After an impressive rally to start off 2023, persistent macroeconomic uncertainties and other factors are taking some wind out of Bitcoin's (BTC -2.84%) sails. On Aug. 16, Bitcoin began to tumble, at one point shedding more than 10%, marking an end to a historically long period of record-low volatility.
Bitcoin's boom-and-bust cycles are well known, making the recent sell-off nothing surprising. But rather than projecting the likelihood of Bitcoin entering a new bull market and surpassing previous levels based on a hunch, we need to dig a little deeper to understand the inner workings of what makes Bitcoin unique and why today could be an opportune moment for investors to add more Bitcoin to their portfolios while it trades below $30,000.
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New hash rate record
Because the crypto is a decentralized network with no single entity managing funds, Bitcoin holders should have confidence that the blockchain is secure. And based on recent trends, that confidence should be higher than ever.
Hash rate is a metric the quantifies Bitcoin's computational power. The greater the hash rate, the greater the security and strength of the network -- and it just recently hit an all-time high. Not only that, but it has consistently grown for more than a decade despite some ups and downs.
A higher hash rate indicates more miners are joining the Bitcoin network with more powerful machines, thereby increasing the system's integrity. Even during a brutal bear market, this continuous growth is a testament to the network's resilience and reinforces Bitcoin's position as the most reliable and secure blockchain, a central aspect of its long-term value proposition.
Historic supply shortage
Adding to Bitcoin's distinctness is a mechanism built into its code known as a halving. The halving is an event that occurs every time 210,000 blocks are added to the blockchain (roughly every four years): The issuance rate awarded to miners for successfully mining a block is cut in half. Currently, the miner reward is 6.25 bitcoins, but in about eight months, the next halving will occur and reduce it to 3.125 bitcoins.
Obviously, the diminishing rate of Bitcoin's supply growth figures into the simple dynamics of supply and demand. As fewer bitcoins enter the market, assuming demand stays at least the same, prices should increase.
Another halving on the horizon might be reason enough to take advantage of Bitcoin's recent dip, yet data shows that the supply shock of this halving could be unlike any other in Bitcoin's history due to an additional factor.
The number of bitcoins on exchanges shows a clear trend of an increasing supply until March 2020, when supply peaked at nearly 3.2 million coins. At 2.2 million, the number of coins available today is the same as in the spring of 2018.
There are likely a handful of reasons behind this, but the most straightforward explanation involves the halving of Bitcoin's supply growth. Up until March 2020, the growth rate of Bitcoin seems to have outpaced demand, at least enough to cause bitcoins to pile up on exchanges. Yet after the most recent halving, in May 2020, the situation changed.
With the next halving set for April 2024, Bitcoin's available supply will likely face another shock and continue to dwindle. The current scarcity of Bitcoin combined with the decreasing pace of supply growth may cause Bitcoin's price to be pushed and pulled by the dynamics of supply and demand more than ever, making the recent dip below $30,000 a better opportunity to buy as investors remain focused on short-term instability.
