Since the bear market took hold of the space in January 2018, Bitcoin enthusiasts have been hanging their hopes on a few factors. Two years after prices crashed from astronomical all-time highs, it seems everything is finally in place for those factors to push Bitcoin prices higher. Here are the 5 factors that will spark a Bitcoin price rally in 2020 and why you should be looking at them closely.
- Bitcoin halving
One of the most misunderstood factors that can push Bitcoin prices up is the halving. Bitcoin’s money supply is controlled by an algorithm. The system itself is set to have only 21 million coins at its point of maximum money supply. To incentivize the miners to keep on doing their crucial work, each block comes with a reward of new Bitcoins that add new money to the money supply. A system that makes those rewards decrease in a predictable manner is needed to maintain a degree of stability and satisfy the 21-million-coin requirement. That system is the halving.
The halving, which slows down the supply of new money, pushes prices up only if demand for Bitcoin keeps growing. Since this is a supply-side factor – the only such factor in this list – it is important to understand if demand-side factors will respond to supply constraints. If they don’t, the halving will not be able to push prices higher by itself. Anyone who thinks that the halving will push prices higher by itself, is misreading historic data. Price has gone up after every halving, which takes place roughly once every 4 years, because there was enough demand to support it.
Exogenous pressures driving demand
When people talk about the demand-side for Bitcoin as opposed to the supply-side, they talk about external factors that affect Bitcoin. If the halving is baked into Bitcoin’s algorithm and is therefore an internal factor that affects supply, then demand is driven by both internal and external factors. Since the virtues of Bitcoin are well-known and often ignored, most of the demand comes from exogenous factors.
- Geopolitical risks
The first such exogenous factor that people think of, which can push Bitcoin prices higher, is geopolitical risk. That is, a risk of war or trade conflicts that can spook investors or otherwise affect the world economy. When geopolitical risks are higher, investors shift part of their investments to safe havens. Up until 2009, those safe havens were precious metals mostly – although the US dollar is also considered by many to be a safe haven in uncertain times, surprisingly.
Since 2009, Bitcoin showed that it could replace gold and offer many other advantages like:
- Ease of storage
- It is widely accepted as a currency
- Ease of transfer
- Censorship resistance
This is why pundits, including Bitcoin perma-bear Peter Schiff, have attributed a recent rise in Bitcoin prices to tensions between the US and Iran. While these tensions might have been part of the reason why Bitcoin prices started climbing in the aftermath of the Soleimani killing, they cannot account for sustained increases following the easing of tensions between these nations.
- Debt is Bitcoin’s friend
Geopolitical risk is not limited to the possibility of a US-Iran war. There are many other flashpoints around the globe that can ignite a war. Any war could constitute a factor that sparks a Bitcoin rally. But war might not be the main exogenous factor that pushes prices higher; worldwide debt could be much more significant.
Due to rising debt, the world now owes around $253 trillion USD. That is a hefty sum, especially if economic growth stalls. With interest rates already near historic lows, acquiring more debt in the face of slowing economic growth seems way too easy, so global debt should continue to grow, until everything crashes. At some point, lenders want to have their money back, but if there isn’t enough to go around, either large scale defaults or dangerous bail outs will take place. The last time a large-scale bail out took place was the year Bitcoin was created. People had no other safe haven besides gold. Now they do, so if you are betting on a default soon, you are betting on one of the factors that could push Bitcoin prices up the most. Trade Bitcoin on reliable platforms like eToro to get your foot in the decentralized door before the expected price rally.
- Inflation bodes well for Bitcoin prices
In some cases, low interest rates and debt, coupled with decreasing productivity, will trigger higher rates of inflation before a default comes. Inflation is also a thorny subject, because governments tend to cherry-pick what they include in their calculations. As a result, real inflation might be higher than what the government reports. The most extreme case of this inflation problem can be seen in Venezuela, an oil rich country that was mismanaged to the point of total economic collapse.
In Venezuela, people weigh their money; they don’t count it anymore. That is how bad inflation is over there, and it all started with government over spending due to flawed policies and increased oil revenue. Productivity decreased steadily and when oil prices crashed, the economy went into an immediate tailspin. Those who had Bitcoin managed to hedge themselves from the debacle that resulted in famine and a mass exodus of millions of people. Other countries that are facing worrying inflationary pressures and declining productivity, like Argentina, could well push demand for Bitcoin high enough to trigger sustained upward pressure on prices. Inflation can also depreciate a national currency so far that Bitcoin prices move higher by default, even if there is no significant increase in demand for the digital asset.
- Psychological aspects of a small cap market
But beyond inflations and all the other exogenous factors that can affect demand for Bitcoin, prices in the market might move as a result of pure psychological pressure. This is probably the most underrated factor in Bitcoin markets, especially because in a small cap market like Bitcoin, which is worth about 1/800 of what the gold market is worth, can be moved easily. This is where the so called “whales” come into play. It only takes one or a few individuals moving a billion or two to trigger a complex web of buy orders on exchanges, pushing spot prices higher and creating expectations of even higher prices in the future.
Bitcoin Halving in context
This psychological factor, combined with geopolitical risk, debt and inflationary pressures, in a year in which Bitcoin rewards will halve, definitely augurs a Bitcoin price rally. Just think about it: prices have been rising for more than a week already, showing that any of these 5 factors can trigger the next. If tensions between the US and Iran got the rally started, the expected halving and probably those psychological aspects of the market, have kept it going. Whichever way you look at it, these 5 factors can converge at any given time and spark a sustained Bitcoin price rally all throughout 2020.