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The Euromoney Blockchain Forum 2016 • June 21-22, 2017

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The Fresh All-time High: Is this Just the Beginning?

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It is official; the bitcoin price hits a new all-time high. The media seems to be waking up, but it still does not feel like a bubble. Could it be that the bubble of the third reward era has not even begun?

It was just a matter of time. In most currencies, bitcoin did already hit an all-time high in January or earlier. Only in dollar terms, the landmark price of late 2013 was not reached. Until February 23, when the price broke through the $1,200 level on Bitstamp.

Now there is no excuse left, and it is formally correct to note; nobody has ever made a loss by buying bitcoin and just keeping it. Not in Germany, not in China, not in the US, even if they bought at the peak of a bubble!

Sure, this draws attention. For Germany, you could find around 200 magazines and newspapers reporting. Even the press agency DPA wrote a release, which has been reprinted from a lot of newspapers, from Worms to Tyrol to Upper Bavaria. As reasons for the recent appreciation, the DPA identifies speculations on the ETF, a general worry about political instabilities in the US and Europe, as well as capital controls in China.

While all this is not untrue, the DPA misses the most important reason. Maybe the only reason that is important; the halving.

In case you do not know; the rate by which new bitcoin are created by the miners is regulated by the protocol in a way that only a certain amount of bitcoin is issued every ten minutes. This number halves every four years. First, it had been 50, then 25, and since summer 2016, it has been 12.5. And in three or four years, it will be only 6.25. The amount of newly minted bitcoin flowing to the market decreases over time.

If you search for a predecessor for such an economic event, you might find it in the oil price shock of the 1970s. During this period the cartel of oil producing countries, OPEC, cut the production of crude oil by around five percent. The price of oil instantly climbed 70 percent and multiplied over the following years. The 1973 “oil price shock” is regarded to be the first discrete event since the Great Depression that has had a persistent effect on the US economy. And this with a cut of five percent instead of Bitcoin’s 50 percent!

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Sure. You cannot compare oil and money, and the course of past prices does not say anything about how future prices will act. Of course, there may be too many legal and technical challenges for Bitcoin to continue its path, and a rising price will make some of them not better, but worse.

But let us have a look how bitcoin reacted to the former halving. If we imagine that history repeats itself, the potential of price, the distance to Bitcoin’s moon, makes you dizzy. Until the first halving in Autumn 2012 the all-time high was $30, reached in June 2011, while the price stabilized around $12. When the halving happened, the daily creation of new bitcoin was cut in half for the first time, the impact on the market was nothing. Supply was reduced, but the price stayed the same.

In March 2013 however, the price started to rise. At some time it passed the old mark of $30. Shortly after it jumped as high as $260, found a new bottom at $100, and jumped again, in November 2013, to a new all-time high at $1,163. In short, while nothing happened immediately after the halving, one year later the price grew from $10 to $1,000.

Every former reward era had its own bubbles, crashes and bottoms, its own bull and bear markets. Usually it went like this; first, a small bubble emerges, then an immense bubble, followed by a crash and a long, tiring bear market.

It is interesting to switch perspectives and look at the price exponentially instead of linearly.

The chart from Bitstamp, from late 2012 to early 2017, is displayed above. It contains the whole story of the second reward era, spanning from the start to mid-2016. In this era, each block created 25 bitcoin. On the right side, you see the price axis, scaled in a way that it shows exponential growth. In 2013, two events of exponential jumps are clearly visible, in which the price did not increase linearly, but with the factor of ten or more. At both jumps, the trading volume - the green and red bars - increase significantly, which did not happen at the recent all-time high.

History does not repeat itself. It is possible that the bitcoin price has reached its limit at $1,200. It could be possible that the era of exponential jumps in the price is gone and the future will only see linear growth.

In fact, we will not know for sure what happens, and there is no instrument to find out. The world has never before experienced such a form of money.