The cryptocurrency market feels wobbly right now. After starting the year with a 73% year-to-date gain, Bitcoin (BTC 1.75%) has posted a 21% price drop in five months. Ethereum's (ETH 1.90%) volatility is slightly wilder with a 77% peak gain followed by a 34% decline. Solana (SOL 0.20%) doubled at the top, then dropped 32% lower.
Crypto investors are nervous right now. Bitcoin was supposed to soar thanks to the one-two punch of spot Bitcoin ETF approvals and the fourth halving of its mining rewards. Ethereum was expected to follow suit, spring-loaded for big gains via a game-changing technology update two summers ago. And Solana came back strong last year from the currency's confidence-sapping proximity to the earlier FTX meltdown. None of these ultra-bullish narratives are playing out, so the leading crypto names started to sag instead.
But I'm here to tell you that better times are on the way. The Bitcoin halving boost is a slow-burning fuse, but its market price effects tend to be jaw-dropping when the time is right.
So I see a massive buying opportunity in the current crypto-price downturn. Let me walk you through my logic real quick.
CRYPTO: BTC
Key Data Points
The Bitcoin foundation
The next boom in the highly cyclical crypto market starts and ends with Bitcoin's halving cycle. This four-year rotation of shrinking rewards for crypto mining is a crucial part of Bitcoin's economic model, since it ensures lower inflation over time. Bitcoin has already reached an annual inflation rate of 0.84%, down from 1.7% a year ago and 3.8% in 2019.
By comparison, the global reserves of physical gold is rising at an annual rate of 3%. That's an unusually high increase due to record gold mining and very high recycling rates, all inspired by lofty gold prices. Still, Bitcoin's inflation now stands far below gold's long-term average rate of approximately 1.8%.
In other words, Bitcoin's supply side scarcity looks more stable in the long run than owning physical gold bars at this point. At the same time, the sudden availability of exchange-traded funds (ETFs) based on Bitcoin prices opened the door for large-scale institutional investors to take a direct interest in the crypto market. With this combo in play, the current halving cycle could be more impressive than the last one, where coin prices rose by 579% in the 52 weeks after that reward adjustment.
But the soaring gains didn't start right away. Roughly four months after the May 2020 halving, Bitcoin couldn't quite keep up with the S&P 500 (^GSPC 0.38%) index posting a 22% gain.
CRYPTO: SOL
Key Data Points
Instead, the crypto chart started to pull away by the middle of October. Large banks started to take Bitcoin seriously at this point. Financially questionable mining operations filed for bankruptcy amid lower rewards and constant operating costs. Weak hands folded, freeing up their resources to be bought by stronger competitors in bankruptcy auctions. Bitcoin had gained 124% post-halving by the end of November, roughly six months after the adjustment.
This drama played out in the year of coronavirus lockdowns and unpredictable economic swings. That backdrop probably added to Bitcoin's wild price swings, which continued until a pricing peak formed in November 2021.
You know the drill -- past performance is not a guarantee of future results, and every market cycle is different. Yet, the same economic forces are at work again and Bitcoin transactions are powered by the miners. If they can't afford to stay in business, or they drop their Bitcoin mining operations in favor of a different business model, transactions become slower, less secure, and more expensive for people trying to use the cryptocurrency. So the whole system only works if Bitcoin prices rise over time.
Long story short, Bitcoin should see strong price gains in this halving cycle too, probably starting about six months after the latest halving. The recent price drop only makes Bitcoin a better buy, according to my analysis. If you haven't touched a cryptocurrency with a ten-foot pole so far, this could be a great time to get started with a modest investment in the iShares Bitcoin ETF (IBIT 1.71%) or Bitwise Bitcoin ETF Trust (BITB 1.58%). You don't even have to open a crypto-trading account, since the spot Bitcoin ETFs are available in most stock brokerages.
CRYPTO: ETH
Key Data Points
What about the smaller crypto names?
When Bitcoin makes a big move, the crypto market as a whole tends to follow suit. The correlation between Bitcoin prices and the S&P 500 index is quite weak but the digital currency almost moves in tandem with Ethereum and Solana. Bitcoin is the flagship of the crypto fleet, and many smaller crypto projects rely on Bitcoin to provide fiscal stability.
On top of that, leading altcoins such as Solana and Ethereum come with price-boosting qualities of their own. Ethereum is only partially done with its conversion into a nimbler, fast, and less energy-hungry global computing platform. Solana is carving out a larger slice of the decentralized app space, still battling headwinds from the FTX crisis. I'll be shocked if these healthy crypto systems can't keep up with Bitcoin's near-term gains, and they could even outperform their larger cousin in this four-year halving cycle.
I'll admit that Bitcoin is a more mature digital asset today, and it's probably best to keep these investment bites on the smaller side. And remember that cryptocurrencies should constitute a fairly small slice of a diversified investment portfolio. For what it's worth, my own direct and indirect bets in the crypto space work out to less than 5% of my stock portfolio, and even less if you include things like real estate in the calculation.
