Countdown to halving puts the Bitcoin market to the test

Bitcoin investors are bracing for the long-awaited 2020 halving, a supply crunch that will cut the number of new bitcoins in half.

Bitcoin prices have surged nearly 20% in recent days, surpassing the $9,000 per bitcoin mark for the first time since late February, as excitement builds for this month's price halving.

Even though the halving has only happened twice in Bitcoin’s 11-year life, the event has historically been followed by massive price increases for the dominant crypto asset. The first halving occurred in November 2012, and Bitcoin experienced a price appreciation of approximately 9,200% before halving to its cycle high a year after the event. Likewise, during the second halving, Bitcoin appreciated around 2,900%, reaching an all-time high of $20,000 18 months after the event. However, it is impossible to draw statistically significant insights from two data points, and Bitcoin faces a completely different macroeconomic environment this time around.

Heading into the halving, analysts with opposing views occupy two camps. The first camp believes that this event is already priced in; the second camp believes that the halving is not priced in and will ignite the next bull market cycle. Proponents of the first view cite the efficient market hypothesis, while proponents of the second cite the mechanism of supply and demand and the previous idea of ​​halving market cycles.

In short, the efficient market hypothesis posits that all information about publicly traded bitcoins is already factored into the price of those bitcoins. Since the halving has been known to the public and has been going on for years, market participants expect the event to be bullish, pushing up prices in the months leading up to the event and discounting higher expected future prices into the present .

Assuming this assumption is true, when exactly was the event priced in? At $10,000 in February, below $4,000 in March, or near $9,000 now? Bitcoin volatility suggests that market participants are unsure how to respond Valuation of new assets, and expected value after halving. Rather, this assumption may be best applied to more established asset classes rather than emerging ones for which there is little consensus on any valuation framework.

Basic supply and demand economics dictates that reduced supply and constant demand will lead to higher prices. Demand for Bitcoin has grown organically as individuals learn the mechanics of Bitcoin, network effects emerge, and new data surfaces showing Bitcoin’s resilience and performance as a store of value asset. Due to its liquidity and ease of storage and transfer, an entire lending industry has recently emerged, enabling retail and institutional investors to use crypto as a form of collateral for loans. In just two years, the crypto lending market has surpassed $5 billion in loan originations.

As the Bitcoin asset matures, new industries, new products, and new use cases for Bitcoin will continue to develop, which will drive significant demand.

But today, due to the impact of the epidemic, there are many uncertainties in the global economy, so there are also many uncertain factors in digital investment. Everyone should pay attention to controlling investment risks.