bitcoincryptocurrency

Is Bitcoin Suitable Instrument to Get Over the Crisis?

Is Bitcoin suitable instrument to get over the crisis?

Bitcoin went through its third ‘halving’ without much public attention. Bitcoin ‘halving’, occurring every four years, only took place twice in the past. 

International Monetary Fund forecasts global economy to decline in 3%. Country economic forecasts predict the U.K. (BoE) to drop far below 25%, Germany in almost 18%, and the U.S. to decline in 15%  in the worst case scenario. These predictions could lead to estimations that Bitcoin could serve as a suitable instrument to ensure price movements of traditional currencies. And that is supported by lower Bitcoin supply. 

Yet, it’s important to point out that the often declared Bitcoin non-correlation with other instruments isn’t as obvious as some investors wish or believe it to be. Asset correlation states how similar or different two entities are in their behaviour, and whether they respond to macroeconomic trends similarly. If Bitcoin did not correlate with other risk assets, such as S&P500 or currencies, it would serve as an ideal and universal instrument, most of all due to its deflationary aspects. However, a different perception could be that the Bitcoin aspect is already taken into account in the current price and would not affect Bitcoin (BTC) value at all. 

First transaction on BTC block chain happened on the 3rd of January 2009, when Nakamoto generated 50 bitcoins. In the white paper, Nakamoto specified that after every 210,000 blocks the reward for miners will half. First halving took place on 28th November 2012, when the reward dropped to 25 from previous 50 bitcoin. Second halving happened on 9th July 2016 and the reward lowered from 25 to 12,5 bitcoin. And the third, most recent halving on 11th May 2020 means that bitcoin miners receive only 6,25 bitcoins. Even though, there’s no clear explanation to why bitcoin halving happens, most crypto experts agree on similar explanation – it concerns yields. 

Prior motivation reward, which served as a marketing tool at the same time, also lowers with bitcoin amount, its expanding and its probable price growth. Yet, the clear and logical assumption is in conflict with dynamics of bitcoin valuation, which causes an opposite effect, that is a deferred consumption and bitcoin transition among volatile and speculative tools, rather than to category of transaction exchange instrument. 

From the perspective of currency as such, speculations on bull market don’t affect the situation much, as can be seen in the above mentioned effect of supply reducing. However, there’s evident bitcoin market tightening and dynamics of price development in the period of mining reward decline, that is lower supply on the market. 

From a speculative point of view, a possible price growth dynamics in the period between reducing of mining profitability, offer tightening and another progress in 2024 is currently the main issue. 

Regardless of its volatile aspects, bitcoin can be a major player on the institutional level. A change in the number of speculative investors into transaction movement benefits, which will happen sooner or later, will affect bitcoin price and remove its excessive volatility while keeping a constant long-term growth.

In spite of the optimism by the crypto community regarding Bitcoin’s “anti-crisis” character, Gulf Brokers warn against strong risks that imply all the crypto currencies  including Bitcoin. Basically, there are two major of them: one is an arrival of even stronger crypto which would redirect the demand from Bitcoin and, thus, cause its price fall. The other one, that we can already see, governments and central banks represent. As the power of Bitcoin grows, there are more tendencies to regulate the crypto currency. No matter what kind of regulation to be deployed, it is almost sure, it will go against the value of Bitcoin.

Syam K.P.

Chief Analyst

Gulf Brokers

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