Why Bitcoin Could Rise in the Coming Years
In November 2021, Bitcoin (BTC -0.38%)looked unstoppable as the price approached $70,000 per coin. Since then, the cryptocurrency has lost nearly 70% of its value and is now trading at around $19,000.
Was this just a grand financial experiment gone awry, or should investors continue to look at Bitcoin as a possible means of building a diversified investment portfolio?
It is certainly possible that the king of cryptos has seen its best days, but there is also much to be optimistic about. When you consider Bitcoin’s history of sales and recoveries and an important upcoming event, this crypto looks quite attractive at current prices.
Image source: Getty Images.
Bitcoin has a history of crashes and recoveries
If you’ve been following Bitcoin history for more than a couple of years, you know that large drawdowns are a common occurrence. In fact, there have been three crashes in the last decade worse than the current one:
|
Year |
Crashed |
% loss |
Reason |
|---|---|---|---|
|
2011 |
Dropped from $32 to $0.01 |
99% |
Mt. Gox breach |
|
2015 |
Dropped from $1000 to $170 |
83% |
Chinese Ban/Mt. Gox halts trading |
|
2017 |
Dropped from $20,000 to $3,200 |
84% |
Crypto winter |
Source: Cointelegraph. Table by author.
Most importantly, on all three occasions Bitcoin recovered from these huge declines.
When you look at the causes of the previous crashes, the current situation feels pretty tame. In 2011, Mt. Gox – a Japanese exchange that was responsible for roughly 70% of all Bitcoin transactions – was hacked, resulting in the theft of more than 800,000 Bitcoins.
And yet Bitcoin not only recovered from this difficulty, but rose to new heights in the years that followed.
If Bitcoin can survive an event as damaging as a 99% crash, I have no doubt that it can recover from today’s bear market and macroeconomic headwinds.
The next halving could push Bitcoin to a new all-time high
Perhaps the most important catalyst in the near term is the next halving, which is scheduled to take place in the second quarter of 2024.
If you are completely new to Bitcoin, I would suggest reading this informative article, which will give you a basic understanding of Bitcoin basics.
Halving refers to an event that occurs approximately every four years. Bitcoin’s protocol requires that after every 210,000 blocks are mined, the reward given to miners is halved. In the early days, miners were rewarded with 50 bitcoins each time they solved a problem.
Fast forward to today and miners receive 6.25 tokens, and that number is scheduled to be halved in about 18 months. It doesn’t take a genius to understand that if fewer Bitcoins are rewarded to miners, the value of these coins will likely rise. There is simple logic to supply and demand.
If we look at previous halvings, we see how this premise played out:
|
Year of halving |
Price increase in the next 12 months |
|---|---|
|
2012 |
950% |
|
2016 |
400% |
|
2020 |
120% |
Source: Investopedia. Chart by author.
The light at the end of the tunnel
Bitcoin has recently been lumped into a broad basket of risky investments, and as such, the market has hammered it. But investors should also understand that the market is a leading indicator, and it comes before the broader economic environment.
It is entirely possible that we may see a resolution in supply chain constraints caused by the pandemic and the Russian invasion of Ukraine in the next 12 to 24 months, which will ease the pace of inflation. This is likely to prompt the Federal Reserve to change its rate hike strategy and could very well be the catalyst growth investors have been waiting for.
Considering that Bitcoin has tracked growth stocks almost in lockstep over the past year, the next halving and a potential drop in inflation could see the coin’s price rise.
^IXIC data by YCharts.
While we can only speculate on the macro environment, we can be sure that the Bitcoin halving will happen sometime in 2024. And if history is any indicator, this is likely good news for the price.
