The publicity during Bitcoin's incredible run from roughly $5,000 in March 2020 to just over $68,000 in November 2021 was likely responsible for drawing many newcomers to the original cryptocurrency. If you are one of these newcomers who bought Bitcoin (BTC -0.14%) hoping for a similar run, then you are likely disappointed with its dismal performance in 2022.
But before you sell or look for other opportunities, we need to walk through why that could be one mistake you don't want to make.
A half of a half of a half
One of Bitcoin's most unique characteristics is known as a halving event. These halvings are what reduce the growth in the supply of Bitcoin with time. Unlike central banks, that can print money, or some other cryptocurrencies that have an unlimited supply, Bitcoin is designed to be capped at 21 million coins. Currently, there are about 19 million bitcoins in circulation.
To achieve this, Bitcoin's code reduces by half the reward that miners receive when they successfully mine the next block after every 210,000 blocks. Since a block is mined roughly every 10 minutes, we can do a little math and realize that a halving event happens about every four years or so. We can do some more math and find out that the last Bitcoin won't be mined until around the year 2140.
These halving events gradually reduce supply. When compounded with increased demand, it becomes easy to see why Bitcoin gains value. Investors who have not held Bitcoin for at least one halving cycle are missing out on the one characteristic that makes Bitcoin so unique.
There have been three halvings in Bitcoin's history. The first occurred in 2012 and reduced the block reward from 50 bitcoins to 25. The next one was in 2016, which then made the reward 12.5 bitcoins. And the most recent one was in May 2020, cutting the reward to 6.25.
What the halvings tell us
When analyzing Bitcoin's price action surrounding these halvings, a few things become clear. On average, Bitcoin hits a new high roughly 1.5 years after the halving. Additionally, a bottom seems to hit around 1.5 years before the halving event. And lastly, Bitcoin's price at the time of the next halving event tends to be around 55% less than the previous all-time high. These timelines and percentages are only averages, but they provide some insight into Bitcoin's price metrics.
Let's unpack all of that. We are currently just under two years from the next halving, which should happen around May 2024. Given this, it could be plausible that a bottom for this halving cycle has hit. As long as past trends hold true, then Bitcoin's price should be around 55% less than the all-time high of almost $69,000. That results in a price of about $30,000.
At a price of around $22,000 today, Bitcoin is well under the projected May 2024 halving price of $30,000. While we can never time a market, nor should we, now could be a good time to add to your Bitcoin position.
Those who were a little late to the Bitcoin party in 2021 and now have a loss on their investment should do one thing: hold. Time is on your side. In the past, Bitcoin has rewarded those who hold on for at least one halving cycle. And it looks like the best returns come around 1.5 years after the halving. If you bought Bitcoin at or near the 2021 peak, you should have your sights set somewhere on 2025.
With the next halving getting closer each day, Bitcoin is doing exactly what Bitcoin has done in the past. A collective deep breath might be needed after the roller coaster of 2020 and 2021, but investors should be confident that the world's most valuable cryptocurrency is progressing just as it should be.