Creating a Fortune from Bitcoin “Halving Events”.
And avoiding the Crypto Winter
Bitcoin is one of the most volatile assets that is traded in the markets. This is because Bitcoin has a very high volatility index, which is currently hovering between 70 and 80. In simple terms, this means that the asset can move 80% in either direction on an annual timeframe. It can potentially lose 80% or gain 80%. Compare this with stocks where the volatility has averaged about 20.
Most investors cannot stomach this kind of volatility and hence the ideal way of investing in a Bitcoin is to allocate a very small portion of your net worth to this asset class. You need to be ready to lose 70–80% of this portion in a jiffy and you also need to keep your excitement under check when the asset doubles in a flash. In short, you require nerves of steel to be a long-term investor or a Bitcoin Maximalist as they are commonly referred to.
However, if pricing history is any indicator, the Bitcoin price movement is highly cyclical and if you are able to ride these cycles you can easily create a fortune.
Halving events and the Bitcoin rocket
An important event that can be used to time the Bitcoin price cycle is the “Halving Event.” These halving events occur every 4 years and correspond with a massive jump in the price of the asset. The Bitcoin price turns into a rocket, growing manifold. The last halving event took place in 2020 and this is when the price of Bitcoin orbited from 5000 levels to 62000, a twelve-fold increase, in a matter of months. If you thought this was an awesome return, take the time machine to 2012–13, when another halving event occurred and the price moved from 10 dollars to 1200 dollars in one year flat. A sum of 10000 dollars invested in Bitcoin in 2012 would simply have turned you into a dollar millionaire in a year's time. In 2016–17, another year with a halving event, the Bitcoin price true to its nature, moved from ~500 dollars to ~20000 dollars.
The next halving event is in 2024…. so tighten your seatbelts.
The rationale behind Halving events.
So what on earth is the rationale behind halving events.
Satoshi Nakamoto, the mythical founder of the Bitcoin ecosystem, understood that asset prices are dependent on demand and supply. He knew that governments and central banks had abused their power to turn currencies like the US Dollar into Fiat currencies. This meant that governments were free to print money when they desired. Because of this unlimited supply of money, all major currencies kept losing their real value over a period of time.
Satoshi had kept a provision of mining in the Bitcoin ecosystem, through the “Proof of Work” mechanism. Accordingly, the new supply of Bitcoins would be created as a reward for people who could verify and validate transactions on the Blockchain network. This sounds easy but actually involves complex calculations and a lot of computing power. This process is referred to as “Bitcoin Mining”. Bitcoin mining is currently done by professionals who operate with advanced infrastructure.
Satoshi was smart and in order to restrict the future supply of Bitcoins, he introduced the concept of “Halving”. The reward for mining is reduced by half after every 210000 blocks are added. This takes roughly four years. With every halving cycle mining of Bitcoins becomes more expensive, thereby increasing the value of the existing Bitcoins. Eventually, new mining will have to stop when a supply of 210,000 Bitcoins is reached. With limited supply, Bitcoin becomes like the Gold of the Digital Space.
This scarcity event for Bitcoin always coincides with an explosion of price.
But wait ….” You need to first survive the Crypto Winter.”
Before we get excited about making a fortune we need to first survive the “Crypto Winter.” Crypto Winter is the prolonged period of price crash and consolidation that occurs every time the Bitcoin price hits a new high after a halving event is over.
The price of Bitcoin plummets and stagnates for the next few years. The correction during this period ranges from 80–90%. In 2017 after hitting a new high of 19700 the price corrected to roughly 3000 levels. The same happened in 2015 when the price went down from 1200 levels to 150.
Fast forward to 2022 and we observe that Bitcoin price has already gone down by 40% to 39000 levels. We may say that the Crypto Winter is currently underway. It may sound shocking, but if the past is any indicator, an 80% correction in the price could mean levels of 14000 dollars. This price level also happens to be long-term support.
Riding the Roller Coaster
So if you want to ride the Bitcoin roller coaster, ride when the price corrects and invest only the amount that you can afford to lose. No one can time the market and no one can really predict the future. There could be several factors like inflation, institutional participation, and government regulation that could come into play. These could positively or negatively impact the price of Bitcoin.
“Halving events” however provide milestones for timing your entries, if you have missed out on the Crypto bandwagon. Do keep these in mind while investing in this asset class of the future.
This article is not investment advice. It is based on my own analysis and views on this topic. You should consult your financial adviser before making any investment decisions.