By Obi Nwosu, CEO and Co-Founder, Coinfloor
In such uncertain times we could all use a little good news – and what could be better than free money for all?
So, imagine my delight when I chanced upon a recent Facebook posting that seemed to promise exactly that:
“Guys no joke, buy some Bitcoin now, and just hold onto it for 10 days, which is when the Bitcoin ‘halvening’ or ‘halving’ occurs, THEN SELL! All of the bitcoin left in existence that hasn’t been ‘mined’ or extracted and put into circulation yet, suddenly gets halved.”
A little learning is a dangerous thing, and sometimes half a truth can cause more harm than no truth at all. We should always be suspicious of get-rich-quick schemes, so let’s do what any wise investor should and critically examine the claim that the halving is a chance to make a ton of money in the blink of an eye.
Don’t invest when you only half-understand
The regular halving of supply was built into Bitcoin from the very beginning. But its actual impact upon Bitcoin’s value is widely misunderstood.
For an example, let’s return to the Facebook post, which continues: “So imagine the world’s supply of gold or diamonds and if it was reduced by 50%, the price of both would SKYROCKET!”
This expectation of instant explosive returns is a basic (but common) misconception, so let’s deal with it straight off the bat. While it’s true that, historically, each of the two previous halvings preceded a meteoric rise in the US dollar price of bitcoin, it took a year after the first halving for the value to peak, and eighteen months the second time around. Will we see a faster rise in bitcoin’s price this year? Possibly. Will the value leap to its peak within a day or two of the 2020 halving? Unlikely. Is making short term bets on bitcoin’s value a sensible investment decision? Absolutely not.
Don’t get me wrong: the halving is a major event which many are convinced will have an impact on bitcoin’s value in the medium to long term. As with any investment, though, you shouldn’t buy bitcoin with the expectation of an immediate payday. In fact, the wisest tactic for anyone who’s new to Bitcoin is to learn as much as they can about it, instead of rushing into an investment that they only half-understand.
Time to take stock
So, what does the halving really mean for bitcoin’s value? Let’s look at what the proponents of short-term profit have got (half) right. As we’ve seen, it’s not the bitcoin supply that is halving, but rather the flow of new bitcoins into the market. This affects the stock-to-flow (S2F) ratio, where halving the rate of bitcoin increase will double the S2F ratio.
It’s at this point that we enter the realm of real rather than fantasy economics. As we see with precious metals and other commodities, the higher the S2F ratio the harder it is to obtain more of it – and so, in theory, the value will tend to rise over time.
But any economist will tell you that the real world is a great deal messier than the “perfect” theoretical models of money. And remember, the halving is not taking place in some kind of financial laboratory, but in a competitive market. Bitcoin mining might seem like a licence to print money, but in reality most miners operate on tight profit margins. So, when the flow of bitcoin reduces – along with the reward for mining a block – its first effect will likely be to put such a squeeze on the market that many miners are forced out of business.
In the long term, this may well contribute to a higher price – but so may a million other, unrelated factors. Indeed, bitcoin’s value might just as well fall in the short term as the market comes to terms with the turbulence that the halving brings.
And that, of course, will leave our Facebook friend with egg on his face – and some serious explaining to do.
Sure, I’m excited as everybody else to see whether there will be another big, post-halving spike in bitcoin’s price. But I’m not going to advise selling one’s house to fund a bet on an instant post-halving price pump. (Elon, hopefully that’s not why you’re getting rid of all your possessions!)
Because the best way to get rich is to do so slowly – and for the right reasons. Ask yourself this: Am I buying bitcoin because I think the price will rise tomorrow, or am I investing because I truly believe in this currency’s power to change the world? Do I want to bet on the incredibly unpredictable daily peaks and troughs in the market, or do I want to track long-term trends by purchasing regular, affordable amounts regardless of the day-to-day price – a strategy borne out by bitcoin’s historic performance?
Yes, it takes more than a little learning to succeed with any type of investing. The seeds of success lie in gaining as much knowledge as you can from multiple, independent sources, and not from a Facebook post promising instant profits.