This year has demonstrated that perhaps the so-called crypto winter is thawing, as the overall market for digital assets has climbed in value by about 50%.
Bitcoin (BTC +0.98%), the world's most valuable cryptocurrency, has performed much better. It's up 77% so far in 2023, crushing even the tech-heavy Nasdaq Composite Index's gain.
Yet despite its impressive momentum, Bitcoin is still 57% off its peak price of nearly $69,000 set in November 2021. This might present a potential opportunity for investors.
Should you buy Bitcoin on the dip? Here's why I think this is a smart financial decision.
Ready to skyrocket to a new all-time high
High inflation started to become a serious problem in the second half of 2021, and this forced the Federal Reserve to start increasing interest rates at a pace never seen before. The result was that Bitcoin, and many other risky assets, tanked in 2022. Investors prioritized safer holdings for their portfolios.
Things could be reversing course, though. The widely followed consumer price index, a key measure of inflation, has shown signs of slowing in the past few months. Because the market is a forward-looking system, investors might be predicting that the central bank will eventually get back to cutting rates in the near future. Maybe in anticipation of this, Bitcoin has soared in 2023.
Besides the possibility of a more favorable macroeconomic backdrop for risky assets, there's another important catalyst that investors need to know about. Every four years, Bitcoin's network undergoes what's known as a halving, which is when the number of new coins rewarded to miners gets cut in half. Bitcoin's price has typically gone up in the months before and after this event.
This is mainly due to the basic economic theory of supply and demand. The supply of new Bitcoin that enters the market is reduced, but over time, demand has generally increased. This creates the perfect scenario for a bull run.
The next halving is forecast to occur in April 2024, about nine months from today. If history is any guide, now could be one of the best times to buy Bitcoin.
CRYPTO: BTC
Key Data Points
Benefiting from a bigger trend
If the near-term catalysts of looser monetary policy by the Fed and the halving reducing the supply growth rate aren't strong enough reasons to be an investor, then it's best to take a step back and focus on a more powerful trend that could lift this top digital asset to new heights.
Considering recent news, the most obvious long-term catalyst is the chance of greater institutional adoption. BlackRock, Fidelity, WisdomTree, and Invesco, among others, have pending applications with the Securities and Exchange Commission (SEC) to launch spot Bitcoin exchange-traded funds. This has been denied before by the SEC amid concerns about market manipulation. But with such huge money managers that together control trillions in assets pushing for this financial product, it's clear that there's a ton of interest among investors to gain exposure to Bitcoin.
Going back to the basic economic theory I discussed above, when these huge buyers enter the market for an asset that has a fixed supply cap of 21 million coins, Bitcoin's price is well positioned to rise.
Prepare for volatility
Bitcoin is significantly below its all-time high price. And the catalysts I mentioned could lift the price to a new all-time high in the next few years. But this path, unsurprisingly, will be full of volatility.
As Bitcoin's market cap has grown, its volatility has come down to the point that it now trades like another growth tech stock you might have in your portfolio. That's an encouraging sign, for sure. However, some investors might not be able to stomach this if it is a large part of the portfolio, so it's best to start with a smaller position.
