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Bitcoin just did something it has only done 3 times before. Cryptocurrency usually does this next.
Bitcoin (CRYPTO:BTC) has soared 140% over the past year as economic resilience has brought investors back to risky assets. Other factors have also contributed to this price appreciation, particularly excitement over Bitcoin spot exchange-traded funds (ETFs) and the halving of Bitcoin block subsidies.
To be more specific, Bitcoin’s supply is capped at 21 million coins, and this supply limit is reinforced by the periodic halving of block subsidies. The first three events halved occurred in 2012, 2016, and 2020, and the most recent took place on April 19, 2024. But investors have been excited for months because Bitcoin has consistently soared in the four years since the events of halving.
Keep reading to find out 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 revenue streams: (1) transaction fees determined by network traffic and data volume, and (2) block grants encoded in the Bitcoin protocol.
Block grants represent newly created Bitcoin. They get paid every time a new block is generated, which happens approximately every 10 minutes. However, the subsidy is reduced by 50% every time 210,000 blocks are added to the blockchain, which happens approximately 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, as the halving of block subsidies naturally reduces selling pressure. In other words, the amount of newly issued 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 past halving events. However, neither outcome is likely this time around, as 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, this technical analysis is flawed because three data points hardly constitute a trend. Additionally, it doesn’t take into account the approval of spot Bitcoin ETFs, a recent development that could trigger 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 correlated with demand and inversely correlated with supply. In other words, prices reflect changes in demand, but they work against changes in supply. Bitcoin obeys this law, but demand is the most important variable since its supply is fixed.
To this end, Fidelity analysts assess whether demand is increasing or decreasing in a quarterly report that breaks down different market signals. The most recent report rated the long-term outlook (more than five years) as neutral, meaning that some indicators suggest strengthening demand, while others point to weakening demand. However, the recent approval of spot Bitcoin ETFs could easily tip the scales towards an uptrend in the coming quarters.
Spot Bitcoin ETFs provide direct exposure to Bitcoin without the drawbacks inherent to cryptocurrency trading. Investors no longer need to create specialized accounts and pay high fees for each transaction. Instead, they can actually buy Bitcoin through their existing brokerage accounts, most of which offer commission-free trading. Many analysts believe this value proposition could bring more retail and institutional money into the market.
Indeed, Geoff Kendrick of Standard Chartered Bank estimates that ETF inflows could push the price of Bitcoin to $250,000 by 2025. Tom Lee of Fundstrat Global Advisors says this catalyst could push its price to $250,000. $500,000 in five years. Finally, Cathie Wood, CEO of Ark Invest, believes that spot Bitcoin ETFs will eventually capture around 5% of institutional assets, bringing their price to $3.8 million.
Here’s the bottom line: Investors should never focus on price targets, but the recent Bitcoin block grant halving and approval of spot Bitcoin ETFs could certainly result in price appreciation in the years future. Investors who are patient and comfortable with risk should consider purchasing a small position in Bitcoin.
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Trevor Jennevine has no position in any of the stocks mentioned. The Motley Fool posts and recommends Bitcoin. The Motley Fool has a disclosure policy.
Bitcoin just did something it has only done 3 times before. Cryptocurrency usually does this next. was originally published by The Motley Fool