Bitcoin (CRYPTO: BTC) rose 140% over the past year as economic resilience drew investors back to risky assets. Other factors also contributed to that price increase, especially the excitement around spot Bitcoin Exchange-Traded Funds (ETFs) and the halving of Bitcoin block subsidies.
To elaborate further, Bitcoin supply is limited to 21 million coins, and that supply limit is enforced by the periodic halving of block subsidies. The first three halving events took place in 2012, 2016 and 2020, with the most recent happening on April 19, 2024. But investors have been excited for months as Bitcoin has consistently skyrocketed during the four-year period following the halving events.
Read on for more information.
The fourth Bitcoin halving took place in April 2024
Bitcoin miners earn block rewards when they validate a group of transactions (called a block) and add them 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 the newly minted Bitcoin. They are paid out every time a new block is generated, which happens about once every 10 minutes. However, every time 210,000 blocks are added to the blockchain, the subsidy is reduced by 50%, which happens about once every four years.
As mentioned, the most recent halving took place on April 19, 2024, when the block grant was reduced from 6.25 BTC to 3.125 BTC. Investors are excited about the implications of this event, as halving block subsidies 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 led to a significant increase in price, as shown in the chart below.
|
Bitcoin halving |
Halving price |
Price at next halving |
Yield |
|---|---|---|---|
|
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 returned an average of 2,391% and a median of 1,263% between previous halving events. However, neither outcome is likely this time, as gains have grown weaker 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, that technical analysis is flawed, because three data points can hardly be classified as a trend. Furthermore, it does not take into account the adoption of spot Bitcoin ETFs, a recent development that could unleash massive 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 go against changes in supply. Bitcoin obeys that law, but demand is the biggest variable since supply is fixed.
To that end, Fidelity analysts evaluate whether demand is rising or falling in a quarterly report that breaks down different market signals. The latest report rates the long-term outlook (more than five years) as neutral, meaning that some measures point to strengthening demand, while others point to weakening demand. However, the recent adoption of spot Bitcoin ETFs could easily tilt the outlook toward bullish in the coming quarters.
Spot Bitcoin ETFs provide direct exposure to Bitcoin without the inconveniences inherent in cryptocurrency exchanges. Investors no longer have to create specialized 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 that a value proposition could bring more retail and institutional money into the market.
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 take the price to $500,000 within five years. Finally, Cathie Wood, CEO of Ark Invest, thinks spot Bitcoin ETFs will eventually capture around 5% of institutional assets, pushing the price to $3.8 million.
The bottom line: Investors should never fixate on price targets, but the recent halving of Bitcoin block subsidies and the adoption of spot Bitcoin ETFs could certainly translate into price increases in the coming years. Patient investors who are comfortable with risk should consider buying a small position in Bitcoin.
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Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Bitcoin. The Motley Fool has a disclosure policy.
Bitcoin just did something it has only done three times before. The cryptocurrency usually does this afterwards. was originally published by The Motley Fool
