Bitcoin (BTC 2.33%) soared 140% over the past year as economic resilience drew investors back to risk assets. Other factors also contributed to that price appreciation, especially the excitement surrounding spot Bitcoin exchange-traded funds (ETFs) and the halving of Bitcoin block subsidies.
To elaborate, Bitcoin supply is capped at 21 million coins, and that supply limit is enforced by the periodic halving of block subsidies. The first three halving events occurred in 2012, 2016, and 2020, and the most recent one took place on April 19, 2024. But investors have been amped up for months because Bitcoin has consistently skyrocketed during the four-year period following halving events.
Read on to learn more.
CRYPTO: BTC
Key Data Points
The fourth Bitcoin halving event took place in April 2024
Bitcoin miners earn block rewards when they validate a group of transactions (called a block) and add it to the blockchain. Block rewards include two sources of revenue: (1) transaction fees determined by network traffic and data volume, and (2) block subsidies coded into the Bitcoin protocol.
Block subsidies represent newly minted Bitcoin. They are paid out each time a new block is generated, which happens about once every 10 minutes. However, the subsidy is reduced by 50% each time 210,000 blocks are added to the blockchain, which happens about once every four years.
As mentioned, the most recent halving event occurred on April 19, 2024, when the block subsidy was slashed from 6.25 BTC to 3.125 BTC. Investors are excited by the implications of that event because the halving of 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 significant price appreciation, as shown in the chart below.
|
Bitcoin Halving |
Price At Halving |
Price At Next Halving |
Return |
|---|---|---|---|
|
Nov. 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 past halving events. However, neither outcome is likely this time around because the gains have become more muted with each subsequent halving. In other words, history says Bitcoin will be worth more four years from now, but the implied upside is less than 619%.
However, that technical analysis is flawed because three data points hardly qualifies as a trend. Moreover, it fails to account for the approval of spot Bitcoin ETFs, a recent development that could unlock enormous demand for Bitcoin in the coming years.
Spot Bitcoin ETFs could increase demand for the cryptocurrency
The law of supply and demand stipulates that asset prices are directly correlated with demand and inversely correlated with supply. In other words, prices mirror changes in demand, but they run counter to changes in supply. Bitcoin obeys that law, but demand is the most consequential variable given that its supply is fixed.
To that end, Fidelity analysts evaluate whether demand is rising or falling in a quarterly report that breaks down various market signals. The most recent report scored the long-term outlook (greater than five years) as neutral, meaning certain metrics hint at strengthening demand, while others point to weakening demand. However, the recent approval 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 to cryptocurrency exchanges. Investors no longer need 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 zero commission trading. Many analysts believe that value proposition could bring more retail and institutional money to the market.
Indeed, Geoff Kendrick at Standard Chartered Bank believes ETF inflows could push the price of Bitcoin to $250,000 by 2025. Tom Lee at Fundstrat Global Advisors says that catalyst could carry its price to $500,000 in five years. Finally, Ark Invest CEO Cathie Wood thinks spot Bitcoin ETFs will eventually capture about 5% of institutional assets, driving its price to $3.8 million.
Here's the bottom line: Investors should never fixate on price targets, but the recent halving of Bitcoin block subsidies and the approval of spot Bitcoin ETFs could certainly translate into price appreciation in the coming years. Patient investors comfortable with risk should consider buying a small position in Bitcoin.
