Bitcoin Price Compression: the Pros and Cons
The proactive strategy by traders to engage in Bitcoin trading activities based on price compression has pros and cons. The pros are evident with the justification of the trades when predicted conditions come to pass. They include:
Supply and Demand Trends of Bitcoin are Favorable
The laws of demand and supply stipulate that increase in demand with constant supply leads to high asset prices. Increasing supply when demand is constant will lower asset value due to a lack of extra interest. The law applies to the valuation of Bitcoin in the crypto market.
The nature of Bitcoin mining is that the number of new coins joining the blockchain keeps diminishing with time. The mining algorithm presents a Bitcoin halving mechanism that ensures its supply is cut in half every four years. However, the market inclination toward Bitcoin trading is steadily increasing, with people trusting it to be a secure trading medium.
The increased demand under diminishing Bitcoin supply conditions justifies price compression by traders who value their coins higher than the current market prices. Traders can predict that the halving criteria will cause the BTC market value to skyrocket after a known period. They justify their need to sell their assets at future prices by arguing that reducing supply makes their assets as valuable as they can be. Buyers also understand the need to buy at such prices.
The Law of Scarcity Justifies Bitcoin Price Compression
The Bitcoin halving mechanism introduces an aspect of coin scarcity on the blockchain circulation every time it comes to pass. The result is that the miners get fewer coins from their mining efforts after successfully adding new blocks to the chain. However, the high costs of Bitcoin mining involving expensive equipment and high energy requirements mean that miners must compensate by selling high. The miners use the scarcity of the coins to justify the high valuation while they use the opportunity to cover the mining costs.
Bitcoin scarcity results from the increasing number of people joining the blockchain as miners, traders, or users. The mining protocols dictate that Bitcoin will not join circulation after thirty-four halving occurrences, seeing the hard cap of 21 million Bitcoin achieved. Traders, therefore, experience reduced block rewards whereby they can only depend on high transaction costs and coin prices to get profits. Their high valuation in the current market based on expected market conditions of the future becomes justifiable.
Despite the reasons justifying Bitcoin traders selling at higher prices than the situation in the current market, there are cons to price compression:
Bitcoin Experiences Frequent Price Volatility
The market volatility of Bitcoin is a problem that affects both trading sides involved in value exchanges based on compressed price valuations. The unpredictable value trends of the asset make it difficult to predict how its value will behave in the future, independent of the elements of scarcity, demand, and supply. It is possible to buy high and suffer heavy losses when its price falls by a big margin. It is possible to sell higher than the current market valuation and only for the asset to gain and become more valuable than projected.
Government Regulations Undo the Expectations of Price Compression
The intervention of government regulatory authorities influences Bitcoin prices in different ways. First, there are attempts to enforce laws to tax crypto transactions which will unbalance the crypto market. The regulations, such as President Biden's Executive Order seek to establish consumer protection legislation in the crypto ecosystem. However, such regulations influence future crypto prices negatively, thus affecting buyers acquiring assets under compressed price conditions.
The attempts to curtail climate change effects experienced due to increased carbon emissions will also influence future crypto markets. The reduction of fossil fuel use will reduce the energy supply for Bitcoin mining, creating extreme scarcity without alternative renewable sources. Therefore, in their price compression attempts, traders cannot correctly predict future Bitcoin prices.
The Effects of Inflation Make Price Compression Efforts Futile
The possibility of inflation makes it difficult to predict and make Bitcoin sales at expected future costs correctly. The potential use of Bitcoin as an inflation hedge in the future means that traders might undervalue it and sell it at rates lower than the real future prices. During inflation, the stability of crypto values makes the assets more valuable than in normal market conditions since they remain scarce. It is easy for holders to sell at compressed prices way lower than what the coins will be worth in an inflated economy in the future.
Author's Thoughts
Price compression requires careful analysis of market trends and the valuation of assets by both holders and potential buyers. The buyer must be cautious not to acquire assets that will soon decline under the impression that the high buying price will be justifiable later. The seller must also be keen to sell only after determining that the assets will not experience positive price shifts with heavier margins.