Last year was terrific for investors. The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 all experienced double-digit percentage gains. A lot of the positive momentum in the capital markets was fueled by bullishness about artificial intelligence (AI).
With so much hype around AI and its myriad applications, it was easy to overlook the performances of other asset classes. After experiencing a brutal crypto winter in 2022, Bitcoin (BTC -5.10%) emerged as a big winner last year as well -- surging more than 150%.
While this is great for those who bought the dip, there is one big reason in particular to believe that 2024 could be the year Bitcoin eclipses the $100,000 mark. With many anticipating another Bitcoin halving this year, investors may want to assess why now could be a lucrative time to invest in Bitcoin.
What is a Bitcoin halving?
There are multiple ways for crypto investors to gain access to Bitcoin. One is by buying shares of companies engaged in Bitcoin mining. Simply put, miners essentially serve as auditors for transactions on the Bitcoin blockchain. Subsequently, miners are compensated in Bitcoin for their service. While this is a fairly straightforward process, there are some important nuances that investors should understand.
Remember, Bitcoin is much different from traditional investment vehicles such as stocks or bonds. For starters, the crypto token is decentralized -- meaning it is not governed by traditional financial institutions or regulatory authorities. Furthermore, there is a finite amount of Bitcoin available to purchase. In fact, the total supply of Bitcoin is 21 million tokens, of which about 19.6 million now are in circulation. This feature is what makes mining Bitcoin so tempting.
However, while Bitcoin miners are rewarded with tokens, there is a unique phenomenon called halving that occurs every few years.
Image source: Getty Images.
Why do Bitcoin halving cycles matter?
After 210,000 blocks are mined, the reward given to Bitcoin miners is cut in half, slowing the supply growth. As a result, Bitcoin can become perceived as more valuable, assuming demand stays the same or rises. In turn, the price for the token can move higher.
To get a sense of how Bitcoin has moved after halving cycles, check out the graph below:
Bitcoin Price data by YCharts
Past Bitcoin halving cycles occurred in 2012, 2016, and 2020. The graph above illustrates that in the years between each cycle, Bitcoin tends to eclipse prior highs. With that said, following the halving in 2020, Bitcoin also eventually cratered from its all-time high of nearly $69,000.
It's paramount that investors understand that while Bitcoin has reached new highs following halving cycles, the token often experiences striking volatility and is not guaranteed to stay at these highs.
Where is Bitcoin headed in 2024?
In a way, Bitcoin halving is a lot like a stock split. When a company splits its stock, the overall value of the company should not change. Even though the share price goes down after a split, the number of shares issued goes up. In turn, the market capitalization for the company does not change.
Although this makes superficial sense, seasoned investors probably know that this is seldom the case. Instead, given the lower share price, many investors perceive the stock as cheaper than it once was. This typically results in higher demand and more buying, thereby sending the newly split stock higher.
The same model can be applied to Bitcoin. Since halving cycles reinforce Bitcoin's scarcity, it's quite possible that the token falls onto more people's radar after these events, spurring some increased -- if temporary -- demand.
Although this is all fascinating in theory, investors should be aware of a few things. First, it's not yet known precisely when the next halving will occur. Models and forecasts suggest it will occur in April, but this is not a lock.
My personal take is that Bitcoin will indeed experience a halving this year and I see the token reaching new highs. But as the graph above illustrates, Bitcoin's price could just as easily drop off a cliff at some point after that. For this reason, investors really need to understand the risks associated with Bitcoin and crypto investing at large. While the potential returns could be enormous, the risks are likely commensurate.
