license plates? And that is the point. No one knows.

A great in-depth analysis about why the halving event is significant and interesting but by itself not a good impetus to make a bitcoin position, take a look at Novum Alpha CEO, Patrick Tan’s article⁴.

We are still in the infancy of the newly created crypto-asset class evolution. The crypto naysayers remain resolute and will stubbornly persevere with the flat-earthers. Nothing wrong with that. Bitcoin and crypto overcame its stonewall moment during the crash of 2018 and continue to rise from the ashes. Viruses, wars, crisis after crisis, new technologies, and finicky dynamic markets are going to affect prices way more than any event that has been future-pegged way in advance, even if you don’t believe in the efficient-market hypothesis. I am very bullish on the long-term prospects of Bitcoin and cryptos in general, but not because of the halving event. There simply is not enough data to try and predict the future based on events that have happened only twice before. Challenges remain, work still needs to be done. Happy Halving Day and be safe!