Bitcoin (CRYPTO:BTC) rose 140% last year as economic resilience drove investors back into risk assets. Other factors also contributed to this price increase, most notably the excitement surrounding spot Bitcoin exchange-traded funds (ETFs) and the Bitcoin block subsidy halving.
To elaborate: Bitcoin supply is capped at 21 million coins, and this supply limit is enforced through regular block subsidy halvings. The first three halving events occurred in 2012, 2016, and 2020, and the most recent one occurred on April 19, 2024. But investors have been excited for months as Bitcoin has continued to soar in the four years following the halving events.
Read on to find out more.
The fourth Bitcoin halving took place in April 2024
Bitcoin miners receive block rewards when they validate and add a group of transactions (called a block) to the blockchain. Block rewards include two revenue streams: (1) transaction fees, which are determined by network traffic and data volume, and (2) block subsidies, which are encoded in the Bitcoin protocol.
Block subsidies represent newly minted Bitcoin. You are paid out 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 is approximately every four years.
As mentioned, the last 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 impact of this event as the block subsidy halving naturally reduces selling pressure. In other words, the amount of newly minted Bitcoin will decline by 50% over the next four years, meaning miners will have less Bitcoin to sell.
As a result, halving events have historically resulted in significant price increases, as shown in the chart below.
|
Bitcoin halving |
Price at halving |
Price at next halving |
To return |
|---|---|---|---|
|
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 achieved an average return of 2,391% and a median of 1,263% between past halving events. However, no outcome is likely this time as the gains became more muted with each successive halving. In other words, history says Bitcoin will be worth more in four years, but the implied upside potential is less than 619%.
However, this technical analysis is flawed because three data points are hardly considered a trend. Additionally, it does not take into account the approval of spot Bitcoin ETFs, a recent development that could trigger huge demand for Bitcoin in the coming years.
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 contradict changes in supply. Bitcoin obeys this law, but demand is the most important variable since supply is fixed.
To do this, Fidelity analysts assess whether demand is rising or falling in a quarterly report that breaks down various market signals. The most recent report rated the long-term outlook (longer than five years) as neutral, meaning that certain metrics point to increasing demand while others indicate weakening demand. However, the recent approval of spot Bitcoin ETFs could slightly tip the outlook towards bullish in the coming quarters.
Spot Bitcoin ETFs allow direct exposure to Bitcoin without the inconvenience associated with cryptocurrency exchanges. Investors no longer have to create special accounts and pay high fees for each transaction. Instead, they can effectively purchase Bitcoin through their existing brokerage accounts, most of which offer commission-free trading. Many analysts believe the value proposition could bring more private and institutional money into the market.
In fact, Geoff Kendrick of Standard Chartered Bank believes that ETF inflows could drive 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, expects spot Bitcoin ETFs to eventually capture about 5% of institutional assets, driving their price to $3.8 million.
Here’s the bottom line: Investors should never fixate on price targets, but the recent Bitcoin block subsidy halving and the approval of spot Bitcoin ETFs could certainly lead to a price increase in the coming years. Patient investors 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 in and recommends Bitcoin. The Motley Fool has a disclosure policy.
Bitcoin just did something it has only done three times before. Typically, cryptocurrency does this next. was originally published by The Motley Fool