The world's largest cryptocurrency by market capitalization is Bitcoin (BTC +4.64%). And it's gotten a whole lot bigger in 2023. As of this writing, Bitcoin has a market cap of over $860 billion and the price is up 160% year to date.
While a 160% gain is extraordinary, it's not necessarily surprising -- Bitcoin is following a pattern that's been going on for over a decade. Investors should first try to understand why there's a pattern. But once understood, there's reason to believe Bitcoin could double again in 2024, with an important caveat.
Bitcoin Price data by YCharts
Why is there a Bitcoin pattern?
Investors in stocks would do well to disregard patterns. Stocks represent real-world businesses, and long-term price movements reflect what's going on in the business. There's no way some lines on a chart can predict the future for what these companies will do.
Bitcoin's pattern, however, is based on something going on in real life -- something that is predictable. And I'll explain. But I have to start at the top.
As a currency, Bitcoin is meant to change hands, paying for goods or services in theory. But because it's digital, computers have to process the transactions and keep track of it all.
Bitcoin is decentralized, which means there's no single centralized owner. Therefore, the computers processing transactions are doing so voluntarily. The process is called mining. And these volunteers do it because the system is set up to pay them Bitcoins for their efforts.
The Bitcoin network issues new Bitcoins to these miners, so there is modest inflation built into the network. There are over 19.5 million Bitcoins in circulation today. And at the current mining pace, about 900 new Bitcoins enter circulation daily.
However, roughly every four years, the mining reward is cut by 50% -- this is known as the halving event. Therefore, there's a huge, sudden shock to the system. And this disruption is what has caused the aforementioned pattern in the past.
CRYPTO: BTC
Key Data Points
Why Bitcoin could double again in 2024
The next Bitcoin halving event should happen in the first half of 2024 based on the current pace of mining.
In past cycles, Bitcoin has seen huge gains in the year before the halving, the year of the halving, and the year after the halving. The second year after a halving has historically had a drop of 60% or more, as seen below.
Bitcoin Price data by YCharts
This year is the year before the halving, and Bitcoin has followed the pattern with big gains. And that's why one would expect Bitcoin to continue its surge with big gains and new all-time highs in 2024.
How the entire pattern could fall apart
I wouldn't be doing readers any service by simply pointing out a historical pattern and calling it a day. Even though Bitcoin's pattern has been predictable, there's something that could cause it to utterly disintegrate.
I always talk about this in terms of supply and demand. The price of Bitcoin is rising, indicating that there are more buyers than sellers and that demand is higher than supply. When the supply gets cut in half, the imbalance is exacerbated and the price soars even more.
Bitcoin could skyrocket in 2024. This assumes that there will be consistently strong demand from investors. But this very human element is the thing that could unexpectedly change on a dime.
I personally own some Bitcoin and I've been happy with my investment. But I'm still not satisfied with my ability to predict the human element. To best predict future demand, I wanted to see people actually using the cryptocurrency as, well, a currency. But it seems that for most, it's an investment.
If increasingly more people and businesses were adopting Bitcoin as a currency, I'd feel good about long-term demand. But as an investment, I'm much less sure. Changes in investors' perception could totally change market sentiment and the past Bitcoin pattern would fall apart.
No matter your personal view on the future of Bitcoin, I believe all investors can recognize things are volatile and subject to change. As mentioned, I do own some Bitcoin. But I believe all investors should still have a healthy appreciation of the risks, even though past cycles point to big gains for Bitcoin in 2024.
