In the dynamic cryptocurrency space, few events attract as much attention and potential impact as Bitcoin‘S (CRYPTO:BTC) Halving. On April 19, Bitcoin experienced its fourth halving, marking a pivotal moment in its journey.
While past performance does not always predict future results, a closer look at the halving reveals Bitcoin’s resilience and its potential for significant price appreciation.
What is Halving?
The halving occurs approximately every four years when 210,000 blocks are added to the blockchain. The halving reduces the payouts awarded to miners for solving blocks, a process known as proof of work.
Since this is the primary means of bringing new Bitcoins into circulation, cutting miner rewards effectively reduces Bitcoin’s inflation rate. With the fourth halving now over, Bitcoin’s inflation rate is a meager 0.85%, making it less inflationary than gold. This process of reducing the inflation rate will continue until 2140, when the last Bitcoin is to be mined, and underpins its robust monetary policy that emphasizes scarcity and finiteness.
The impact of the halving
Because halvings reduce Bitcoin’s inflation rate, they effectively change the dynamics of supply and demand. Therefore, even if demand remains constant, price must increase to compensate for the decrease in supply. Essentially, halvings cause Bitcoin prices to rise.
We can see this by analyzing Bitcoin’s past performance after a halving. On average, in the years when a halving occurs, Bitcoin returns around 125%. If this trend continues, the price would be at $100,000 from the beginning of 2024.
Even better: the more the impact of the halving becomes more entrenched, the higher the likelihood that the largest gains will occur in the years following the halving. During these years, Bitcoin grew on average by almost 400%. If this halving follows a similar pattern, the price of Bitcoin could reach around $500,000 in 2025.
Further exploration of the current landscape
While the halving alone can have a profound impact on the price of Bitcoin, there are some other developments that could make this halving special. Further exploration of the current situation should help you realize that these potential price targets are not as sensational as they seem.
First, it is important to understand that while the halving changes the production of Bitcoin, this halving is unique in that it occurred on an existing supply shock. For the first time, there were fewer coins available on exchanges during this halving than the previous halving. Since its peak in May 2020, the total number of coins available on exchanges has declined sharply. At around 2.2 million today, this is the lowest level since 2018.
Then the spot Bitcoin ETFs come onto the market. In January, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, effectively opening the doors for a new group of buyers to enter the Bitcoin market. For those unfamiliar with cryptocurrency exchanges or who lack the technical knowledge required to navigate cryptocurrency exchanges, these ETFs provide a familiar and regulated way to gain exposure to Bitcoin through traditional brokers. Now investors can add Bitcoin exposure to their 401(k) plans or IRAs, effectively lowering the barriers to entry for a broader range of investors.
Although it is still early, we can see how popular the ETFs are. To meet pent-up demand, the 11 ETFs collectively purchased in mid-February at a rate ten times higher than Bitcoin’s daily production (approximately 900 Bitcoins). Even though the initial buying frenzy has subsided, a renewed surge in buying at this level would mean ETFs would be buying at 20x the daily production rate now that the halving is over, putting even more pressure on Bitcoin’s price would put.
Only time will tell how explosive this halving cycle will be for Bitcoin. But a quick assessment of the impact that each halving will bring, as well as other contributing factors such as an existing supply shock and the introduction of ETFs, provides cause for considerable optimism. Even though the Bitcoin price is around $66,000 today and the effects of the halving will be felt in the coming months, I am still buying Bitcoin in anticipation of what is to come.
Should you invest $1,000 in Bitcoin now?
Before you buy Bitcoin stocks, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and Bitcoin wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $506,291!*
Stock Advisor provides investors with an easy-to-follow roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks »
*Stock Advisor returns from April 22, 2024
RJ Fulton holds positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
Will the Bitcoin Halving Spark a Huge Rally? was originally published by The Motley Fool