I never see traders taking this important fact about bitcoin into account when making price predictions.
Every day currently there are 1800 new Bitcoins created. At a price of $8,000 USD that’s $14.4M USD worth of Bitcoin created each day. That’s a lot.
As I hope you know, these go to miners, of which there are more and more each week. As you may also know, a % of these Bitcoins are sold by miners each day in order to pay for costs like electricity, rent, wages, etc. And some are sold just so miners can lock in a profit. They’re often a pragmatic bunch, and they're mining to make a profit, not predict the future price.
But whether they sell or hold, that’s $14.4 million worth of coin that need to find a new home each day, either through miners hodling, or miners selling on the various exchanges.
The growing number of miners and the unavoidable increase in difficulty in mining Bitcoin is having the effect that a higher percentage of the bitcoin they mine needs to be sold to cover their costs (source: I mine).
Now think about this for a second.
When the price of Bitcoin falls, the effect is that MORE bitcoin has to be sent to market by the miners to cover their expenses, thus putting EVEN MORE downward pressure on prices.
The inverse is also true. When the price of Bitcoin is higher, less of the mining rewards needs to be sent to the exchanges to cover expenses, decreasing the supply of new coin and putting more upward pressure on price.
I have failed to find any data to demonstrate how much of the daily new 1800 coins are held vs sold, but for the sake of this illustration, and given the cost of an Antminer S9 (a popular Bitcoin miner) and electricity, let’s say we need $14.4M of new money to enter the ecosystem each day to cover the purchase of the new coins.
Now, a lot of traders, charters, analysts, and Twitter shitposters, seem to approach bitcoin from a share trading background. But I’ve asked many of them what their understanding of mining is, how much of the block rewards they think is being sold each day, and literally no trader has been able to answer this. I don’t think they factor this important aspect of bitcoin in at all.
So BEFORE bitcoin even starts the day, it has to absorb $14 million of new coin just to maintain a price of $8,000 per coin. That’s a lot of new money needed in the ecosystem each day. (Yes I realise we don’t know how much the miners are selling vs hodling but considering the costs of mining equipment I’ll use this arbitrarily to make the point.)
And my belief is that on many days there simply isn’t that much new money coming in. Some days there’s more. Some days there’s less.
People telling you based on trend lines, RSI, moving averages... they expect blah blah blah never mention how much new coins are being generated daily. When prices fall they frequently blame weak hands, bears, and other market factors, when the cold hard reality is: electricity is expensive, and miners want a return on their investments and will be dumping a portion of their rewards each day whether Bitcoin is God’s gift to mankind or not.
I believe that most hodlers of bitcoin have NOT dumped their stash, cashed out, and caused the price fall we’ve seen the last few months.
Sure, of course there’s been a little of that.
But I believe the price fall can simply be explained by a lack of NEW money coming in as the hype dies down, but miners still needing to sell their coins each day regardless.
All that said... anyone who knows how Bitcoin works also knows the block subsidy (block reward is combination of subsidy and transaction fees) halves again roughly in June 2020. Then, only 900 new coins will be born each day. And four years after that there’ll only be 450 new coins daily. And it will keep halving every 4 years.
When I hit retirement age there will only be 7 new coins per day.
There’s 1800 now.
By the time my youngest child retires, there will only be 0.01 new coins per day.
I can’t predict, nor do I trust anyone who thinks they can, what the price of Bitcoin will be in the next 6 years. But my decision to continue investing in Bitcoin is done with eyes wide open to the fact that it’s going to be challenging for the next 6 years to find new money each day to join the network.
But every four years it gets twice as easy to find new homes for the new Bitcoin, and I’m of the strong opinion that there will be A LOT less sellers in a decade, as there simply won’t be much new coin available. It seems logical to me that a massively decreased supply will have an unavoidable affect of causing upward pressure on price.
Because of the conclusion I’ve come to regarding Bitcoin's increasing scarcity, I have decided to invest in Bitcoin with a 30 year time horizon. If the price falls in the mean time, I’m grateful I’m able to buy more at a cheaper price.
I realise when we look back on the historical price of bitcoin it feels like it’s expensive now... It used to be $20, now it’s $8,000. The thoughts come in “maybe this is the top?! Maybe I should get out.”
Spend a few minutes and look at the price in the months leading up to the last halvening.
Every day the price remains above $8k I’m blown away that there’s been enough new money to absorb all the new Bitcoin that has been minted, and if demand for new coin can even remain stable, in June 2020 there’s going to be a lot less new coin to go around, and that will certainly be an interesting time.
Because I'm not 85 years old and needing to cash out right now, I am approaching Bitcoin with a long time horizon, and making it my goal to collect as much BTC as possible before June 2020.
You might argue that 1800 coins or $14M per day is nothing compared to the daily trade volume on the exchanges, thus this phenomenon is having no effect on price.
But remember that coin price is a function of demand at a specific point in time. Most of the traders that buy and sell Bitcoin regularly are playing musical chairs with the coin. But when the chips are down, no-one NEEDS to buy Bitcoin. But the miners NEED to sell it. So there will be a constant flow of new coins onto the market, but there may or may not be a constant flow of new money to soak up the new coins created.
I'm not predicting Bitcoin's price will fall below $8k or skyrocket above it in the short to medium term. The purpose of pointing out the above phenomena is simply to remind purchasers of how much new money needs to flow into the Bitcoin ecosystem each day for an $8,000 per coin price to be sustained. If you plan on investing for the short to medium term, I suggest you weigh up whether or not you think that is likely. Otherwise adjust your expectations about how long you plan on holding your Bitcoin, and enjoy collecting even more when the price drops.