In my post understanding the economic functions of bitcoin, I explained in-depth how bitcoin functions as if it were a central bank, and how the supply of ‘bit-coins’ are created. Understanding bitcoin’s supply is important for understanding what we are witnessing today with the huge price increase. This has been caused by a supply-side liquidity crisis that is just getting started. This ‘crisis’ has been caused by the ‘monetary policy’ of bitcoin, and how new bitcoins are created by the mining process. For more details on how bitcoin creates its value, please check out the intrinsic value of bitcoin and bitcoin as a commodity money.
It was decided long ago that bitcoin’s monetary supply would cut in half every 210,000 blocks no matter how much hashing power is being expended. We are feeling the shock of the impending drop in the production supply, which is causing the of bitcoin price to sky-rocket.
‘The Halvening’ is the moment that the bitcoin production supply reduces by half. When we go from block 419,999 to 420,000 and the block reward will go from 25 BTC to 12.5 BTC–the production amount is chopped in half.
Similar to how markets will to respond to changes The Fed will make weeks in advance of an actual meeting, this is what we are seeing with bitcoin today. Bitcoiners understand the production supply will change soon, and the market is starting to respond to that. The key difference between The Fed’s policy and bitcoin’s, is we know what is going to happen with the supply of bitcoin, whereas it’s a guessing game with The Fed.
This known reduction of the production supply is creating a liquidity crisis that causing for a deflationary hodling activity to occur. People are less willingness to sell bitcoin now that the halvening is approaching, as the perception of the value of a bitcoin is changing.
Half the production supply
The production supply, the new bitcoins that are mined each day are done mostly by huge multi-million dollar mining operations. They are the ones whose production will be cut in half, while still spending the same amount of real electric energy to mine for bitcoin. After block 420,000 it will cost at least twice as much to produce the same amount of coins previously.
These are the coins that are sold directly to exchanges and institution and provide the most sell-side liquidity to exchanges. With block 420,ooo impending, this is causing for bitcoin to entering into a new price seeking event; as the market knows the supply is about to dry up. This is causing for a new bubble to increase the price of bitcoin to new equilibrium price that accommodates the drop in supply. This is so the same amount of nominal liquidity (fiat value) can be provided with sharp reduction in the available supply of circulating bitcoins. Until block 420,000 is reached, we are going to be in price disequilibrium in a bullish direction.
A Hyperbitcoinization event?
The value of a bitcoin token is changing again, and this time it could be more then just another bubble. Bitcoin is a fundamentally better form of money than any other form of money we have seen before, and it has a higher liquidity preference then cash itself and it will always have a low transaction cost than fiat money.
At some point, the rigged game of old money and finance will be seen for what it is, and people will want to exit.
The global economy is teetering on catastrophe, and once a large financial institution like Deutsche Bank goes down, it is going to drag a large part of the financial industry and world economy with it. And not a goddamn thing will be done to prevent it. As moral hazard has taught us all, the banks are special and will be bailed out at the expense of the general public.
People are tired of the bullshit, lying, cheating, and stealing that is universally accepted by banks and their political allies as ‘business as usual’. We are changing how money works in response to this, and we will rejoice as the banks burn, and the real crisis starts.
Summer 2016 is going to be a hot one!