From the Satoshi’s Page Archive
This article reflects my thinking at the time it was written. My ideas continue to evolve, and newer articles may revisit or challenge some of the conclusions expressed here.
In the last eighteen months, Bitcoin has seen a tremendous run-up in its price. From an all-time low of $4,000 per Bitcoin in March 2020 to the recent high of $67,000. Bitcoin’s price appreciation has been phenomenal and incomprehensible to those with no idea why Bitcoin is valuable and how the software protocol works.
Many disciplines come into play when understanding Bitcoin’s dynamics. Economics is one, and as a business owner, this was the discipline that initially led to my interest in Bitcoin. Other fields include an understanding of how computer software works, how the more extensive financial infrastructure of the world works and, to a certain extent, politics. In my last newsletter, I went to great lengths to explain how politics ties intimately to money in our current society and how this is somewhat unusual historically speaking.
In the last few years, we have seen dramatic events in the political sphere. First, the Brexit vote initiated a shocking series of events for many people as the UK contemplated the end of its collaboration with the EU, then the election of Trump in the US, then the pandemic. I do not intend to write a political essay here, so I won’t go on, but you get the idea…
With political disruption and too many unexpected events, planning can become extremely tricky. When the stability of money ties to political stability, money can start to become tricky too. The pandemic has created devastating circumstances for many small businesses, including supply chain disruptions leading to empty shelves. When the stability of a currency relies on its custodians’ excellent management, and those custodians are simultaneously being buffeted unexpectedly in all directions. It creates an environment where almost anything could happen.
In a crazy world, certainty is a welcome balm. With its constraint of twenty-one million coins that the Bitcoin protocol will ever create, Bitcoin provides a level of algorithmically secured certainty. When almost everything else can fluctuate in value, one Bitcoin will always be one Bitcoin, and for many, this is a comforting thought and a welcome foundation.
However, as is the nature of these things, there can come a time when an asset can seem overvalued. Don’t get me wrong, I believe the entire world will eventually come to recognise the strength in the properties of Bitcoin, and along with this, the value of a single Bitcoin has much further to go.
The technology, however, can be challenging for some to understand. Many have invested in Bitcoin because they want the wealth that Bitcoin promises; in short – ‘number go up’, which can create precarious territory when an asset has appreciated dramatically in value over a short time. Those who are still learning and not yet confident in their new understanding can be unimpressed in their investment opportunity. The price is so much higher than in the recent past. Buying an over-appreciated asset has always been something savvy investors are taught to avoid.
With Bitcoin, we are also talking about an asset now over twelve years old, so there is a better understanding of how it works. The advantages it provides and, along with this, the destruction to our existing paradigm that a world running on Bitcoin will ultimately wield.
Not everyone is ready for that transformation, and there are those with significant resources who will fight such an outcome with everything they have. If they can’t stop it, they will at least try and slow it down.
In my book Truth Decay – How Bitcoin Fixes This, I talk about how the price cycles in Bitcoin work and how they are related to the mechanics of the underlying technology. It is worth knowing this because it provides a foundation for handling this asset. In the book, my discussions on this topic were related to businesses who wanted to accept Bitcoin as a payment method. It is essential to understand these price cycles as there is a danger that companies would acquire Bitcoin for their goods and services when the price was high, only to watch that funding deplete in value as the inevitable downward trend in price took hold.
When the price of Bitcoin moves in the way it has over the last year, it is hard to believe that it won’t keep going. All the chaos in the world right now and the features of Bitcoin give it such a substantial advantage as a monetary asset; for many, it is a definitive safe-haven asset as a place to hold their wealth.
Over a long enough time horizon, the price of Bitcoin won’t matter, but if you are a business owner, that needs to keep the business solvent and support your suppliers and staff. A drop in the price is a risk that needs managing, and therefore it is worth knowing when the end of the hype cycle could be nigh.
Over a long enough time horizon, the price of Bitcoin won’t matter, but if you are a business owner, that needs to keep the business solvent and support your suppliers and staff. A drop in the price is a risk that needs managing, and therefore it is worth knowing when the end of the hype cycle could be nigh.
