Bitcoin
Bitcoin just did something it has only done three times before. Cryptocurrency usually does this next.
Bitcoin (CRYPTO:BTC) soared 140% last year as economic resilience drew investors back into risky assets. Other factors have also contributed to this price appreciation, especially the excitement surrounding spot Bitcoin exchange-traded funds (ETFs) and the halving of Bitcoin block subsidies.
To elaborate, Bitcoin’s supply is limited to 21 million coins, and this supply limit is enforced by the periodic halving of block subsidies. The first three halving events occurred in 2012, 2016, and 2020, and the most recent occurred on April 19, 2024. But investors were excited for months as Bitcoin soared consistently during the four-year period following the halving events.
Keep reading to find out more.
The fourth Bitcoin halving event occurred in April 2024
Bitcoin miners earn block rewards when they validate a group of transactions (called a block) and add it to the blockchain. Block rewards include two sources of revenue: (1) transaction fees determined by network traffic and data volume and (2) block subsidies encoded in the Bitcoin protocol.
Block grants represent newly minted Bitcoin. They are paid every time a new block is generated, which happens once every 10 minutes. However, the subsidy is reduced by 50% each time 210,000 blocks are added to the blockchain, which happens once every four years.
As mentioned, the most recent halving event occurred on April 19, 2024, when the block subsidy was reduced from 6.25 BTC to 3.125 BTC. Investors are excited about the implications of this event because halving block subsidies naturally reduces selling pressure. In other words, the amount of newly minted Bitcoins will decrease by 50% over the next four years, meaning miners will have fewer Bitcoins to sell.
As a result, halving events have historically led to significant price appreciation, as shown in the chart below.
|
November 28, 2012 |
$12 |
$647 |
5,291% |
|
July 9, 2016 |
$647 |
$8,821 |
1,263% |
|
May 11, 2020 |
$8,821 |
$63,462 |
619% |
Data source: Morgan Stanley, YCharts.
Bitcoin has returned an average of 2,391% and a median of 1,263% between previous halving events. However, neither outcome is likely this time because the gains have become weaker with each subsequent halving. In other words, history says Bitcoin will be worth more four years from now, but the implied upside is less than 619%.
However, this technical analysis is flawed because three data points can hardly be considered a trend. Furthermore, it does not take into account the approval of spot Bitcoin ETFs, a recent development that could unlock huge demand for Bitcoin in the coming years.
The story continues
Spot Bitcoin ETFs could increase demand for the cryptocurrency
The law of supply and demand stipulates that asset prices are directly correlated with demand and inversely correlated with supply. In other words, prices reflect changes in demand, but counteract changes in supply. Bitcoin obeys this law, but demand is the most important variable, as its supply is fixed.
To that end, Fidelity analysts assess whether demand is increasing or decreasing in a quarterly report that analyzes various market signals. The most recent report classified the long-term outlook (greater than five years) as neutral, meaning that certain metrics suggest strengthening demand, while others point to weakening demand. However, the recent approval of spot Bitcoin ETFs could easily tilt the outlook bullish in the coming quarters.
Spot Bitcoin ETFs provide direct exposure to Bitcoin without the inconveniences inherent in cryptocurrency exchanges. Investors no longer need to create specialized accounts and pay high fees for each transaction. Instead, they can effectively purchase Bitcoin through their existing brokerage accounts, most of which offer zero-commission trading. Many analysts believe the value proposition could bring more institutional and retail money into the market.
In fact, Geoff Kendrick of Standard Chartered Bank believes ETF flows could push the price of Bitcoin to $250,000 by 2025. Tom Lee of Fundstrat Global Advisors says the catalyst could drive its price to $500,000 in five years. Finally, Cathie Wood, CEO of Ark Invest, believes that spot Bitcoin ETFs will eventually capture about 5% of institutional assets, bringing their price to $3.8 million.
Here’s the bottom line: Investors should never fixate on price targets, but the recent halving of Bitcoin block subsidies and the approval of spot Bitcoin ETFs could certainly translate into price appreciation in the coming years. Investors who are patient and comfortable with risk should consider purchasing a small position in Bitcoin.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Bitcoin. The motley fool has a disclosure policy.
Bitcoin just did something it has only done three times before. Cryptocurrency usually does this next. was originally published by The Motley Fool