Bright points, potential pitfalls and what you can look out for
The Bitcoin halving has come and gone. Due to the COVID-19 pandemic, governments around the world have pushed out financial stimulus measures.
We can expect inflation for fiat currency due to these measures, which has left many in the Crypto space reminding us that Bitcoin as a currency will never experience inflation, unlike fiat.
A perfect way to illustrate this point would be the Bitcoin halving event that took place right in the middle of the COVID-19 pandemic.
With a supply constantly decreasing, there is no inflation, unlike fiat currency. Should that lead to Bitcoin retaining its value?
So now that the Bitcoin halving event has come and gone, what can we expect 6 months to one year from now?
Let me give my take in this article.
What Does Bitcoin Mean To You?
Before we go any further, I think it is important to recognize that Bitcoin means different things to different people. Depending on what Bitcoin means for you, your perspective will be different.
Here are some of the common viewpoints we see for Bitcoin
- For the retail investor, Bitcoin is an asset that I will buy and hold for the long term
- For day traders, Bitcoin is a volatile asset that offers many opportunities to make money from trading (especially margin trading)
- For institutional investors and family offices, Bitcoin is an alternative asset class- used primarily for diversifying the portfolio for clients with a stronger risk appetite
- “Short the banks, long Bitcoin”- For this group, Bitcoin represents an ideology and belief
- Citizens living in countries with hyperinflation view Bitcoin as a better form of currency
Keep in mind that what Bitcoin means to you will largely influence your perspective on its future post halving.
(Sustained) Drop In Mining Activity?
The Bitcoin hash rate has dropped shortly after halving. This was to be expected since miners are rewarded with less Bitcoin now.
If the price of Bitcoin does not increase (it has in fact dropped post halving) the miners are highly likely to be earning less or even at a loss.
Bitcoin hash rate the past 30 days- taken from Blockchain.com
While transaction fees have conversely increased, can this increase make up for the loss in miner revenue post halving?
This is an unlikely scenario and even if it does happen, interest from the retail investor will drop with transaction fees only going up.
So the next question is whether miners are going to be earning less moving forward and if so what does this mean for Bitcoin?
When asked on his thoughts regarding this, Nikolaj Rosenthal, the CEO of Crypto exchange Evonax said
These 4-6 weeks are going to be crucial for the Bitcoin mining industry and Bitcoin as a whole. We have seen the price of BTC gone up significantly prior to the halving. What will be more crucial is BTC's performance post-halving
At this stage, we cannot say for sure. My guess is that as the big players upgrade their mining equipment and the smaller players close down as mining is no longer profitable, there will be even more consolidation in the mining industry.
Though probably not to the extent where the network becomes completely centralized, will this affect Bitcoin network’s security? How about the manipulation of prices? These are possibilities that are not impossible.
The Bitcoin Transition As An Asset Class
Bitcoin legitimacy as an asset
2019 was highly touted as the year of institutional investment in Bitcoin. The opening of Bakkt exchange and Fidelity Investments opening a digital assets arm were positive signs of institutional interest in Bitcoin.
Unfortunately, institutional interest has been underwhelming with a long way to go on the regulation end. There is, however, a possible silver lining post halving.
Up to and post halving, the price of Bitcoin has not been volatile by Bitcoin’s historical standards.
While this may be disappointing to traders, speculators, and even the retail investor, this may signal Bitcoin’s transition into an asset class that is no longer speculative.
Say goodbye to crazy gains and losses and hello to institutional investment. However, this is not the only reason for Bitcoin’s initiation as a legitimate asset class.
A Hedge In These Uncertain Times
As mentioned earlier, Bitcoin has been viewed as a hedge against censorship, corruption, and inflation of fiat currency. With governments around the world turning to unprecedented fiscal stimulus, fiat is likely to experience inflation.
Against this backdrop, Bitcoin is starting to be seen as a hedge against such a scenario. Just recently, legendary hedge fund manager Paul Tudor Jones was reported to have bought Bitcoin as a hedge against inflation.
Furthermore, in less developed countries where inflation is ever-present, demand for Bitcoin is likely to soar as the COVID-19 pandemic shows no signs of abating.
Wrapping It Up
Where does Bitcoin go from here? Similar to many times in the past, the answer is that we cannot say for sure.
What we can do is to lay out the possibilities and make a decision as to which scenario is most likely to play out.
In my opinion, as Bitcoin matures in a COVID-19 world, we are unlikely to see crazy demand that will lead to volatile price movements as we have been so used to observing.
However, this does not necessarily translate to a sell-off of Bitcoin. It will primarily depend on the extent of inflation in fiat currency as well as the view institutions hold regarding Bitcoin.
I do not think we will see interest from new retail investors as focus from this group has been on “buying the dip” in the stock market or other financial assets in general
What are your thoughts on the future of Bitcoin? Comment below!