• Luke Levine

Bitcoin: Fasten your Seatbelt and Pray?

It’s all turned a bit bleak for the Bitcoin community. In fact, that’s an understatement. If you haven’t been following, this is what it feels like….

The plane (in this case bitcoin) took off smoothly and made great headway early this year, climbing nicely into the sky with little turbulence. However, it’s now mid-flight and it feels like the airplane’s engines just stalled. We’re trying to work out if near death is imminent or if the damn things will get started again. The the problem is, as with most planes, the passengers aren’t the pilots. In fact, in this case, we don’t even know if there are any pilots. The flight deck is locked!

Do we need to reach for the life jackets?

If you read my last post about the triangle formation that was underway, it all came to a crescendo with a big volatile downwards move. The price now sits around $8000 and looks increasingly precarious. Here’s a chart to demonstrate. You see why the panic.

So what’s going on?

Fundamentally nothing has really changed. The plane still has wings, it’s still flying. There’s been no major bad news as such, just a lack of good news. The result is a decline in demand.

The way to think about Bitcoin’s price movement is as follows. This is important...

Most assets have a supply level that can be adjusted, e.g. digging deeper for oil or building new power plants. The result is that when the demand for those kind of assets increases (or decreases), the supply can be adjusted too and the price can stay relatively stable. Simple supply demand dynamics dictate that supply, demand and price all balance each other out.

Bitcoin is different however, it has a fixed supply that can not and will not change (ever). In economics, we call this inelasticity of supply. I won’t bore you with lingo, but you can pull that term out at the next dinner party and thank me later. The point is that the price is at the mercy of the demand side of the equation only. Supply plays a role, but it’s nothing like other assets classes. In the oil markets, when demand decreases, we produce less oil. Bitcoin simply doesn’t work that way.

So demand has fallen, whilst the supply has remained fixed. The result, by simple mathematics, is that the price has declined. This isn’t unusual, 40%+ downwards moves have been common in previous Bitcoin cycles. The problem is however that such moves are not good for general sentiment. The next move is anybody’s guess. The passengers are rightly worried.

I’ll cut to the chase...

In short, the pilots are snoozing, the engines will be reignited before we crash. But to be fair, the flight deck door is locked and nobody has access to wake the buggers up.

Sit tight, fasten your seatbelt and hold tight. We are in for a rough ride.

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