I freely admit that if $67,000 is the top for this cycle, that is disappointing. There are indications that it should have been much higher. In 2013, two peaks in the price took Bitcoin from $30 to $1,300. This year, a similar move would have seen Bitcoin at $1,000,000 per coin, and many discuss such possibilities and still believe that this is possible.
For myself, however, I think this is it. My main reason for believing this is as a result of understanding how the technology of Bitcoin works. The software is programmed to reduce the Bitcoin reward to the miners every four years, which plays a significant role in the price cycles. Towards the end of the price cycle, no one is selling, including the miners, because they wait for the best price. Still, there is also a danger that if they wait too long, they won’t yield what they need from their Bitcoin sales to keep their business operations going. Once they start having to sell, things can change rapidly.
As this dynamic becomes more understood by sophisticated players in the market, slowing down the price trajectory through market manipulations makes sense by allowing the price to run earlier in the cycle. This can lead to a more muted response at the end, which we may be witnessing now.
In 2016 the halving occurred on July 9, and we experienced a peak in the price in December 2017 – just under 18 months later. In 2020 the halving happened on May 11, and here we are 18 months later, experiencing a much more muted run-up in the price compared to previous cycles. The next halving is due to occur in the spring of 2024 (the date is not exact until nearer the time as it is based on the number of blocks mined, not a specific moment in time). In the interim, miners who require electricity to create more Bitcoin; need to sell it at the best price. So it tends to be a downhill competition to receive the reward they can until the scarcity starts to ramp up again. In addition, at the moment, the increase in energy prices is a consistent topic in the news.
There is much hype about a Bitcoin ETF (exchange-traded fund) being approved in America this week and last week, which would allow investors to bet on the price of Bitcoin. Sadly, however, the last time a Bitcoin ETF arrived on the market in December 2017, this introduction coincided with the market’s peak. So although many are talking excitedly about this, I don’t see it as a good sign.
It is also worth considering that the 2017 peak price coincided with some ‘forks’ in the network. Considerable controversy existed over how the software should evolve in 2017. Once this was resolved and a chain split occurred, those already owning Bitcoin received an equivalent amount of coins on the new chain – Bitcoin Cash. Those that supported Bitcoin were able to sell these Bitcoin Cash tokens and buy more Bitcoin. So in effect, these new tokens gave those already owning and understanding Bitcoin bonus resources to purchase more of their favourite asset. This measure will also have contributed to the exponential growth of the price that year.
No such advantages have been given to the Bitcoin community this year. We now have Billionaires like Elon Musk playing fast and loose with people’s emotions over the protocol. First, he said he would accept payment in Bitcoin for his cars; then, he changed his mind. Then China decided to ban Bitcoin. So all of their miners had to pack up their equipment and relocate. The pause caused a temporary slow down in Bitcoins processing power until it recovered, and now here we are. With miners who want to sell their Bitcoin to pay for electricity and new investors who may now be somewhat cautious regarding the price.
Some final thoughts are that 2017 was the year following the election of Trump. Regardless of his personality, the general perception was that he was positive for business. The first year of his presidency, the sentiment was riding high. Now, the economy is much more fragile. The stock markets and asset prices are not yet reflecting this as people are using these assets as a safe-haven for their money.
Governments are creating additional currency using quantitative easing and other tools at their disposal to deal with the pandemic crisis. But what if these tools were to break? The unfolding drama with the Evergrande property company could be a Lehman moment for China that reverberates worldwide. Perhaps the tools that the central banks have access to will avert yet another crisis – but then again, what if they won’t this time? It may be wise to hedge your bets as a consequent sudden removal of liquidity from the markets would impact all such assets – including Bitcoin.
Risks are present, indicating that it could be down from here price-wise for a while if things were to play out negatively. So if your portfolio is looking rather heavy in Bitcoin, now might be a good time to consider a rebalance.
Until next time enthusiasts!
Victoria
Nottingham University Lecture
Watch my explanation of Bitcoin given to the postgraduate students at the University of Nottingham in May 2021.