Whilst bitcoin demand is variable, bitcoin supply is perfectly known and pre-determined. There will only be 21 million. The architectural design is very unlikely to change. It’s incredible how known supply meets variable demand and results in adoption waves, which centre around the halving*. In this article I detail these waves and explain the psychological impact of price on FOMO, speculation and long-term adoption. Education is the antidote to FOMO-based purchases, but price increases remain bitcoin’s number 1 marketing strategy.
*Supply originates via the block reward (every 10 minutes on average) and diminishing supply growth was pre-programmed. Between 2009-2012 the block reward (new bitcoin supply created every 10 minutes on average) was 50 bitcoins, between 2012-2016 the block reward was 25 bitcoins, between 2016-2020 the block reward was 12.5 bitcoins and since May 2020 the block reward has been 6.25 bitcoins.
After the previous price bear market and before the next halving, an accumulation phase takes place. Those who already understand bitcoin’s long-term potential tend to purchase bitcoin during this phase. Often referred to as HODLers, these participants are less likely to sell which creates a floor in the price. Non-holders and the media have largely written off bitcoin after it fell substantially in price from the previous “bubble” peak so purchases from new entrants are limited during this phase.
Post halving, the price begins to rise because of the 50% reduction in supply. Remember, HODLers are unlikely to sell bitcoin before new all-time highs are realised so there is a shortage of bitcoin supply. Price increases towards the previous all-time high causes those who had heard about bitcoin to say “hmmm… I thought this thing was dead…Maybe it’s not…Maybe bitcoiners are right…Maybe I should buy some.” Either way, we get new entrants to bitcoin during this phase.
Approximately 3 to 9 months after the halving, bitcoin tends to surpass its previous price peak. After surpassing the previous peak, bitcoin frequently hits new all-time highs and it garners the attention of a wider audience, including the media. The attention emboldens existing holders to buy more and it pulls numerous new entrants, plus speculators into the market. These new entrants often experience FOMO (fear of missing out) and are price insensitive because they just want to get in on the action at the thought that their friends are making “easy money”. This sets off the speculative phase of the bull-market where the price goes parabolic and surpasses most people’s expectations.
At some point the exuberant nature of the parabolic phase causes widespread profit taking and a loss of price momentum. Eventually profit taking gives rise to a sharp bear-market in price. Short-term speculators (who may not have known what they were buying the first place) want to get out and take profits. People who bought near the price peak are angry and desperate to sell at any price. Prices can fall between 70% and 90% during this phase. Despair and disillusionment set in as we completes the full cycle.
I do not shy away from the speculative component that characterises bitcoin’s adoption cycles, particularly the parabolic 3rd phase. I’ve written a full article about speculation, where I argue that we should embrace speculation.
Indiscriminate bitcoin purchases at any price, based on FOMO, run the risk of creating adverse outcomes for those speculators. Unless you are a very skilled trader, or lucky, FOMO-based speculators tend to get burnt by their experience in the volatile bitcoin markets. This is unfortunate and I hope my readers avoid this experience. But FOMO in a market with parabolic price increases is inevitable. And short of restricting access, there’s not much more we can do about FOMO.
Bitcoiners speak to their friends and family about bitcoin all the time. We try to educate them about the underlying principles and provide a solid foundation for bitcoin allocations not based on FOMO.
But price increases are bitcoin’s number one marketing strategy! I tell people about bitcoin all the time and I’ve been recommending people buy bitcoin since the price was below $10K. But what really gets attention and causes purchases is the price and the FOMO it causes.
Its preferable to purchase in the accumulation phase but that won’t return until 2022, and I suspect prices will be notably higher than $24K. The early stages of the parabolic cycle offer significantly better valuations and price action than the late stage of the parabolic cycle.
It’s preferable to hold bitcoin for long periods of time. Bitcoin’s price change is positive over almost all 3-year rolling periods. Michael Saylor makes a strong argument against trading in this interview with Keith McCullough.
Despite the speculative component, many learn about the underlying value of the technology through the process. Those who learn about the technology tend to become long-term holders of bitcoin and speak the language of bitcoin (which is something I wrote about recently). They start to allocate greater proportions of their capital to bitcoin. Some may choose to adopt bitcoin as a monetary standard, putting their personal and business balance sheets into bitcoin. Perhaps they start to educate others about the potential. These HODLers are also far more likely to purchase bitcoin during the accumulation phase of the following cycle, avoiding FOMO based buying in the future. Become one of these people.