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If you’ve been following the entire cryptocurrency saga – you might have noticed that the rock-star of cryptocurrencies experienced a significant drop. We saw bitcoin floundering around the $10,000 mark yesterday and slightly recovering today to $11,273.65 (indicative price at the time of writing), due to fears of a chain-reaction initiated by South Korean regulation and China’s renewed weariness due to the large energy footprint associated with bitcoin mining.

This marks an unprecedented drop of approximately 50% drop from last year’s record high of $20,000 – the biggest drop to date (the previous record drop was in the region of 81% – in April 2013 BTC went from $266 to $50 due to alleged processing delays by large exchanges). The question bouncing around most analysts’ minds though is – is this the prick that has burst bitcoin’s bubble?

The answer although not as epic or foreboding as the internet age usually demands – is probably not. Bitcoin’s market cap at the moment is a whopping $550 Bn (according to coinmarketcap.com) with a volume of $15,565,400,000 within 24 hours.

There is another thing that plays into Bitcoin’s value – simple, sweet supply and demand. There are currently 16,808,375 BTC in circulating supply, with the maximum (at the moment, but we’ll get to that later on) supply set at 21,000,000 BTC. Reaching this ceiling of supply could potentially create an equilibrium – holding BTCs price at a certain level (at least at the low end) – until speculative trading starts up again, pushing the price up, but again only to a certain level. On the other-hand this could also affect the top end of the price also, especially if certain people or entities accumulate large sums of bitcoin and start restricting the amount of the cryptocurrency in circulation. Much like OPEC decreasing oil production to bolster prices or how De Beers would control the amount of diamonds on the market to increase the price (when they had a monopoly on the trade and mining).

Does the 21,000,000 BTC supply cap mean bitcoin will start acting like a normal currency? The only real world (non-digital) parallel that we can draw is gold. Why? Because there is a finite and more or less known amount of the asset – both in 2015 and 2016 3100 metric tons of gold were produced and 2014 production didn’t deviate much from that number at 2990 metric tons.

Actually, the bitcoin/gold comparison might actually be more proximate than most think; according to the Peak Gold theory (also known as the Hubbert peak theory) once the maximum extraction of gold is reached, production pulls back to zero. According to the theory, this has happened four times in the 20th and 21st century: 1912, 1940, 1971 and in 2001 -with each peak being more significant than the previous. Return to production after the peak is then spurred by increasing prices – pushed up inevitably by the throttling of supply.

For example, after 2001 peak gold was reached gold extraction slowly dropped, starting up again in 2009 and reaching historic record highs during the period of 2011-2015.

So, what will happen to bitcoin as it draws closer to its maximum capacity? Here are a few potential scenarios:

  • Fork: A new fork and possibly a new crypto is created with an updated protocol allowing for mining above the 21 million cap. Just like we saw when Bitcoin cash emerged from Bitcoin – it ultimately pulled down the price of (the original) BTC although not significantly.
  • A floor for the price may be set: the bitcoin bull run of 2017 was largely fueled by speculative trading of BTC by both institutional level and laymen investors. This has detracted from the intrinsic value and use of bitcoin, it was intended as a decentralized currency that wouldn’t be swayed by political and institutional manipulation. That means it has inherent value as long as transactions are being performed in the cryptocurrency. Copper is a great historic comparison as it was used both as a currency and commodity, but after it was dropped as a currency its value was still preserved due to its use (initially in everyday objects from mirrors to knives and today in anything that needs and electricity conduit). As long as it has use it may have value.
  • The media has (another) field day: Just like we saw in 2017 the media’s crypto darling was bitcoin – can you imagine the click bait that would be produced if we witness the first currency in history to literally run out.

 

Indicative of other significant BTC slips, today we have seen a slight recovery and if bitcoin follows its recent drops it may recover shortly. Both price drops in 2017 – one due to the proposed Segwit2x fork and the second over fear that China would ban the crypto. In both cases the BTC slipped more than 35% but not only recovered but broke through previous price records. There are two further variables that were added since then though, BTC’s price then hadn’t previously broken through the $5,000 level and secondly this was before financial institutions started both being interested in it and actually offering it.

Sources:
http://fortune.com/2017/09/18/bitcoin-crash-history/
https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
http://cryptocurrencyfacts.com/understanding-hard-forks-cryptocurrency/
http://www.businessinsider.com/peak-gold-gold-production-collapse-continues-in-south-africa-2012-7

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