How Long Will the Crypto Winter Last?

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Crypto startups are currently enduring one of the harshest winters. Tourists are out and only the true believers of the blockchain technology have dug in for hibernation. For the real builders, 3 questions are quintessential to their developments:

  • What is the Bitcoin bottom?
  • What is the trigger for next bull market in Bitcoin?
  • Is Bitcoin really the next big thing or the most overstated technology ever?

We don’t know exactly the bottom, but we have an idea for timing

Nobody has the magic formula to determine the exact bottom. There are different approaches, such as the marginal cost of mining that would signal the floor to be around $2650 globally, but sinks to $1250 with respect to solely Chinese marginal mining costs.

We feel that using this marginal approach is wrong. Do prices of gold, copper or oil only reflect the marginal cost of production? We prefer to use statistical data, gathered from the daily data of the last 3 bear markets in Bitcoin, to attempt to define some investment benchmarks. Prices are the only real signals.

There is on average, an average period of about 400 days for the price to recover.

There is on average, an average period of about 400 days for the price to recover.

Source: bitcoinblockhalf

Time reversion probability distribution.

Time reversion probability distribution.

What is the trigger for the next bull market? : Halving

We see many triggers for a new bull market in Bitcoin. The first one is a technical issue related with the mining process.

Bitcoin supply is limited to 21 million units In order to add a new block to the ledger, a cryptographic problem must be solved by a miner. Miners use electricity and processing power to solve these cryptographic problems for which they are rewarded. The reward rate began at 50 BTC per block and decreases by one-half, every 210,000 units. Currently there are approximately 561,564 blocks. The next halving event will be at 630,000 blocks. Current estimates indicate this will occur around May 2020. The logic is control the supply by decreasing the reward received from mining Bitcoins, modulating the bear market. The price becomes even more important to create incentives for new mining as the base reward decreases by 50%. Halving, coupled with big institutional flows into cryptos could trigger a furious bull market.

Is blockchain the next big thing or the next Napster?

We think it is a little bit of both. We do in fact believe that security tokens, or the digitization of assets, is the first step towards the next financial revolution. To put this into perspective, we relate Security Token Offerings (STO) to when the Dutch East India Company launched their first shares of Verenigde Oostindische Compagnie (VOC) on the Amsterdam Stock Exchange in 1602.

The Dutch East India Company was once the most important company in the world, holding a monopoly in the spice trade of the Indias. For comparison across eras, the Dutch East India Company at the time was greater than the market capitalization of the 20 largest modern companies.

VOC shares were the first step towards democratizing monarchical property.

VOC shares were the first step towards democratizing monarchical property. Source: Visual Capitalist

This analogy is not only interesting because of the size and importance, but also because the Dutch East India Company minted their own coins as well. The VOC chartered company issued a considerable series of coinage in bronze, silver and gold for its territories in the Far East between 1602 and 1799.

Coin minted by the Dutch East India Company.

Coin minted by the Dutch East India Company. Source: Visual Capitalist

Now platforms like Open Finance, BlockFi and Overstock are aiming to be the key players in the development of a more decentralized financial infrastructure through security tokenization within the blockchain ecosystem. Imagine Amazon, Facebook, Alibaba or Tencent allowing different tokens or coins to be used to make payments.

Equity shares of the Dutch East India Company originally faced strong opposition from the Habsburg family, but eventually evolved into what we know today as the major stock markets.

The Dutch East India Company led to huge bubbles, like Tulipmania, the South Sea Company and the Mississippi Company. However, they were the beginning of the capital market revolution.

The same will happen in the blockchain ecosystem. Many bubbles will emerge, as some already have, but at the same time the gates are open for the democratization of finance.


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