The rally in Bitcoin (BTC -2.54%) may not count as a bull market as it tries to shake off the frost from a brutal crypto winter, but the world's most valuable cryptocurrency has more than doubled in 2023. Helping to add to a solid year, over the last few days, Bitcoin mustered enough momentum to break through the $30,000 mark and surge to a new yearly high. Yet even with a fresh rally, sentiment remains overwhelmingly bearish as Bitcoin's price is still more than 50% off of its all-time high.
For now, Bitcoin is teetering between the depths of a bear market and potentially preparing for a resurgence. As it continues to navigate this fine line, there are two reasons investors should treat this as a buying opportunity in preparation of looming unprecedented pressure on Bitcoin's finite supply.
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A supply scarcity game changer
Bitcoin's halving events, which occur roughly every four years, have been instrumental in its transformation into a scarce digital asset and ascension to the most valuable cryptocurrency. The principle is straightforward: After every 210,000 blocks, the rewards granted to miners are cut in half. This automatic mechanism reduces Bitcoin's supply growth rate and makes it scarcer with each passing event. Currently, miners receive 6.25 bitcoins for their efforts, but in just 172 days, this figure will drop to 3.125.
This simple supply-and-demand dynamic has been a driving force behind Bitcoin's historical price surges, especially in post-halving years. As the next halving approaches, the growth in Bitcoin's supply will slow, potentially amplifying its value -- provided demand remains steady.
Yet this halving might be unlike any seen before. When observing data related to the number of Bitcoins on exchanges, there is a clear trend of an increasing supply until March 2020, when supply peaked at nearly 3.2 million coins. However, since then, it has been a different story. Currently sitting at 2.3 million, the number of coins available today is at levels last seen in the spring of 2018.
There are likely a handful of reasons behind this, but the most straightforward explanation is related to the reduction of Bitcoin's supply growth. Up until March 2020, the supply growth of Bitcoin seems to have outpaced demand, at least enough to cause Bitcoins to pile up on exchanges. But after the most recent halving in May 2020, the situation changed as the available supply of coins significantly diminished.
The institutional floodgates are opening
Over the course of Bitcoin's evolution, there has been a widespread belief that it would one day mature enough to be sought after by mainstream institutional investors. Yet after the token went on a historic run in 2021 en route to an all-time high of nearly $69,000, the number of deep-pocketed institutions clamoring for Bitcoin exposure remained minuscule, with just a handful of companies including Tesla, MicroStrategy, and Block leading the way. But that might finally be changing.
June of this year marked a turning point as BlackRock (BLK 0.69%), the world's largest asset manager, applied to the U.S. Securities and Exchange Commission (SEC) for approval to create a spot Bitcoin exchange-traded fund (ETF). The potential approval of a spot ETF could revolutionize institutional adoption, opening doors to clients with retirement plans, IRAs (individual retirement accounts), pensions, and more. Following BlackRock's filing, an array of Wall Street giants, including Fidelity, Invesco, Ark Invest, and VanEck, also entered the Bitcoin ETF race.
While spot Bitcoin ETF applications have been submitted here and there since 2013, all have been denied thus far. But there's growing optimism that this time will be different due to the prominence of these firms and the recent legal battles between the SEC and crypto defendants tipping in favor of the accused.
Quantifying the impact an approval would have, Steven Schoenfeld, former managing director for BlackRock, surmised that approval of a Bitcoin ETF by the SEC is a near certainty at this point and would bring $200 billion to Bitcoin in the short term. More optimistic estimates claim that approval of the ETF could unleash $600 billion into the Bitcoin market. Considering Bitcoin's current market cap hovers at about $650 billion, these numbers could easily move its price.
The bigger picture
In the short term, it's easy to understand bearish sentiments surrounding Bitcoin, especially when comparing its current price to the all-time high. However, when looking at the bigger picture, there's a compelling case for a resurgence. The combination of an imminent halving, diminishing available supply, and billions of institutional dollars knocking on Bitcoin's door is coalescing to drive the price up.
Investors who maintain a long-term perspective, understanding that this is a marathon, not a sprint, are poised for the most lucrative rewards. With Bitcoin's price still significantly below its peak, those who invest now have the potential to reap substantial gains in the coming years as Bitcoin enters a new chapter of its success story.
