COVID-19. Bitcoin Halving. The Economy. What's Happening?
The Pestilence, otherwise known as the Bubonic Plague, killed an estimated 75 to 200 million people throughout Europe and Asia. Although, COVID-19 has proved to be far less detrimental; the spread of this virus has nonetheless taken the spotlight for all major publications both domestic and international.
As of this writing, there is a total of 775,306 confirmed COVID-19 cases globally with the United States and Italy tallying the most confirmed cases.
As the number of confirmed cases seems to be following an exponential growth trajectory; President Trump has recently extended the social distancing guidelines to April 30th, 2020 to impede COVID-19's spread. However, as the average investor dwells in their respective households; the question of what will happen in financial markets continues to surface.
With no feelings of ambivalence all investors would agree that the market has taken a huge hit. See the graph below on the 1 year simple moving average of the S&P 500 index.
This graph illustrates a noticeable downward trajectory of the S&P 500 index (SPX). The black line that's seen above shows the MACD (Moving Average Convergence Divergence) which is a popular technical trend following indicator that shows the relationship between two moving averages. Mainly, the graph conveys that the U.S economy is heading towards a potential recession or perhaps a temporary market correction.
The Stimulus Package
To combat the economic effects of COVID-19, the US government has signed a $2 trillion economic stimulus package that includes payments of up to $1,200 to US taxpayers. Many Americans will undoubtedly use this money to pay for critical everyday items and debts, but there will nevertheless be a cohort of tax paying U.S citizens who will pour these payments into investments such as Bitcoin and other cryptocurrency projects.
With this relief effort in place and Bitcoin's Halving happening in May the possibility of a Bitcoin bull run should be heavily considered.
Amidst these economically tumultuous times Bitcoin's value has dropped, but surprisingly not as significantly as one would expect.
Looking at the 3 month chart from December 30th, 2019 to March 30th, 2020 Bitcoin has only decreased by only $819.40 ($7,303.81 - $6484.41). Albeit, COVID-19 has really started to pickup globally in the last two months these charts show that Bitcoin has held its own through the stock market decline. The question is why?
WHAT IS BITCOIN HALVING?
Let's backup here and dive deeper into the Bitcoin halving event and the psychology behind it.
To some, the term halving may sound like a gruesome horror movie starring the grim reaper's scythe. However, the term halving is the dubbed nickname for a highly anticipated event in Bitcoin's history.
In May 2020, the total number of Bitcoin entering circulation every 10 minutes, otherwise known as block rewards, will drop by half (hence the term "halving"). The reward will drop to 6.25 from 12.5.
The halving event happens every four years and has happened twice before.
The previous halving events have resulted in significant Bitcoin price increases. Check the chart below for validation. The underlying logic for why Bitcoin's price would increase is the amount of supply entering the system will suddenly shrink. Theoretically, if the demand for Bitcoin stays the same it will drive Bitcoin's price up.
Curious About The Technical Details?
New Bitcoins enter circulation as block rewards. These block rewards are produced by individuals called “miners” (see previous blog posts on who miners are if you want more information). These miners solve complex hashing problems in order to "mine" Bitcoin.
Every 210,000 blocks, or roughly every four years, the total number of Bitcoin that miners can potentially mine is halved.
In 2009, the system started at 50 coins mined every 10 minutes. Two halvings later, 12.5 bitcoins are currently being dispensed every 10 minutes.
This process will end with a total of 21 million coins, most likely in the year 2140.
This is the genius of the creator(s) of Bitcoin, Satoshi Nakamoto, the acclaimed creator of Bitcoin.
Historically, Bitcoin's halving events have ALWAYS resulted in a positive increase in price following the event. Each event has resulted in higher highs meaning we can anticipate and speculate that Bitcoin will reach at least $20,000 in May.
In your analysis on what will come always consider the risk of Bitcoin and other cryptocurrencies. The price may very well fall below $1,000.
For those investing in Bitcoin and other cryptocurrency projects, it's crucial to have an exit strategy.
An exit strategy can look something like this:
Buy Bitcoin at: $6,000
Sell 50% of Bitcoin position at $15,000-$20,000
Sell 25% of Bitcoin at $25,000-$30,000
Sell 15% of Bitcoin at $35,000-$40,000
Sell 10% of Bitcoin at $50,000-$60,000
Do not let greed get the best of you as there's always a pull back with every spike in price.