The 'orse 'as run nowhere, sir!

June 18, 2024
Temple Melville

SO here we are a couple of months down the road in the post Bitcoin Halving world and the price has gone nowhere. The headline refers to the words of an ancient retainer of an old aunt of mine – long since deceased – and was his invariable response when asked how his Saturday afternoon pick had done.

As ever, there is no one reason why Bitcoin should have gone nowhere, but the background is interesting. As I’ve said before the matters surrounding  a fact can be more interesting than the actual fact itself.

On the macro level, the stubbornness of inflation is giving central banks pause for thought as well it might do. The perceived wisdom that falling interest rates will herald a new All Time High is growing a bit stale. The more important circumstance in my view is the cost of production of one Bitcoin against the market price. 

The meme was that the halving meant fewer BTC about and hence a price increase. Not so. What has happened is that fewer earned BTC means a large number of unprofitable miners, who are nothing if not nimble. So quite large numbers have stopped mining, either temporarily or forever.

As a result, the costs of mining overall have fallen as the more efficient miners keep going and the less so drop out. I expect there will be some jockeying for position over the next couple of months, but overall I expect fewer miners, perforce selling fewer BTC and being willing to accept a lower price as their lower costs help them to survive.

Helping things along is the new Runes protocol. In the simplest terms this allows developers to piggyback all sorts of things on the Bitcoin blockchain – rather like with Ethereum. This led to a huge spike in transaction fees which resulted in a day where miners earned more than $100m – extraordinary when in normal circumstances this is less than $20m.

But the hype and flurry has quickly died down and Bitcoin remains ploughing into heavy seas.  Its elevated positioning, the high bitcoin prices versus gold and versus the estimated bitcoin production cost, and subdued crypto venture capital (VC) funding all remain in place. Not least, retail investors have been selling and the institutions have not been mopping up to the same degree.

Sentiment seems to be shifting from risk-on to risk-off assets. We must be not going to go higher with interest rates, but more importantly, what is happening with the monetary aggregates? They were expanding at more than the rate of inflation (inflationary in itself) so I would expect some tightening.

The problem is the FED has rightly decided that things don’t look too great and is therefore pursuing two opposing policies – keeping interest rates up and expanding the money supply. Traditionally, the FED does very little in the run up to a Presidential election, but may have to this time round.

Quite rightly, top analysts at (for example) Fidelity and others of that ilk have been saying that the only way for Bitcoin to rise is for liquidity to shoot up. The perceived wisdom had been that Bitcoin was a hedge against inflation, but there was a misunderstanding about why this was so.

In the event, increasing money supply (creating inflation) leaked into crypto markets and voila. There is a squeeze coming for sure once those pesky elections are out of the way.