Is the big test for Bitcoin finally here?
By Frank Schuil on The Capital
One of Bitcoin’s biggest promises is to be a reliable store of value. A hedge against everything that is traditional finance protecting your purchasing power. A defense against monetary policy. Satoshi Nakomoto made that abundantly clear when it included a reference to bank bailouts in the genesis block.
A decade later and we have seen the longest bull market in history, a 12-year streak, with Bitcoin’s biggest promise untested. Now, this may finally change. The stock market’s six-day correction sparked by the fears for the Coronavirus may be the prelude to a bear market.
What are we looking for?
To fulfill the premise of a hedge, one would expect to see asymmetrical price action. That’s the answer fortifying the gold analogy that our industry has tried to sell as a key narrative. This argument, however, is secondary to the price action correlating to the underlying protocol. In particular, the halving of supply. The next one will take place in approximately 71 days, when newly minted bitcoins rewarded to miners will drop from 12.5 bitcoins per block to 6.25 bitcoins per block.
The last time this happened in 2016, we saw a steady increase in price until an inflection point was reached in 2017, and Bitcoin set a new record price. Having witnessed three bull markets and subsequent bear markets, this is likely not yet priced in. After the 2016 halving, there was pessimism as the price seemingly didn’t respond to the reduced supply, only to explode the next year. This time around, we may see a very similar pattern emerge. The halving itself will be relatively uneventful, but over the course of 2020/2021, we could see a steady rise in the price until new highs are set. As can be seen in the logarithmic chart below (there are many variations of this chart, so I picked one I found on Tradingview), Bitcoin has been consistently following this trend.
A break from this trend would have one question whether Metcalfe’s law applies and whether Bitcoin is resistant to Mr. Market. On the other hand, if we were to see a recession hit the stock market while Bitcoin continues to trade within its long term trend, it would signal that Bitcoin is indeed the digital store of value it set out to be.
Alternative scenarios
While Bitcoin is the first and largest cryptocurrency, there are many following its footsteps. Its runner-up Ethereum is planning to release a protocol change around summer. After failed promises of the past, developers are confident with 95% certainty that they will deliver. Ethereum 2.0 is developed to see throughput on its blockchain compete with the largest financial networks in the world. It can then serve as a catalyst for the DeFi movement that could push the price of Ethereum’s currency Ether (ETH) up and challenge Bitcoin’s (BTC) dominance.
The last time Bitcoin’s position was challenged in 2017, the highly anticipated flippening was close. As can be seen above, it never happened. The overall cryptocurrency market, therefore, continues to follow Bitcoin’s upward or downward price movement. This is at the core of the above-described trend. In case Ethereum would take over the baton of Bitcoin as the leading cryptocurrency by market cap, it may dictate the overall cryptocurrency momentum from there on out. Once it does, the trend would be harder to predict with Ethereum’s planned move from proof-of-work to proof-of-stake that introduces different economics.
Conclusion
When we finally see a recession in the stock market, it will be thrilling to see if and how the cryptocurrency market holds up. A stern warning for those who anticipate to trade on the long term trend. With such a crucial test ahead of us, price manipulation could make it seem like fundamental levels are broken. Your HODL or not to HODL decision should probably be made before the fireworks set off.
