BTC PRICE CATALYST: BITCOIN HALVINGS
On the subject of digital currency, the halving of the supply of Bitcoin occurred on 11 May. That has reduced the additional supply from 12.5 bitcoins per block to 6.25. This should increase upward price pressure assuming demand for Bitcoin continues to grow, as was the case after the previous halvings in 2012 and 2016.
Thus, after the first halving on 28 November 2012, Bitcoin rose 85 times in the following 12 months. While the second halving on 9 July 2016 resulted in a 30-fold gain within 18 months (see following chart).
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| Source: Bloomberg |
Remember as part of the algorithm in the bitcoin protocol, block rewards for miners are reduced roughly every four years by 50% (after every 210,000 blocks are mined), ending with the last Bitcoin ever to be minted in around 2140. So far Bitcoin price has risen by 14% since the halving on 11 May.
PROTECTION AGAINST FIAT MONEY: BITCOIN & GOLD
Now it is true that the bitcoin price was hit in the March risk-off, declining by 57% from US$9,184 to US$3,915 in the week to 13 March (see previous chart). Still this does not necessarily mean that Bitcoin is just another high beta asset.
For gold also sold off, and also probably for the same reason, namely the need to liquidate assets where there were profits to take to pay for losses elsewhere. It is also the case that with Bitcoin many investors were holding leveraged positions.
To invest in bitcoin it is necessary to believe the system has integrity in the sense that the supply is truly limited. It also should be a source of diversification in a portfolio, as is gold, precisely because of its truly decentralised nature in stark contrast to the Chinese digital currency (discussed below). It is this feature, combined with the fixed supply, which makes it a hedge against central bank manipulated fiat money.
In this respect, Grizzle continues to believe that investors should own both gold and Bitcoin in the sense that they are not mutually exclusive, though clearly attitudes to both vary according to the demographic profile of the investor.
Meanwhile if institutional ownership of gold remains minimal in a world of passive investing, it is almost non-existent in the case of Bitcoin, though that has begun to change with the development of custody services for owning digital currencies.
It also looks promising from a longer term perspective that there are now about 30m wallets with a non-zero Bitcoin balance and only 3m wallets with more than 0.1 Bitcoin (worth US$970) in existence. The total number of Bitcoin wallets has risen by an annualised 65% from 5.4m at the end of 2015 to 50m (see following chart).
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| Source: Blockchain.com |
CHINA’S DIGITAL RENMINBI PILOT TESTING
Amidst the focus on the over-the-top monetary stimulus unleased by the Federal Reserve in response to the Covid-19 pandemic, it is easy to miss perhaps the most interesting news in central banking this year. And it has nothing to do with Covid-19.
That is the release by the People’s Bank of China of a digital renminbi for pilot testing. In April screenshots of a mobile wallet interface for so-called DC/EP (digital currency/electronic payment), rolled out by the Agricultural Bank of China, were shared all over social networks in China.
The rationale for China to move into a digital currency is clear. Apart from making use of a new cost saving and secure technology, it also represents a way for the central government to take back control over nominally private companies, such as Alibaba and Tencent, who have in effect controlled payment systems in recent years via the explosion of ecommerce in the mainland economy.
It is also the case that the digital currency will provide increased powers of surveillance for the authorities while providing practical convenience for users.
Source: Christopher Wood, Global Strategy | Grizzle
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