The stock market and the overall cryptocurrency market have had great years thus far, rewarding investors with strong gains. In this type of bullish environment, it's no surprise that Bitcoin (BTC 0.45%) has soared 125% (as of Nov. 21).
Despite the renewed sense of optimism surrounding the world's most valuable cryptocurrency, its current price of roughly $37,000 is 47% below the peak price from about two years ago. There's still a lot of room before Bitcoin can get back to its all-time high.
Is it a smart move for investors to buy this digital asset on the dip? Let's take a closer look.
A favorable setup
Now might be one of the best times to buy Bitcoin because of an event known as a halving. Miners, or those who expend computing power and electricity to approve transactions, are rewarded with new coins. Happening about every four years, a halving is when Bitcoin's inflation rate of new supply gets cut in half. It's set to happen in April next year.
Over time, as rising demand has taken hold, coupled with less supply hitting the market, Bitcoin's price has trended higher. And looking at history, in the several months leading up to a halving, and in the months after, the price has generally been in bull market territory.
There's also anticipation that the Securities and Exchange Commission (SEC) is poised to finally approve spot Bitcoin exchange-traded funds. Some of the largest asset managers in the world, in charge of trillions of dollars, have applied for this financial product to come to market.
It's hard to know what the SEC will decide, but there's anticipation it will be positive. And this could open up the floodgates of fresh capital being directed to Bitcoin, which can help support a higher price.
I'm no macroeconomic expert, but there's another potential catalyst for Bitcoin on the horizon, and it involves what the Federal Reserve does. With inflation showing signs of cooling, the central bank might decide to start cutting interest rates in 2024. Moreover, if the U.S. economy ends up entering a recession, the Fed will also have no choice but to reduce rates. This scenario can benefit risky assets like Bitcoin.
A unique financial asset
Besides the possibility of three catalysts for Bitcoin's price in the near term, there are some other reasons investors might be interested in owning this asset.
Just look at what has happened in 2023: Bitcoin, often viewed as extremely risky to own, has crushed the performance of Treasuries and gold, both of which are seen as two of the safest assets to own. It's encouraging to see Bitcoin's price skyrocket this year amid economic and geopolitical uncertainty.
Some investors might view Bitcoin as a much more attractive asset in light of what's going on in the traditional financial system, thanks to its decentralized nature where no single entity is in charge.
Financial mismanagement by the government has seemed to cause rising costs for everything. Plus, budget deficits, increasing debt balances, underfunded entitlements, and the continuous threat of government shutdowns are likely only going to get worse. This situation makes buying Bitcoin, an asset completely outside of this fiat architecture, look incredibly smart.
To be clear, this is still a very volatile asset, which might be hard for most investors to stomach. So it's a good idea to allocate a tiny percentage of your overall portfolio to Bitcoin. As you learn more and gain greater conviction, it makes sense to increase that allocation.
