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Is Bitcoin Worth Buying Before the Next Halving?

RJ Fulton, The Motley Fool 2024.04.02 20:00

Is Bitcoin Worth Buying Before the Next Halving?

In less than a month, Bitcoin (CRYPTO: BTC) will undergo its fourth halving. Halvings are hardwired into its code and occur roughly every four years (or once 210,000 blocks are added to the blockchain) and form the foundation of Bitcoin's robust monetary policy by cutting its supply growth rate in half.

This halving, scheduled to occur on or about April 20, will reduce Bitcoin's supply growth to roughly 0.8% a year. The effect of halvings has historically been dramatic, and this one is shaping up to be just like the past. Here's why Bitcoin is still worth buying before April 20.

Analyzing the effect of halvings

Each halving that passes effectively alters dynamics around supply and demand. By reducing the rate at which new bitcoins enter the market, the halvings make it so that even if demand for Bitcoin remains constant, its price must increase to compensate for the diminished supply growth.

Evidence of this can be found when analyzing Bitcoin's performance in the year halvings occur. On average, Bitcoin has increased roughly 125% in halving years. However, the year after a halving tends to produce the best gains.

In the year after a halving, Bitcoin returned a whopping 415% on average. That means an investment of $1,000 would be worth more than $5,000. Not too shabby.

Now, it is worth noting that past performance is no indication of future success. For all we know, this halving could be an anomaly. However, there is considerable evidence that this halving cycle is playing out just like past ones and could actually be more explosive.

Well-known crypto analyst Benjamin Cowen recently posted a chart on X (formerly Twitter) showing that Bitcoin's performance in 2023 followed a similar trajectory to the average of previous years before halvings.

Furthermore, in a subsequent post, he charted Bitcoin's performance this year compared to past halving years. As we can see, so far in 2024, Bitcoin is outpacing past halving years by a significant amount. The reasons for this are likely nuanced without any single cause, but one, in particular, is most apparent.

For the first time in Bitcoin's history, this halving will occur when there are fewer available coins on exchanges than during the previous halving. Today, roughly 2.3 million coins are on exchanges, levels not seen since 2018.

When considering the added demand from newly approved spot Bitcoin exchange-traded funds (ETFs) and the looming and compounding effects that a reduction to Bitcoin's growth rate will bring to an existing supply crunch, this halving is shaping up to be an anomaly, but for the better.

What goes up must come down

While it can be exciting to see Bitcoin's potential after a halving, some additional context is necessary. Two years after a halving, Bitcoin's price usually tumbles more than 80% on average.

The reasons behind this phenomenon are lesser known, but this lack of performance serves as a reminder that Bitcoin is a long-term game. Investors trying to time the market often get burned, and data proves that Bitcoin rewards those who simply buy and hold for the long haul.

With substantial data proving Bitcoin's price is cyclical, it is important to maintain a long enough outlook. In fact, we know precisely how long your outlook should be: Four years, the exact amount of time between each Bitcoin halving.

Willy Woo, a prominent pioneer of Bitcoin on-chain analysis, found that even if investors bought at the top of each bull market, as long as they held those coins for at least four years, it resulted in an annualized gain of 30%, roughly three times the average return of the S&P 500. In other words, no Bitcoin held for more than four years has ever resulted in a loss.

Although data insinuates that it isn't too late to buy Bitcoin and it remains an attractive investment before the April halving, investors must remember that Bitcoin rewards those who hold and weather the post-halving declines. The more halvings that pass, the more likely it is that you will reap the benefits of Bitcoin's dwindling supply growth as each cycle compounds gains.

By no means is this an incentive to try to time markets. Instead, it is an attempt to provide context and insight into Bitcoin's unique cyclical behavior. With a better understanding of Bitcoin, investors can more confidently navigate the ups and downs of each halving.

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RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

Is Bitcoin Worth Buying Before the Next Halving? was originally published by The Motley Fool

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