7 months ago • 2 mins
Bitcoin is up by more than 70% so far this year, and for the past six weeks has been trading between $28,000 and $30,000. That strong rally is mostly because of three key factors: 1) expectations that central banks will soon stop hiking interest rates (and might even cut them); 2) renewed interest in a digital alternative to the traditional financial sector after some banking turmoil; and 3) a 10-month low in bitcoin’s liquidity (price swings can become more dramatic as trading volume dips).
But the rebound is just the start of a rally that could take bitcoin past $50,000 next year, courtesy of a process known as “halving”, according to projections from crypto analysts at Bloomberg Intelligence. A bitcoin halving, also known as "the halvening", occurs roughly every four years, reducing (by half) the reward for mining new bitcoin blocks. This process is a part of bitcoin's monetary policy, designed to uphold the value of the crypto by decreasing the rate at which new bitcoins are created, until it hits its maximum fixed total supply of 21 million coins in 2140.
You can think about it like this: the coin supply has been increasing by 1.8% a year lately, but after the next halving, due in April 2024, that pace’ll drop to 0.8%. As new coin production dwindles, the laws of supply and demand suggest that the price should trend higher (everything else being equal). But there’s also a psychological aspect to all this: bitcoin investors tend to get all hyped up about halvings, and tend to think other investors are just as hyped, and that leads to a lot of people buying in at about the same time. Put differently, the anticipation of a halving-fueled rally helps create the rally.
The chart above shows that bitcoin tends to bottom 12 to 18 months prior to each halving before going on to hit new record highs. And those Bloomberg crypto analysts say the upcoming halving looks to be only about 50% priced in, based on previous cycles. That’s why they’re estimating a $50,000 bitcoin price tag by April next year.
So if you think the same halving dynamics will play out again, this might be a good time to start building a bitcoin stack. After all, even a tiny allocation would have helped improve a diversified portfolio across all return and risk-adjusted return measures: this table compares the 2015-22 performance of a traditional 60/40 portfolio (US equities/bonds) against a 60/39/1 portfolio that includes a 1% allocation to bitcoin at the expense of bonds. The portfolio with a little bitcoin outperformed in both absolute terms and on a risk-adjusted basis.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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