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Bitcoin just did something it had only done 3 times before. Cryptocurrency usually does this next.
Bitcoin (CRYPTO:BTC) is up 140% over the past year as economic resilience draws investors back into risky assets. Other factors have also contributed to this price appreciation, most notably the enthusiasm for 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 halve events it occurred in 2012, 2016, and 2020, and the most recent took place on April 19, 2024. But investors have been amped up for months as Bitcoin has consistently skyrocketed during the four-year period following the halving events.
Read on to learn more.
The fourth Bitcoin halving event took place 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 Bitcoins. They get paid every time a new block is generated, which happens about once every 10 minutes. However, the subsidy is reduced by 50% every time 210,000 blocks are added to the blockchain, which happens about 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 such an event because halving block subsidies naturally reduces selling pressure. In other words, the amount of newly minted Bitcoin will decrease by 50% over the next four years, meaning miners will have less Bitcoin 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, this time neither outcome is likely because the gains have become more muted with each subsequent halving. In other words, history says Bitcoin will be worth more in four years, but the implied upside is less than 619%.
However, technical analysis is flawed because three data points hardly qualify as a trend. It also doesn’t 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 states that asset prices are directly related to demand and inversely related to supply. In other words, prices reflect changes in demand, but are at odds with changes in supply. Bitcoin obeys this law, but demand is the most important variable as its supply is fixed.
To this end, Fidelity analysts evaluate whether demand is rising or falling in a quarterly report that analyzes various market signals. The most recent report rated the long-term outlook (greater than five years) as neutral, meaning that some metrics suggest strengthening demand, while others indicate weakening demand. However, the recent approval of Bitcoin spot ETFs could easily tilt the outlook higher in the coming quarters.
Spot Bitcoin ETFs provide direct exposure to Bitcoin without the drawbacks inherent to cryptocurrency exchanges. Investors will no longer have to create specialized accounts and pay high commissions for each transaction. Instead, they can actually purchase Bitcoin through their existing brokerage accounts, most of which offer zero-commission trading. Many analysts believe the value proposition could bring more retail and institutional money to the market.
Indeed, Geoff Kendrick of Standard Chartered Bank believes ETF inflows could push Bitcoin’s price to $250,000 by 2025. Tom Lee of Fundstrat Global Advisors says the catalyst could push its price to $500,000 over five years. Finally, Cathie Wood, CEO of Ark Invest, believes that spot Bitcoin ETFs will eventually capture around 5% of institutional assets, driving their price to $3.8 million.
The point is this: Investors should never fixate on price targets, but the recent halving of Bitcoin block subsidies and the approval of spot Bitcoin ETFs could certainly result in price appreciation in the coming years. Patient investors who are 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 had only done 3 times before. Cryptocurrency usually does this next. was originally published by The Motley Fool