This Catalyst Will Drive Bitcoin Next Year

Happy Black Bitcoin Friday, everyone! ✋ 

Yours truly began this newsletter by discussing the two major catalysts that will drive Bitcoin next year. The first is the launch of a Bitcoin ETF, likely within the next 7 weeks. I covered the significance of this new investment product here and the potential impact on the price here.

Today, I'd like to cover the other major catalyst that's coming up. It's called the halving. It’s expected to occur on the 24th of April. 🥁 

The halving is the single most important event in all of crypto. It's the reason why Bitcoin and ROC (the rest of crypto) move in four-year cycles. So let's take a closer look. 🔬 

To understand why the halving is so important, you need to understand that all of the world's 163 official currencies are inflationary, which means you get less bang for your buck over time. 😢 That's because money today is not pegged to any underlying asset (although some currencies are tied to another), and the available supply can be changed.

Central banks can print money and inject it into the economy. 🖨️ This is called quantitative easing (QE) and is a way of keeping economies afloat when they are going through bad times. The chart below shows the USD money supply. You can see an increase after the Great Financial Crisis of 2008. And you can see that after the COVID-19 pandemic, printing went to a whole new level. The money supply almost doubled in less than a year. (It has since declined).

Printing money may be a quick fix for an economy on the rocks, but it has long-term effects. It creates inflation, which means it eats into your purchasing power and dilutes your savings. After all, why do we pay taxes if governments can just print money at will? 🤔 

Enter Bitcoin. 🛸

Bitcoin is different from all existing money in the world because it has a fixed supply.

There will only ever be 21 million Bitcoins. 🕉️ 

It's like a central bank that, by design, can't issue more than 21 million coins. But Bitcoin not only has a fixed supply, it also has a supply schedule that works like a Swiss watch. 🦾 

Let's take a closer look at how Bitcoin comes into circulation. 🧐 

Bitcoins enter the open market via miners. Miners are computers that compete around the clock to solve cryptographic puzzles. In the process, they validate transactions on the blockchain and earn Bitcoins as a reward.

Bitcoins are mined into existence as a reward for miners. The miners then sell the Bitcoins on the open market, where you and I buy them. 🧑‍🤝‍🧑 

Currently, the reward for one block of transactions is 6.25 Bitcoins.

Now, what the halving refers to is that approximately every four years, the reward per block is halved. 🔪 

This means that after the next halving in April, Bitcoin miners will only receive 3.125 Bitcoins per block of transactions. There will be many more halvings until around 2140. At that point, there will be 21 million Bitcoins in circulation and no more coins will be created. 🔚 

In the chart below, you can see that Bitcoin is deflationary compared to all existing currencies in the world, meaning that its inflation rate is actually falling over time. It currently stands at 1.7% (pretty damn good compared to the 🇦🇺 inflation rate of 5.4% in September), but as supply grows 📈 and more Bitcoins are mined and put into circulation, the inflation rate falls 📉 with each halving event - until the supply ceiling is reached. That's the exact opposite of every existing currency in the world, where inflation rises as supply expands. 🤯 

As we've all learned at school, the price of a good or service is determined by the interaction between supply and demand. As the halving leads to less Bitcoin being mined and put into circulation, the result is a supply shock. Assuming demand remains the same, this leads to higher prices. 🚀 

Historically, the supply shock caused by the halving has triggered a lot of price action, not just in Bitcoin, but in the entire shitcoin crypto space. A rising tide lifts all boats. 🌊 

On the chart below, you can see that the halvings of 2012, 2016, and 2020 were all followed by new all-time highs. The historical pattern is that Bitcoin tends to bottom between 400 and 518 days before the halving and top between 371 and 546 days after the halving. Keep in mind that past performance is no guarantee of future results. But yours truly would be very surprised if we see a radically different pattern this time around.

That said, yours truly wishes you all a wonderful weekend.

Next week, having covered the two main catalysts for Bitcoin going forward, yours truly will address the question at the very heart of this newsletter: Why Bitcoin? 🤷‍♂️ 

Over and out.

Before you go, please help me get better! 🙏 

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Thank you! 🤜 🤛