What is forecasting?
Trying to predict what is going to happen in the future.
However, since seeing into the future is impossible, forecasting accurately is also near impossible.
Warren Buffett has constantly said he pays no attention to economic forecasters, interest rate forecasters, inflation forecasters, because throughout his life, they’ve always been wrong.
Howard Marks also said in his book The Most Important Thing that economic forecasters are all useless. If one forecaster gets it right this cycle, he gets it wrong the next cycle. There has never been an economic forecaster who consistently gets it right in the history of forecasting, and this can be proven by the fact that there are no economic forecasters who have become famously rich. If they could really predict the future accurately, they would be trillionaires.
The reason forecasting is so difficult is obvious: Because the future can never be known before it happens. Interest rates can’t ever be predicted because there are no rules to interest rates. Over ten years the Fed can raise them 10% or drop them 10%. There is no rule saying they must do this or that, and even if there are rules, they are constantly broken.
Gold prices can never be predicted because demand can’t be predicted and supply can’t be predicted. What happens if a gold deposit of a billion tons is found tomorrow in the jungle? The entire market changes. There are no rules when it comes to these things.
This is something that is unique about Bitcoin. Perhaps Bitcoin usage can be influenced by government policy etc, but Bitcoin itself as an asset is not reliant on randomness or human discretion. It is only reliant on mathematics. Of course, things still change – mining difficulty changes which changes the hash rate which changes the mining cost – but these things are all based on an equation. It is maths, which means it can at least be forecasted with some accuracy. Because it is maths, many things can be predicted with greater accuracy than say, the gold or silver or stock markets.
What is the halving?
The Bitcoin network is sustained by miners.
(If you’d like to better understand how Bitcoin works, read my article here).
Miners use their computer power to process transactions on the network, and in return they are rewarded with Bitcoin.
Every ten minutes, a block is processed. After each block is processed, one lucky miner receives that block’s reward.
However, this reward is reduced over time.
When the first Bitcoin was mined back in 2009, the lucky miner received 50 BTC per block.
That might sound like a lot, but remember back then, one Bitcoin was only worth a few cents.
Then in 2012, approximately four years later, the reward was cut in half to 25 BTC.
This event is known as a halving.
This is an inflationary control mechanism built into the Bitcoin code.
The rewards are cut in half every 210,000 blocks.
Doing some basic math, we can forecast at ten minutes per block, the halving occurs approximately every four years.
Halvings will continue until roughly 2140, when the entire supply of 21 million coins is predicted to be fully mined.
If you’re not very familiar with Bitcoin this might all sound like gibberish to you, but the important point is that it’s easy to make educated predictions about Bitcoin supply.
Nobody knows how many dollars will be printed in the next 100 years, nobody knows how much gold will be found and mined, but everybody can make an educated and reasonable prediction on what the Bitcoin supply will be every single day for the next 150 years and beyond.
That doesn’t mean we can predict the price, but if price follows supply and demand, and we can forecast down to the day what supply will be, that’s extremely valuable.
Assuming you are interested in holding Bitcoin, we could also assume you believe in what Bitcoin offers and that demand will increase over time or at least stay flat. As long as you can be confident demand won’t decrease over time, we can make a meaningful forecast.
To understand how halving affects price, let’s start with a basic economics question:
There are 5,000 cars and 5,000 carparks. The price per carpark is $10 a day.
Let’s say we remove 2,500 carparks (i.e. we cut supply in half)
Now 5,000 cars need to compete for only 2,500 carparks.
What happens to the price?
It will go up.
So when we cut supply in half, price increases.
Now let’s imagine, in the place of the carparks that we removed, we build a shopping mall.
Now demand for carparks has gone up.
Instead of only 5,000 cars wanting a carpark in the area, there are 10,000.
10,000 cars competing for 2,500 carparks – what happens to the price?
Goes up even more.
This shows we have two levers for price upside:
- When supply goes down, the price goes up.
- When demand goes up, the price goes up.
Let’s translate this to Bitcoin.
In 2009, there were 50 Bitcoins coming onto the market every ten minutes.
In 2012, this fell to 25 Bitcoins every ten minutes.
In 2016, this fell to 12.5 Bitcoins every ten minutes.
In 2020, this fell to 6.25 Bitcoins every ten minutes.
As supply has squeezed, the price of Bitcoin has increased.
As a second catalyst, demand has also increased.
Far more people are buying Bitcoin now than they were in 2012.
If price is a basic function of supply and demand, it is no mystery why Bitcoin has increased from a few cents to $16,000 today, in barely a decade.
But here is what is so powerful about understanding this:
Bitcoin supply can be accurately forecasted.
We mentioned before that Bitcoin supply is not based on a Fed chairman or a government or a central bank, which is really just a bunch of guys in suits sitting around a table making stuff up.
It is based on mathematics.
Therefore we know with certainty that in 210,000 blocks, or about four years, inflation will cut in half. The Bitcoin reward will fall from 6.25 to 3.125, the supply curve will flatten and demand will likely increase. But even if demand stays unchanged, the price will still need to rise to find equilibrium. This is Economics 101.
Take a look at this chart:
The blue lines are the halvings.
The first three blue lines are the halvings from 2012, 2016 and 2020.
The last blue line is the forecasted halving, expected in April 2024.
As you can see, price has always rallied very strongly after the halving.
Again, basic economics should tell you this is not a surprise.
But here’s the more interesting thing to me.
The purple dashed lines mark the day exactly one year before the halving.
What do you notice?
It quite accurately predicts the market bottom.
Why is this?
We can guess why the cycle works that way, but to be honest there’s no point. The million-dollar takeaway is simply that the cycle has been consistent, likely because the supply has been consistent.
And supply will continue to be consistent forever, because again – it’s not based on a guy in a suit picking a random number out of his head – it’s based on mathematics.
So how might this information be valuable?
Maybe we can pick the bottom.
I would never try to pick a bottom in stocks, interest rates, gold, Ethereum, or any other market.
But Bitcoin is one market I’m willing to try, because the mathematics makes it plausible.
The next halving is going to be on block 840,000, expected to fall somewhere between March 2024 and May 2024.
(the reason it can’t be predicted to the exact day is because block time is not exactly ten minutes every time, the mining difficulty constantly changes to keep it as close to ten minutes as possible).
So where is the most likely buy zone?
One year pre-halving, which would fall between March 2023 and May 2023.
Of course, I must disclaim I reserve the right to be wrong, and I may turn out to be absolutely and incredibly wrong, but if anyone ever asks me when I think would be a good time to buy Bitcoin, that would be my answer.