How Financial Models Could Move Bitcoin’s Price After the Halving

Every four years halved the Bitcoin- protocol, the block reward, get the miners when they called a "block" of transactions to block chain contribute . Currently, the reward is 12.5 bitcoins per block. The next halving will take place in May 2020.            

In the protocol for the control of the inflation of Bitcoin integrated (BTC), the previous falling halving together with massive rallies. After the first halving in November 2012, the Bitcoin price rose from $ 12 to over $ 650. After the second halving in July 2016, the price rose to almost $ 20,000 in late 2017.           

See also: CoinDesk Report - Bitcoin : Halving and Why It Matters    

While it is, of course, uncertain whether the next halving will accelerate prices, the halving seemed to have driven bitcoin from the previous hype cycles. Of course, the next halving has sparked an intense debate as to whether it is already priced in or not.        

A popular model that is often mentioned in these debates is the stock-to-flow model . The Bitcoin price is modeled using the so-called "stock-to-flow ratio", which was originally used to value gold and other raw materials. By correlating the “stock” - the amount spent - with the “flow” - the amount spent annually - it derives a prediction of a Bitcoin price after halving $ 55,000 to $ 100,000 (which is a market cap would correspond to more than $ 1 trillion).          

Not surprisingly, the stock-to-flow model has garnered some attention since its release in March 2019 . Various attempts to counterfeit the model have been launched, and for Bitcoin maximalists, it was another boost to their hyper-bullishness.       

See also: Bitcoin halving, explained  

According to the Efficient Market Hypothesis (EMH), the prices only contain new information. The market is believed to be fast enough to respond to an equilibrium price that correctly reflects all external or so-called exogenous information. In turn, all internal or endogenous processes are already reflected in the prices. From this perspective, only exogenous inputs - for example an exchange hack, a central bank announcement or a geopolitical event - can change investors' expectations and prices. As a result, extreme events such as bubbles or crashes simply result from exogenous news that has not yet been included in the prices.       

For supporters of the EMH, the Bitcoin delivery plan encoded in the protocol and known since the beginning of the network represents endogenous information and should accordingly already be priced in. And most likely the most demanding market participants like market makers have done so. However, this does not mean that the halving is fully priced in.       

Financial modeling is not a hard science like physics. The models not only reproduce markets true to the original. they actively transform them.  

There is robust evidence that prices move too much compared to what you would expect from EMH. Research shows that only a small part of the price movements can be explained by relevant press releases . Such results suggest that price dynamics are primarily driven by endogenous positive feedback mechanisms between investor expectations and prices - a phenomenon George Soros has termed "market reflectivity".        

Regardless of whether the stock-to-flow model is valid or not, whether one believes in the EMH or expects an epic rally that triggers hyperbitcoinization , I believe that the fundamentally reflexive nature of finance is often underestimated in these debates .    

Markets and Bitcoin in particular are reflexive phenomena. There is a positive feedback mechanism between expectations and prices: expectations influence prices, which in turn influences the expectations and behavior of traders or investors. It is this self-reinforcing positive feedback loop that also forms the core of speculative bubbles and market crashes.     

See also: For Crypto Miners could the halving of Bitcoin mean a doubling of the cost      

Because of this reflective dynamic, models can shape the financial markets. In the past, there have been a few instances where a model realigned the market it was designed to model. For example, the famous Black Scholes option pricing model led to increased conformity between option pricing patterns and the model. That is, until the 1987 crash broke its validity. Similarly, current short volatility strategies, which use volatility both as an input for risk taking and as a source of return, have a transformative effect on equity markets as they lead to systematic suppression of volatility.         

Financial modeling is not a hard science like physics. The models not only reproduce markets true to the original. they actively transform them. They become what the famous sociologist Robert K. Merton called self-fulfilling prophecies. (Ironically, Merton was the father of Robert C. Merton, whose notorious long-term capital management hedge fund itself became a self-fulfilling prophecy of financial ruin.)     

So, bitcoin's halving, or the predictions of models like the stock-to-flow model, could become self-fulfilling prophecies. This could lead to a self-validating feedback loop of price acceleration. That is not to say that it will happen. However, if enough investors and traders believe in them, the model and reality could actually grow together.       

The online black market's Bitcoin earnings are successful amid a pandemic     

The coronavirus pandemic has touched every corner of the global economy - even the shabby underbelly of internet commerce.

Customers less spent Bitcoins on darknet markets in the last two months despite the slide in the cryptocurrency price, according to data from block chain monitoring company Chainalysis .            

Darknet markets are websites that facilitate the sale of illegal goods, usually drugs, counterfeit currencies and weapons. 

"In the past, darknet market revenue (value of bitcoins sent to dark markets ) had a weak inverse correlation with bitcoin price," said Chainalysis . However, this relationship has reversed in the past two months, as can be seen in the graph below.            

Bitcoin peaked at $ 10,500 in mid-February and fell to $ 3,867 on March 13. As prices fell, the value of bitcoins sent to darknet markets rose from $ 4.1 million to $ 3.2 million.        

However, the value of bitcoins sent to dark markets rose from $ 3.9 million to just over $ 5 million in the last quarter of 2019. Over the same period, the cryptocurrency had dropped nearly 13 percent to hit a low of $ 6,400 in mid-December.     

The most recent change in correlation is due to a health crisis triggered by the coronavirus pandemic . The virus, originating from Wuhan, China, spread faster in Asian countries in February and hit the European and American coasts in March.    

See also: Bitcoin all-time high in 2020? The chances are only 4%, option market signals   

As a result, traditional markets recovered and triggered a liquidity crisis in which investors sold classic port assets such as gold for cash, mainly the US dollar. Bitcoin was also treated as a source of liquidity.  

Darknet providers may have panicked due to a sudden drop in prices and slowed sales for fear that the cryptocurrency could become worthless in the event of a catastrophic event. Darknet customers may also have cut back on purchases as investors tend to hold onto cash in times of panic.      

While the exact reason for the decline in revenue of Darknet- markets is not clear, suggests the report by Chainalysis out that COVID-19 has hampered the sale of drugs.        

"Recent reports indicate that Mexican drug cartels find it harder to get fentanyl because the Chinese province of Hubei - a center of global fentanyl trade - has been hard hit as the epicenter of the outbreak. Such disruptions in global supply chains could hamper the ability of darknets to Marketers to do business, "the company said.   

Merchant services and gaming providers have also seen sales decline in the past few weeks.

The 7-day average of the value of bitcoins sent to merchant services fell from $ 7 million to $ 4.5 million in the five weeks to the end of March. In the meantime, the value of bitcoins sent to gaming services decreased from $ 5 million to $ 3 million.        

See also : Crypto markets can never close , and that's a good thing    

Again, the decline in these sectors is not surprising, as people tend to save more in recessions.

Historically, however, gaming service revenue has always been very weakly correlated with the price of Bitcoin , as individuals rarely rationalize and view it more as an entertaining activity.