Forget Halvening, The Real Driver Will Be Crypto Derivatives
There is plenty of speculation on what to expect from BTC, in terms of pricing and how the current economic conditions will impact us.
Recently, it was reported that “With a second stimulus check handout on the way, less than 1% of the $478 billion in cash is needed to buy up the entire year’s Bitcoin supply.” However, whilst this is mathematically true, we know that the decentralisation of digital currency prevents govt control and it is only being adopted by very few large banks at this present time, Couple this with the well-known volatility of BTC and the recent demonstration of stimulus effect on the US Stock market (further panic selling) I feel that such a stimulus would likely not be beneficial to BTC as a whole.
Besides, BTC pricing has other concerns at present. I have seen some associate the halvening to quantitative easing; however, I see this more similar to a reverse stock split. A reverse stock split consolidates the number of existing shares into fewer, proportionally more valuable, shares, but does not directly impact a valuation. However, it often signals distress since it raises the value of otherwise low-priced shares. Typically, this is only a temporary solution, as it does not really add or take away any value, therefore it is more smoke and mirrors to make an asset appear more attractive. By not addressing the actual problem, there can not be a long term solution.
The halvening, which is meant to control supply and increase the price, is really to make a BTC seem more attractive, which remarkably inflates the price. Think of a way to ensure the price of BTC stays over a certain point. Have you noticed how it always seems to happen right around a price crash? There is any number of reasons behind this, miners preemptively sell BTC holdings, exchanges liquidating their fees in the prior week and more, this only generates further downside pressure. For instance, after recent Halvenings, such as December of 2018, the price of Bitcoin rallied from $3,100 to $14,000 in merely seven months by June 2019.
There is no denying that reducing the production and as such the supply will increase the price, but unless there is a change in demand and market acceptance it will not hold. Interestingly enough derivatives have entered the market, and are only growing. That coupled with the halvening is why we were able to rally and decouple from the broad base equity market amidst COVID.
Bitcoin Price Prediction
As we approach from the $10,000 mark for the 11x in recent months we are met with big resistance, so once again, the price fell back sharply. Derivatives could push us over the hump.
Historically, adding derivatives to any asset class has immensely increased the volume, and as well as the price. Derivatives are preferred to spot because it allows investors to hedge positions, increase leverage, and speculate on an asset’s future price. Theoretically, if derivatives are traded properly one can increase returns and mitigate risk to maintain the same prior risk profile. A great example is Palladium, which in the 80s became more cost-effective for automakers to use, so the price doubled. Yet, the price stayed there for about the next 15 or so years until the introduction of the CME in 2007 and derivatives products. Within a few short years, the price re-doubled.
While Halvening effectively reduces supply and the increasing price seems great, it poses an entirely new challenge. What will happen to liquidity? Many Crypto Exchanges already have massive issues with liquidity at current volumes, what will happen as volume increases?
With the supply of bitcoin reducing, introduction to derivatives products, and continuously increasing volume it is imperative that crypto exchanges utilize crypto liquidity providers and crypto market makers.
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