 |
| Image source: istockphoto |
The cryptocurrency world is always changing, and one event that stands out for its potential impact is Bitcoin's (CRYPTO: BTC) halving. On April 19, Bitcoin went through its fourth halving, a significant milestone in its history. While it's not guaranteed, looking at the past halving events shows how Bitcoin has shown resilience and the possibility for substantial price increases in the future.
What does "halving" mean?
Roughly every four years, or after 210,000 blocks are added to the blockchain, the halving event occurs. This event results in a reduction of the payouts awarded to miners for solving blocks, which is part of the proof of work process.
The reduction in miner rewards through the halving process is the primary method for introducing new Bitcoins into circulation. With the fourth halving completed, Bitcoin's inflation rate has been significantly reduced to a mere 0.85%, making it less inflationary than gold. This ongoing process of decreasing the inflation rate will persist until 2140, when the final Bitcoin is expected to be mined. This approach underscores Bitcoin's strong monetary policy, which emphasizes scarcity and limited supply.
The impact of the halving
The halving events significantly alter the supply and demand dynamics of Bitcoin by reducing its inflation rate. Consequently, even with constant demand, the price of Bitcoin must rise to counteract the decrease in supply. In essence, halvings drive upward price movement for Bitcoin.
This trend is evident when examining Bitcoin's historical performance following a halving. On average, Bitcoin tends to generate a return of approximately 125% in the years when a halving occurs. If this pattern continues, it could potentially lead to a price of $100,000 by the beginning of 2024.
As the impact of the halving becomes more pronounced, it is during the years after a halving that the most significant gains usually occur. Historically, Bitcoin has experienced an average growth of nearly 400% during these years. If this halving follows a comparable trend, it is possible that Bitcoin's price could potentially reach approximately $500,000 by 2025.
Further investigation into the current situation
The halving event alone can have a significant impact on Bitcoin's price, but there are other factors at play that could make this particular halving different from previous ones. By examining the current landscape, it becomes clear that the projected price targets are not as far-fetched as they may initially appear.
It's important to note that while the halving affects Bitcoin's production, this particular halving is unique because it follows an existing supply shock. For the first time, there were fewer coins available on exchanges leading up to this halving compared to the previous one. Since reaching a peak in May 2020, the total number of coins available on exchanges has drastically decreased, currently sitting at around 2.2 million, the lowest levels since 2018.
In January, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, which allowed a new group of investors to enter the Bitcoin market. These ETFs offer a regulated way for individuals who may not be familiar with cryptocurrency exchanges to gain exposure to Bitcoin through traditional brokerages. This means that investors can now include Bitcoin in their 401(k) plans or IRAs, making it more accessible to a wider range of people.
Even at this early stage, the popularity of ETFs is evident. In mid-February, the collective purchasing rate of the 11 ETFs was 10 times higher than the daily production of Bitcoin, which is approximately 900 Bitcoins. While the initial surge in buying has subsided, if purchasing were to reach these levels again, it would mean that the ETFs would be buying at a rate 20 times higher than the current daily production rate, putting even more pressure on Bitcoin's price now that the halving has occurred.
It remains to be seen how impactful this halving cycle will be for Bitcoin. However, considering the potential implications of each halving event, along with other contributing factors such as existing supply shock and the introduction of ETFs, there are grounds for significant optimism. Despite Bitcoin's current price of around $66,000, I am optimistic about the future and continue to invest in Bitcoin, anticipating the effects of the halving to unfold in the coming months.
Is it a good idea to put $1,000 into Bitcoin at this time?
Before purchasing Bitcoin stocks, take into account the following:
The Motley Fool Stock Advisor analyst team has recently identified what they believe to be the top 10 stocks for investors to purchase, and Bitcoin did not make the list. The 10 selected stocks have the potential to generate significant returns in the upcoming years.
For example, consider Nvidia's inclusion on this list back on April 15, 2005. If you had invested $1,000 at the time of their recommendation, you would have had $506,291!*
Stock Advisor offers investors a straightforward roadmap to success, with guidance on portfolio construction, regular analyst updates, and two new stock recommendations every month. Since 2002*, the Stock Advisor service has delivered returns that are more than four times that of the S&P 500.