While Bitcoin (BTC 1.76%) has soared more than 60% in value in 2023, it's still also more than 60% below its all-time high from November 2021. The current price sits at just around $26,750, pressured by higher interest rates and uncertain economic backdrop.
With this top cryptocurrency trading below $30,000 for the past 2 1/2 months, investors might be smart to take a closer look at adding Bitcoin to their portfolios. Here are some compelling reasons that's a good move.
Near-term catalysts
Looking out even 12 months from now, it's possible that Bitcoin's price will be significantly higher than today, which means buying it for less than $30,000 would look like a real steal in hindsight. Some powerful potential catalysts are on the horizon in the near term.
Every four or so years, Bitcoin undergoes what's called a halving. This is when the amount miners are rewarded for processing transactions gets cut in half, essentially reducing the rate at which new coins are created. Looking at past halving cycles shows us that Bitcoin could see major bullish sentiment. Between the last halving on May 11, 2020, to Bitcoin's all-time high, the price skyrocketed 661%.
Basic economic theory can explain what's going on. If Bitcoin's supply of new issuance gets cut in half but demand remains steady or even rises, there is support for a higher price. The next halving is scheduled for April of next year.
The biggest news coming from the world of Bitcoin in the past several months has been that huge asset management firms have filed applications with the Securities and Exchange Commission (SEC) to approve spot Bitcoin exchange-traded funds. While the SEC hasn't made any decisions yet, instead pushing back its deadlines, there is a lot of enthusiasm that these financial products will get approved.
The belief is that if this happens, the floodgates will open, introducing fresh capital -- and lots of it -- with a regulated, accessible, liquid, and easy way to gain exposure to Bitcoin. Should this happen, it could be viewed as a major milestone for Bitcoin, transforming it into a legitimate financial asset. And again, with higher demand, the price could soar.
CRYPTO: BTC
Key Data Points
Another catalyst, the most unpredictable, is the Federal Reserve's monetary policy. Since March 2022, the central bank has been on an aggressive path of hiking interest rates with the sole intention of getting inflation back to its 2% target. There might be one more rate hike before 2023 ends.
However, I have the view that interest rates will have to come down sooner rather than later, mainly due to how much debt the government carries. Unless the government wants interest payments to keep taking up a sizable chunk of public spending, a looser monetary policy, characterized by lower interest rates, will need to happen.
A more accommodative Fed is usually the key ingredient for a very favorable backdrop for risky assets, Bitcoin included. Investors will go further down the risk curve to achieve better returns. And this, again, can be a boon for Bitcoin's price.
Patience is key
These near-term catalysts could be powerful price drivers for Bitcoin, but their potential positive impact is far from a sure thing. I'm always skeptical of price targets any Wall Street analyst, economist, or strategist comes up with. The world is inherently uncertain, with a million different variables that can affect the prices of financial assets.
Let me be clear. If you are indeed bullish on Bitcoin, do not buy it hoping that it shoots up in value in 12 months. Instead, add it to your portfolio with the intention of owning it for the next decade. There's a good chance your patience will be rewarded.
