The price of Bitcoin has risen 36% since bitcoin spot ETFs were approved on January 10. As of Thursday morning, its price was around $62,460.
But an upcoming event known as a halving could drive price growth even further.
The halving occurs automatically when 210,000 “blocks” are created as part of the bitcoin mining process. This happens approximately every four years and discourages coin production by halving the reward for mining new bitcoins. The last halving event was in 2020 and the next one is expected in April.
The halving is intended to slow down the coin supply as it approaches its total supply, which is capped at 21 million coins. The built-in mechanism mimics the scarcity of gold and ensures that bitcoin mining becomes more expensive over time.
“The expectation is that the halving will lead to an increase in price because people expect supply to be limited,” says Douglas Boneparth, president of Bone Fide Wealth and a member of CNBC's Financial Advisory Board.
“When supply goes down, the price goes up, assuming demand remains the same or higher,” says Boneparth, who has investments in bitcoin and other cryptocurrencies.
Historically, bitcoin's value has increased little after its three previous halving events, albeit with diminishing returns with each halving. according to CoinDesk.
Of course, the implications of bitcoin's halving could be built into its current price, as the impending halving is widely known.
“It could be discounted, but now that spot ETFs are here, the idea is that institutions will need to buy more bitcoin on the open market to support flows into their funds,” Boneparth says.
Should you invest in bitcoins?
As with all cryptocurrencies, bitcoin is a highly speculative and extremely volatile asset, sometimes seeing price fluctuations of 5% to 10% in a single day.
While there is money to be made from bitcoin price swings, past performance does not guarantee future success. There are also no guarantees that it will retain its current value.
And unlike traditional investments like stocks or bonds, bitcoin does not represent ownership of a physical asset or a claim on future earnings.
Financial planners often recommend traditional investments like S&P 500 index funds, which offer less risk. Furthermore, the average annual return of the S&P 500 is more than 10%.
That said, some experts may recommend a small stake in bitcoin as part of a diversified investment portfolio. But even so, it is still considered a high-risk asset.
“I think it makes sense for most people to have a small stake in cryptocurrencies, maybe 1% or 2% of an entire portfolio,” said Chris Diodato, CFP and founder of WELLth Financial Planninghe previously told CNBC Make It.
“I hesitate to recommend more because, in addition to its significant volatility, it doesn't produce cash flow like traditional investments; it's only worth what someone is willing to pay for it.”
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