Before you buy Bitcoin – Don’t forget what happened last time

The interest in Bitcoin from analysts and news publications is growing as the “halvening” approaches.

This halving event is when rewards to miners on the Bitcoin blockchain are cut in half to stop inflation negatively affecting the cryptocurrency.

There have been two previous halving events – in 2012 and 2016.

So why are people getting excited about the halving? Well, in the previous two cases, the price of Bitcoin went up by 8,000% and 2,000% respectively in the months which followed.

Calculations have predicted the latest halving will take place during May 2020.

With this date approaching, speculation around what will happen to the price of Bitcoin has started to rise.

Experts on the fence

According to analysts and crypto experts who spoke to Bloomberg, there is no guarantee the price of Bitcoin will drop or rise substantially when the halving takes place.

“Most people with a Bitcoin position understand that it’s capped in supply, so the issuance change shouldn’t make a difference. Also, the halving is perfectly forecastable,” said Nic Carter, co-founder of Coin Metrics.

“The halving thesis relies a lot on the idea that miners need to sell their Bitcoin to pay for expenses, which is less true now that miners have balance sheets and hedging options that allow them to hold their Bitcoin,” said Eric Turner, Messari research director.

In an article on Forbes last year, however, Moe Adham – Bitaccess CEO – said there is a “clear correlation between Bitcoin reward halving and price volatility”.

“These supply side changes happen every four years, and keeping that in mind can help build a better picture of what influences the price of Bitcoin at different times,” he said.

At the other end of the spectrum, famed investor Warren Buffett has described Bitcoin as a gambling device with no real underlying value.

Before you buy

If you are thinking of buying Bitcoin in anticipation of the volatility or price hikes around the “halvening”, do not forget what has happened in recent years.

Many South Africans, including Sygnia CEO Magda Wierzycka, said they bought Bitcoin when its price was at an all-time high – and then watched their investments plummet.

To show you how violently the price can fluctuate, and the sleepless nights this can produce if your portfolio is overexposed to Bitcoin, here is a real-life example.

A MyBroadband reader bought and sold Bitcoin on multiple occasions in recent years, with the majority of their trades taking place between April 2017 and March 2018.

Their original plan was to buy and hold until long into the future, but due to overexposure, big price swings, a tsunami of news reports “spelling the end”, and general regret, they got out totally – only having made a small profit.

For the purposes of the article, the actual amounts invested have been brought down in line with a constant ratio.

Ethereum transactions have also been included, as they were part of the total play.

The table below shows how much was put into the reader’s cryptocurrency trading account and how much they actually got out in rand at the end.

As you can see by the dates, many buy and sell trades were made within days of each other – with the aim of maximising gains thanks to Bitcoin’s volatility.

At the end, however, only a marginal gain was realised and the reader decided to call it a day as prices continued to drop at the start of 2018.

Trading and transfer fees have been excluded from the calculations, but do not materially affect the totals.

Date Invested/Withdrawn Bitcoin/Ethereum
04-2017 R1,050 Deposited Purchased BTC
05-2017 R100 Deposited Purchased BTC
05-2017 R130 Deposited Purchased BTC
05-2017 R200 Deposited Purchased BTC
05-2017 R500 Deposited Purchased BTC
06-2017 Sold BTC
06-2017 Purchased BTC
06-2017 R3,000 Deposited Purchased BTC
09-2017 R1,000 Deposited Purchased BTC
10-2017 R100 Deposited Purchased BTC
10-2017 R100 Deposited Purchased BTC
11-2017 Sold BTC
11-2017 Purchased BTC
11-2017 Sold BTC
11-2017 R14,500 Withdrawn
11-2017 R5,000 Deposited Purchased BTC
11-2017 R2,000 Deposited Purchased BTC + ETH
12-2017 R100 Deposited Purchased ETH
12-2017 R1,000 Deposited Purchased BTC
12-2017 Sold BTC
12-2017 Purchased BTC
12-2017 R6,000 Deposited Purchased BTC
3-2018 Sold BTC
3-2018 R10,000 Withdrawn
3-2018 Sold ETH
3-2018 R350 Withdrawn
Total Invested R20,280
Total Withdrawn R24,850
Profit R4,570 (22.5%)

Bitcoin price

The graph below shows the big changes in Bitcoin’s prices which have taken place since 2015.

The reader conducted his transactions between early 2017 and early 2018 – a particularly turbulent time for the cryptocurrency.

Luno’s price graph from 9 January 2020 was used. Click to enlarge.

Bitcoin

This is an opinion piece and does not constitute financial advice.

Now read: What to expect from Bitcoin in 2020

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Before you buy Bitcoin – Don’t forget what happened last time