On the evening of April 19, the much-anticipated Bitcoin (BTC 1.25%) halving finally took place. Crypto investors around the world celebrated, and for good reason. There have been three previous halving events, and each one has resulted in a new bull market cycle for Bitcoin.
So is the halving going to send the price of Bitcoin soaring again this year? I think so, and here's why.
Bitcoin has its own monetary policy
Many investors may not realize this, but Bitcoin was actually created as a backlash to the financial crisis of 2008. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, blamed irresponsible fiscal and monetary policy for the crisis, and sought to create a new type of digital asset that would be "sound money."
With that in mind, Nakamoto built the unique halving mechanism into the original Bitcoin algorithm. A halving occurs after 210,000 blocks have been added to the Bitcoin blockchain, and that's approximately once every four years. As soon as the 210,000th block has been added, the mining reward for adding any new blocks is cut in half.
Image source: Getty Images.
Another way to think about this is that Bitcoin is the only asset in the world with its own monetary policy. The halving mechanism carefully controls how much new Bitcoin can be created at any time. It also places a hard cap on how much Bitcoin can ever be created, which is 21 million coins.
All this is done to make Bitcoin as inflation-resistant as possible, a feat that even the most talented central bankers have never fully mastered. According to Coinbase Global (COIN 2.53%), Bitcoin is now a "programmatically disinflationary asset." In other words, Bitcoin is literally programmed to resist inflation. So, if you are looking for a long-term store of value, it's Bitcoin.
Bitcoin has skyrocketed in past halving cycles
The second reason I'm buying Bitcoin is because there is a very high probability that Bitcoin will soar in value after April 19. There have been three previous Bitcoin halving cycles, and in each one, Bitcoin has soared to a new all-time high. Some of the gains have been truly astounding. For example, in the previous halving cycle, Bitcoin soared from $10,000 in May 2020 to $69,000 in November 2021.
CRYPTO: BTC
Key Data Points
Of course, past performance is no guarantee of future performance, so there is a chance that Bitcoin may not soar as high in value this time around. Coinbase recently modeled the results of the three previous halving cycles, and found that the effect of each halving appears to be diminishing over time. This makes sense, given that we're getting closer and closer to the 21 million hard cap, with 19.7 million bitcoins currently in circulation.
But there is something very different this time around with the fourth Bitcoin halving, and that's the recent introduction of the new spot Bitcoin ETFs. This introduces an entirely new source of Bitcoin demand, and will likely help to prop up the price of Bitcoin if there is any selling pressure after the halving. In fact, some crypto traders think that we're already facing a potential "supply squeeze" in terms of available Bitcoin, and the halving could force the price of Bitcoin higher, simply on the basis of supply and demand.
All this leads me to think that we're going to get a similar type of price dynamic to what we've seen in past Bitcoin halving cycles. According to Coinbase, Bitcoin rallied 923% in the six months after the first halving, 37% in the six months after the second halving, and 82% in the six months after the third halving. So it's certainly within the realm of possibility that Bitcoin might pass the $100,000 level sometime this year. Given Bitcoin's current price of $65,000, that would imply a rally of approximately 50%.
How much higher can Bitcoin go?
As Bitcoin goes increasingly mainstream, it should start to behave more and more like a traditional financial asset. That means less volatility, more correlation with stocks and bonds, and greater price dependence on the overall macroeconomic environment. As a result, there could be less explosive upside than we're used to seeing with Bitcoin in previous halving cycles.
While Bitcoin may no longer be able to 100x or 1,000x in value as easily as it once did, it should still be able to increase 10x in price over the next decade. And that could be a conservative estimate. Cathie Wood of Ark Invest now thinks Bitcoin is going to blow past the $1 million price level sometime before 2030.So, if you're thinking about investing in Bitcoin, buckle up and enjoy the ride.
