It's hard to believe Bitcoin (BTC 1.31%) is up more than 50% in Q3, hit a new 52-week high of nearly $44,000, and is up more than 160% in 2023. By nearly every account, it seems that Bitcoin has shaken off the frost from a brutal crypto winter.
Yet, given the magnitude of the gains this year, is it possible that investors have missed the Bitcoin boat? The answer might surprise you, but several signs indicate Bitcoin's best days remain ahead for three key reasons.
Image source: Getty Images.
Cyclical growth
Similar to the stock market, Bitcoin goes through phases. This isn't some novel insight. Cycles of growth, like we saw in 2021, are followed by periods of contraction. While those down periods can be painful, they are only natural.
At the start of 2022, a brutal crypto contraction began. Bitcoin fell by 65% at its lowest point in that cycle, and the overall crypto market cap slumped by 80%. But now, a new growth cycle is starting, and it is right on time with historical trends. There is some ambiguity when measuring the durations of bull and bear markets, but history shows that the average bear market lasts around 300 days or so. By most estimates, this most recent crypto winter was its longest ever at nearly 490 days. Put simply, based solely on the patterns of the past, we are a bit overdue for a recovery.
If this is the beginning of a new bull market, as it looks to be, it means there is still plenty of room for Bitcoin to run. In bull markets, it hasn't been uncommon for Bitcoin to increase exponentially, with momentum often lasting for the greater part of a year.
Analyzing short-term drivers
In April 2024, Bitcoin will undergo its fourth halving event. These events are hardwired into Bitcoin's code, and occur every time 210,000 blocks are added to its blockchain -- roughly every four years. At those points, the amount of new tokens that Bitcoin miners are paid for solving hashes and verifying transactions on the blockchain is cut in half -- reducing the effective "inflation" rate at which new tokens are produced. This is one of the primary features that preserves Bitcoin's sound monetary policy, upholds its finite nature, and makes it an effective store of value.
In Bitcoin's early days, its inflation rate was more than 10%. But with three halvings under its belt, its inflation rate has since fallen to just 1.75% today. Yet in four short months, it will be reduced again and sit at a measly 0.875%. This process will continue until all 21 million coins are mined (more than a century from now), at which point Bitcoin will enter unprecedented territory.
The upcoming halving holds significant importance for many reasons, but the most compelling for investors is how it will alter the dynamics around supply and demand. Historically, some of Bitcoin's most impressive gains have come in the months after a halving as the market attempts to find a new equilibrium. With the passing of each halving, even if demand remains constant, the reduction in additional supply typically leads to an increase in prices as would-be buyers compete for fewer available bitcoins.
Data by TradingView. Image source: TradingView.
Breaking down the long-term perspective
The first two points focused more on the short term to highlight how it isn't too late now to buy Bitcoin. But considering a more long-term perspective, I would entertain the notion that it might never be "too late" to buy Bitcoin.
While short-term factors are essential to consider in your investment planning, when it comes to Bitcoin, this is a long-term game. More so than any other asset, Bitcoin rewards investors who have time frames of decades, not just months or years. The true power of Bitcoin comes when investors let the effects of multiple halvings compound. The longer one holds one's tokens, and the more halvings that pass, the greater the returns Bitcoin provides as new tokens become harder to create.
Yet, the most attractive reason for holding Bitcoin over the long term is that it is still early in its adoption. It is difficult to quantify accurately, but estimates suggest that around 15% of the world's population has adopted crypto so far. Add in additional drivers such as interest from financial institutions, the continuous debasement of fiat currencies, and general trends in cryptocurrency use among younger generations, and demand for those 21 million coins looks like it will come under even greater pressure.
When considering Bitcoin from this perspective, its short-term jumps hold less significance, which should reduce some of the FOMO that often accompanies Bitcoin bull markets. There are plenty of tailwinds forming that should drive the price higher over the long term, making today a great time to buy Bitcoin.
