As the BTC price is rising again, scoring a value next to 55,000 dollars, lots of people are asking themselves if Bitcoin is a good investment now, or if it is better to wait.
At this point in the Bitcoin story most people have heard of the world’s first decentralized cryptocurrency. Bitcoin is powered and secured by a highly secure consensus model known as Nakamoto consensus that’s reached by proof-of-work. Bitcoin [BTC] recently eclipsed a $1 trillion market capitalization for the first time. Many people waited until the Bitcoin saga couldn’t be denied any longer and are now asking, “is now a good time to buy Bitcoin?”
Bitcoin is a currency based on a distributed network held together by mathematics and a set of absolute rules [the protocol]. Within this set of rules are a number of things that make this network so secure and so sought after in the digital epoch. One important rule that is built into the code is the finite supply of 21 million coins and the journey to the finite supply set in the code.
An important thing to consider when investing in BTC is the Bitcoin halving. May 11, 2020 marks one year since the last BTC halving and the price was just under $10,000. Each BTC halving sees a reduction in the future supply of Bitcoin’s awarded per block by ½. This is known as the ‘Bitcoin halving event’ where the block subsidy is reduced. The event is celebrated in the Bitcoin community because mutatis mutandis the price of Bitcoin is going to increase post halving. The last block subsidy reduction saw a 12.5 coin subsidy reduced to 6.25 new coins per block. The next block reward halving has an ETA of around 1,100 days currently.
The halving sort of sounds like an arbitrary part of the Bitcoin paradigm but it’s actually a rather key indicator [yet just one] that’s been responsible for what have on average been 2 to 3 year bull cycles followed by a similar bear cycle ever since the genesis block of the Bitcoin network was mined.
Looking at Bitcoin’s historical record with regards to cycles is critical. Consider Bitcoin’s first major top of $31 in 2011 and where it made a top after the first Bitcoin halving on November 28th, 2012. That bull run was capped with a 37x multiplier [$1,153]. The multiplier from the previous top in 2013 was 17x [$20,078]and peaked 526 days after the second Bitcoin halving that took place on July 9th, 2016. Bitcoin’s third halving occurred 353 days ago. Historically, the average drawback after these three tops is 87.66%.
Network Effect – Metcalfe’s Law
The second most important thing to consider about the future of Bitcoin is the network effect. The metric by which a network is judged today is through the lens of Metcalfe’s Law. Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). This basic law illuminates the importance of software as money and the value of each additional input [user] or communicable device added in the original context [i.e. fax machine, telephone] or today the Bitcoin [blockchain] network.
Is Bitcoin a good investment? Long-term versus Short-term Orientation
Also, it is important to consider the most important driving force in a person’s actions plans and that’s time preference. Time preference and subjective value theory are two of the linchpins in understanding Austrian Economics, praxeology and human-action.
When considering if ‘now is the time to invest in Bitcoin’ the most crucial aspect outside of the mathematics or the network effect of the Bitcoin protocol is one’s time preference or time horizon. Does the person anticipate holding more than one or two years and are they trying to outpace central bank printers?
For example, in the U.S. the rate of money printing has accelerated. Between 35-40% of all U.S. dollars have been created in the last 12 months. Since the U.S. has the world’s reserve currency, other central banks also print to try and keep pace [and for their own subjective causes as well] with the rate the Federal Reserve is printing in an effort to offset the costs associated with the U.S. exporting its debt through money creation. When holding fiat money the incentive to spend or increase one’s time preference naturally accelerates if the purchasing power of the money is being re-appropriated through inflation via central bank printing.
It is up to each individual to determine an action plan. Some will try and time each Bitcoin cycle and sell the top of the market. Others will exhibit long term orientation and hold for the next ten years or for life?
Every human being has circumstances innate to their own life and therefore each action plan is variable. Betting against Bitcoin however at any time is a bet that central planners will do the right thing and at some point shut-off the monetary spickets pre-monetary catastrophe.