Look to past halvenings, say investors, but also consider how the environment has changed
Bitcoin enthusiasts love to talk about the day when the currency will “go to the moon.” Less discussed is how, exactly, it will get there. After all, spaceships require fuel to propel their exits from the atmosphere and subsequent journeys through hundreds of thousands of miles through outer space. Some believe a powerful “propellant” may arrive in May 2020 in the form of a scheduled Bitcoin halving, in which the number of Bitcoin awarded to miners is scheduled to be reduced by half, increasing the cryptocurrency’s scarcity.
The Halvening, as it’s somewhat apocalyptically known, occurs quadrennially and is generally considered a catalyst for increasing prices based on principles of supply and demand. Satoshi Nakamoto built halvenings into the Bitcoin protocol to hedge against inflation.
In the one-year period following the 2012 Halvening, Bitcoin’s price jumped from $13 to $1,032. During the same time range following the 2016 Halvening, Bitcoin’s price rose from $651 to $2,518. Bitcoin then hit $20,000 in 2017, exceeding most analyst price predictions. This would seem to suggest that halvenings result in, or at least correlate to, major price leaps.
Will There Be a Parabolic Run Redux for Bitcoin?
Despite being dismissed as both a fraud and a Ponzi scheme during its 2017 bull run, Bitcoin continued to make gains in part because of the hype around blockchain technology, which drew more investors into the ecosystem. Most of these investors were retail traders attracted to the prospect of quick profits. Thin liquidity volumes coupled with increasing media chatter translated into extreme volatility for the currency. Still, not even a fresh batch of scams and a steady drumbeat of high profile economists trashing Bitcoin could tarnish its appeal.
Now consider the crypto ecosystem of 2019.
While there are some contextual similarities with previous halvenings, there are also major differences. Bitcoin’s price crashed by more than 80% in 2018, just as it had at other points in its history. But the 2018 crash had less to do with speculation than with an assessment of Bitcoin’s capabilities. As mainstream bankers deepened their involvement with crypto over the course of 2018, they began expressing concerns about its potential.
In August of 2018, Goldman Sachs predicted that Bitcoin and other cryptocurrencies would not “retain value in their current incarnation.” Bitcoin’s skyrocketing prices were a thing of the past, the firm claimed. The financial company argued further that cryptocurrencies did not fulfill the traditional roles of a currency, including scalability as a form of payment. JP Morgan CEO Jamie Dimon and renowned investor Warren Buffet similarly derided the digital currency.
At this year’s SALT investment conference, Nouriel Roubini, an economist who had successfully predicted the 2007-2008 financial crisis, declared that “crypto is the mother and father of all bubbles.”
But these assessments by naysayers should be taken with a grain of salt. Even as they are publicly skeptical about crypto and its limitations, institutional firms have begun to incorporate the currencies into their operations. JP Morgan has launched Quorum, a blockchain initiative, while Goldman Sachs is reportedly setting up a trading desk for Bitcoin, and Bank of America has been snapping up blockchain patents.
Cryptocurrencies need institutional investors and the liquidity they bring in order to grow, and institutional investors prefer more stable assets. Therefore, if institutional investors do make a mass entrance into the space over the next year, we are likely to see a more measured growth trajectory, one which provides returns generated over a period of time, rather than the volatility we’ve become accustomed to — even with next year’s Halvening.
Put another way, the days of lambos parked outside of crypto conferences are probably numbered.