Halving forms Bitcoin’s price bottom

This article refers to discussions in the Pied Piper group. In addition, Liu Jiaolian, Xiang Yang, RLpeng, and others participated in the discussion. The topic is, Is Bitcoin’s four-year halving market still alive? Generally speaking, if the rules are the same, there will be a repetition effect, but because the scenes that appear each time are different, they will be different. This article brings together everyone’s views.

What determines the bottom?

Let’s look at the on-chain data in the figure below (provided by https://studio.glassnode.com/dashboards/btc-core-on-chain):

Figure 1 The relationship between the 7-day average number of new addresses and currency price Bitcoin: Number of New Addresses (7d EMA)

The black line is the currency price. The red line is the number of addresses.

The most significant increase in new users occurred on November 27, 2017, which was 602,000, and the price on that day was US$17,000. On December 4, 2020, the price exceeded US$35,000, and the most significant number of new users that day reached 530,000. However, the number of people did not exceed that of 2017. It is not a good sign, indicating that the stimulus to the market is not as good as that of 2017, but it is close. For Bitcoin to surge, the number of new users must exceed the growth in the last two times.

It was halved on July 9, 2016. On November 27, 2017, the number of new users was 602,000. On November 18, 2017, the price reached a high of $18,000.

Halved on May 12, 2020, and new users reached a high of 530,000 on December 4. The currency price reached a high of $69,000 in November 2021.

Figure 1 also shows several characteristics:

1. It is very obvious that the bottom of the number of new addresses is gradually rising. In other words, the number of new people has continued to increase. The difference is that the slope has changed in the third period. PlanB’s model and rainbow bar both predict exponential growth. When the number of people does not increase exponentially but tends to have an arithmetic slope, models based on exponential growth, such as PlanB, will have problems.

2. Price increases will drive new users to enter the market. As the number of new users drops, prices will inevitably drop.

3. There is an expectation of halving in four years to drive up the price. Once the price rises, it will trigger the entry of new users.

4. There is not much difference between the two halving cycles and the time they reach the high point.

5. During the second halving in 2016, new users were positively correlated with coin prices, while the third halving in 2020 had little correlation.

6. The influx of new people is continuous. When the coin price rises rapidly, more new people enter.

Figure 2 Bitcoin: Number of Active Addresses (7d EMA)

The number of active addresses positively correlates with price, and the correlation weakens after the third halving.

The black line is the price.

Figure 3 Bitcoin: Number of Transactions (7d EMA)

The black line is the price.

Figure 4 Bitcoin’s trading volume Bitcoin: Total Transfer Volume (7d EMA)

Comparing Figure 3 and Figure 4, Figure 3 shows that there are many transactions, but it does not correspond to the transaction volume in Figure 4. Online transactions require real money as handling fees, and fraud is impossible. Judging from the experience of the stock market, when the trading volume is minimal, it is the bottom characteristic.

Figure 4 shows it very clearly: the market with large trading volume in 2017 was short-lived. The number of users will not increase much in 2021, but the transaction volume will not decrease so that it can maintain a high level. This time, funds entered the market, and the situation was completely different from 2017. In a previous article, when I answered a big question raised by a child (chainless.hk), I said that gold has recovered and stocks are also high. You need a reason to buy Bitcoin. Impressing retail investors is entirely different from branding funds. The fund has a broad horizon and many choices. My conclusion is that the user characteristics of Bitcoin have changed. There is little chance of a big market after the halving if no new narrative exists. It will be a big market when Bitcoin reaches 120,000 in 2023. It requires the construction of recent news just for stimulation.

The Internet makes costless reproduction possible, thus creating an economy of surplus. In this case, all economic logic of the industrial era must be rewritten. Except for the industrial inflation caused by the Russo-Ukrainian war and the reorganization of the world financial supply chain, excessive currency issuance did not cause inflation. The reason is that the capital market is a currency reservoir for the excess economy, and the impact of interest rate increases on the industry is far less than that of changes in the capital market. Big and fast. Bitcoin still belongs to the capital market, its trading properties are fragile, and it is positioned as a safe-haven asset. However, the central bank chose gold instead of Bitcoin. Bitcoin is unlikely to rise sharply if it cannot be integrated into the mainstream economy. Because the amount of funds needed to drive the increase is now different, this point of view is also in the article.

