Historically, the crypto market has been highly cyclical. Long bull market rallies are followed by long bear market reversals, and then the cycle repeats again. That appears to be what is happening right now -- after a long crypto winter led to widespread carnage in the crypto market in 2022, we're seeing the signs of an extended crypto market rally in 2023.
The big question, of course, is what happens in 2024. If the "crypto winter" phase of the cycle is finally over, it could mean the arrival of "crypto spring." Let's take a closer look at what that means for your portfolio.
The Bitcoin halving
As Wall Street firm Morgan Stanley recently pointed out to its wealth management clients, a number of different factors could signal the arrival of crypto spring. The most important of these is the upcoming Bitcoin (BTC -2.41%) halving. This event, which takes place only once every four years, is scheduled for April 2024. There have been three previous Bitcoin halvings (in 2012, 2016, and 2020), and each one led to a huge rally in the price of Bitcoin.
While some may say that this is just an interesting historical coincidence, or that past performance is no guarantee of future performance, there are several good reasons the halving seems to have such a strong impact on the price of Bitcoin. Most importantly, the halving introduces an element of scarcity to Bitcoin. It also makes Bitcoin more deflationary over time.
Image source: Getty Images.
In a halving event, the rate of new Bitcoin production is cut in half. Currently, Bitcoin miners receive a reward of 6.25 Bitcoins for every block they create for the blockchain. In 2024, that figure will shift to 3.125 Bitcoins. And there's nothing that anyone can do to stop this -- it's literally controlled by an algorithm, which is what makes Bitcoin unique. As the scarcity of Bitcoin increases, the price should go up.
What to buy after the crypto winter
If crypto spring is indeed on its way (or perhaps already here), then what should you be buying? The obvious answer, of course, is Bitcoin. If you buy into the idea of the Bitcoin halving cycle, then it makes sense to start buying Bitcoin now. As Morgan Stanley points out, the biggest gains for Bitcoin have always come in a 12-to-18-month window right around the halving. This is the "growing season" (Morgan Stanley's words, not mine) for Bitcoin. If you get in during this season, you can let the market take care of the rest.
The next most obvious answer is: any stock that is highly leveraged to the price of Bitcoin. This includes companies such as MicroStrategy (MSTR 3.38%), which has a balance sheet stuffed with Bitcoin. And it includes companies such as cryptocurrency exchange Coinbase Global (COIN 5.68%). Currently, Bitcoin accounts for approximately one-third of all trading volume on the Coinbase platform.
And to a lesser extent, it includes Bitcoin mining stocks. On the surface, the Bitcoin halving might sound like a fantastic catalyst for companies such as Marathon Digital Holdings (MARA 2.21%) or Riot Platforms (RIOT -1.49%). The problem, though, is that the Bitcoin halving results in the mining rewards they receive being cut in half. Even if they run their Bitcoin mining facilities at 100% capacity, and crank up all their mining rigs to 10, they are almost certain to see a direct hit to their profitability unless the price of Bitcoin doubles. So, if you choose to invest in a Bitcoin mining stock, caveat emptor.
Options beyond Bitcoin
Historically, any rally in Bitcoin brings along the entire crypto market. This means that other cryptocurrencies beyond just Bitcoin could start to rally as well. Prime candidates include the likes of Solana (SOL -5.99%), which is up a sizzling 575% in 2023.
So, to use the "growing season" analogy used by Morgan Stanley, it might make sense to plant a few seedlings of these cryptos as well. It really depends on your risk tolerance. Obviously, these cryptos are a lot riskier than Bitcoin, but the potential upside could be much higher.
Where are we in the cycle?
Whether or not you fully buy into the idea of the Bitcoin halving, there's no question that crypto is highly cyclical. Morgan Stanley refers to the "four seasons" for crypto. It's your task to figure out which season we're in and adjust your portfolio accordingly.
As for me, I'm fully convinced that crypto winter is over and crypto spring is on the way. The weather outside may be getting colder, but my portfolio is starting to heat up. From my perspective, the Bitcoin halving event in April could be just the catalyst the crypto market needs to break out of its long winter slump.