The data of cryptocurrency is transparent. Halving means that the supply is reduced by half, which in turn should bring about a doubled increase in value. This doubled benefit is not reflected at the top but at the bottom. As can be seen from Figure 4, the second halving cycle created a double bottom, 4,000-5,000; 8,000-10,000; will the third halving also make a double bottom? The cycle in the first two years was at the bottom rhythm of 16,000-20,000, which has doubled. The current computing power can barely break even. Enter the replacement cycle of the next mining machine; the next two years will. The bottom level of 38,000-40,000 reflects the benefits of halving, allowing the machine to be replaced with a new one. If the price does not rise, it will affect the next wave of market trends. There is an obvious correspondence between the bottom and the computing power. The secret of Bitcoin is that it has a computing power base similar to gold’s cost base. If Bitcoin does not have a computing power base, how can it have value as a store of value like gold?

The period from half a year before the halving to one year after the halving is the opportunity period. Once every four years, you will have a great chance of accumulating money after falling. Once you gain inertia from success, you will have a market that happens once every four years. Funds are the first drivers of growth. No one tells the secret of making money, but the underlying logic remains. It’s just that this time, it stayed at a high level for a long time. As can be seen from Figure 4, the trading volume is minimal, indicating that there are many hold-up orders. In this case, there may not be a double bottom. If so, the bottom of the next halving cycle should be 38,000- 40000. It broke the psychological expectations of all Bitcoin insiders. Maybe the currency circle needs an awakening to reach a consensus. I hope that big news will emerge, making the bottom of the next cycle far exceed 40,000.

What determines the top?

A combination of short-term supply shock and external factors forms the bull market’s top. Every cycle of price increases will bring an influx of new people, which is reflected in an increase in the number of new addresses. The increase in new entrants further promotes price increases, which Soros calls reflexivity. Reflexivity is called positive feedback in the field of self-control. It is not self-stability but self-oscillation feedback. Just like the howling sound of a microphone, it will drive the price to a height far away from the reasonable range in a short window.

Although halving is certain, most people worldwide do not understand or know it. For the vast majority of 7 billion people, this certainty does not exist. When they know, understand, and pour in, and then, when the buying power is insufficient, uncertainty collapses into certainty, and the price establishes a computing bottom. If the increase is large, the computing power will be large. The increase in new computing power means the elimination of old mining machines. Historically, the price of Bitcoin has more than doubled every time it has been halved. Can we predict that the bottom of the next cycle will be around 40,000? In fact, this is just a reference indicator. Because what are the machines and production capacity of three nanometers? Only mining machine manufacturers know this, and people are unsure about clean energy policies. In addition, the increase in computing power is also determined by the height of the price increase, which is also reflexive. So, it’s not a math problem. There is a very intuitive chart for the growth of computing power in a period. The cost of computing power is easy to calculate to determine the bottom of the computing power. The computing power is limited to a range because there are many models.

According to Buffett, speculation is unpredictable. He is also right that Bitcoin is not a means of production. Bitcoin is a demand valuation, and only effectively constructed demand should be the fundamental reason for Bitcoin’s rise. If the computing power market can only bring about a doubled increase, it will not be attractive enough. It takes stimulating news like Musk’s for the price of Bitcoin to reach more than 60,000. The current price has fallen back to a position not high from the computing power moat.

Currently, history is at an inflection point. Cryptocurrency is an insufficiently researched field. How do we design demand? If Buffett were to buy Bitcoin, it must align with Buffett’s theory. His theory is not a monetary theory but a theory of value assessment, and the Bitcoin dollar standard (see chainless.hk) can be consistent with Buffett’s theory, allowing the bottom of Bitcoin to continue to break away from the doubled valuation and create a new computing power bottom. The computing power may be doubled or tripled.

Halving means letting a fixed butterfly flap its wings every four years. Whether it can form a hurricane depends on the efforts of all of us. If you want to wait for the market, just like Bitcoin’s previous cycles, the computing power at the bottom of the next cycle should be around 40,000. Which have limited appeal to mainstream funds. Of course, funds that make money every time will not give up this opportunity to profit without losing money.

Bitcoin is relatively certain to have a computing power bottom, and gold has a cost bottom, collectively called a price bottom. There is no price floor for stocks and bonds.

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