Why Bitcoin could enjoy a renewed boom this year

Having peaked at $68,789 in November 2021, the price of the first and largest cryptocurrency, Bitcoin, slumped to less than $17,000 a year later. The context was a series of high-profile collapses that rocked the crypto market, including US dollar-linked stablecoin TerraUSD and Sam Bankman-Fried’s digital asset exchange, FTX. Since then, the price of Bitcoin has rebounded as high as $46,000, and from around $40,000 in the final week of January 2024, there is reason to believe it could enter a fresh bull run in the coming months.

A critical point is the so-called Bitcoin halving, expected on or around April 22, 2024, when the subsidy earned by Bitcoin miners for verifying each block of transactions falls from 6.25 BTC per block to 3.125. This is part of a process that takes place every 210,000 blocks, or approximately every four years (the last halving took place on May 11, 2020).

In essence, this means that the supply of new Bitcoin will be divided by two, which will have a deflationary effect on the market. Eventually, the reward for Bitcoin miners will fall to the equivalent of 0.00000001 Bitcoin, when the finite limit of 21 million Bitcoin in circulation is reached, sometime around 2140. At this point, verification would be funded mainly by user transaction fee revenue.

The growing constraints on the supply of Bitcoin exert upward pressure on its price. However, so does increased demand, which currently comes from adoption of cryptocurrencies by the mainstream financial system. A critical step in this process took place on January 10, when the Securities and Exchange Commission (SEC) issued its long-anticipated approval of 10 US-listed exchange-traded funds that track the spot price of Bitcoin.

The new ETFs feature products from specialized providers such as Ark Invest/21Shares, Bitwise and Valkyrie, but also long-established traditional mutual fund and ETF managers including BlackRock’s iShares, Fidelity, Invesco and Van Eck. In addition, the SEC granted approval for the conversion of the Grayscale Bitcoin Trust, the world’s largest Bitcoin investment vehicle, into an exchange-traded product.

The entry of traditional asset managers into the digital asset space is a momentous step that promises to create game-changing liquidity in crypto markets – not only for Bitcoin, but also for Ethereum, the second-ranking cryptocurrency by market capitalization. The SEC is also weighing approval of a spot Ethereum ETF from BlackRock, whose iShares Bitcoin Trust had already attracted $1.7 billion in investor assets in the first two weeks of trading.

Approval from the SEC for mainstream Bitcoin investment products – even accompanied by warnings about the risk and volatility of crypto-assets for retail investors – would appear to set the stage for mass adoption of cryptocurrencies.

Inevitably, this will also spur investor interest in more speculative and flaky crypto projects, on many of which people will lose money. Bitcoin will remain the most trusted cryptocurrency, widely regarded as the digital equivalent of gold. It will increasingly be seen as a core component of any diversified investment portfolio.

A critical aspect of the Bitcoin concept, as set out in 2009 by the pseudonymous Satoshi Nakamoto, is the hard cap of 21 million Bitcoins to be reached in the next century. At present market participants estimate that around 19.6 million are already in circulation, some 93.3% of the eventual total.

This means that the value of Bitcoin is not at risk of being inflated away in the future by the unlimited issue of new tokens. There is a parallel to gold mining: when extraction begins, the metal is plentiful and easy to dig out, but it progressively becomes deeper and harder to mine, requiring increasing investment of money, time and effort to obtain the same amount.

The rebound in the price of Bitcoin since the trough around the beginning of 2023 has been boosted by a wider trend in global investment markets – renewed enthusiasm about risky assets as central banks’ policy of monetary tightening comes to an end, along with inflation ebbs and interest rates start to decline amid a ‘soft landing’ for the United States and other advanced economies.

The halving of the Bitcoin miners’ subsidy in April also promises to have an important psychological effect on demand. And once traditional financial institutions and mainstream investors become involved, wider holdings of Bitcoin assets are likely to have a stabilizing effect on a market that in its early years was characterized by high volatility and episodes of extreme turbulence.

Bitcoin, the longest-established cryptocurrency and the one with the deepest roots in the financial ecosystem, already benefits from a high profile outside the specialized digital assets sector. It is less certain which other tokens currently on the market will survive, and which may be overtaken by new entrants; remember how a mobile phone market dominated by Ericsson, Nokia and Motorola was turned upside down by the smartphones of Apple and Samsung.

One important development that could affect the cryptocurrency market will be the digital currency projects undertaken by many central banks as tokenized forms of their country's existing fiat currency. Although the US Federal Reserve remains coy about whether it will launch its own digital currency, it continues to explore how one would operate; the European Central Bank is widely expected to move ahead with the launch of a digital euro, and the People’s Bank of China with a digital yuan.

There’s not necessarily a correlation between acceptance of Bitcoin and a digital currency issued by, for instance, the European Central Bank. However, what one can say with confidence is that the issue of a digital euro, dollar or other currency, would represent an enormous boost for the use of blockchain. Digital ledgers were developed to enable investors’ cash accounts to be reflected in the blockchain with virtual coins that have no intrinsic value, only that of the existing cash. This would be a critical tool for central bank digital currencies.

The only problem with such official digital currencies, as investor associations focused on individuals’ privacy point out, is that they can be perceived as a way for the authorities to act as Big Brother, with the capacity to track every transaction – which runs counter to the founding philosophy of Bitcoin.

The European Commission claims that transactions will be anonymized, but it’s hard to see how this could be so because currencies using blockchain offer the capacity to track participants in transactions. However, the Commission has indicated that any digital euro would mainly be involved in B2B operations. How this works out we will see in due course.

The potential for a renewed boom in Bitcoin's value this year is underpinned by a combination of supply-side constraints (due to the upcoming halving) and increased demand driven by significant regulatory approvals. The SEC's green light for Bitcoin ETFs, along with participation of traditional asset managers, brings a new era of liquidity and stability in the crypto market. 

This sea change may position Bitcoin as a cornerstone of diversified investment portfolios as the broader trend of growing enthusiasm for risky assets increases and the global economic outlook improves. The introduction of central bank digital currencies (CBDCs) highlights the expanding role of blockchain technology in the financial sector, despite concerns over privacy and the potential for governmental oversight. 

As Bitcoin approaches its capped supply limit, its comparison to gold becomes increasingly accurate, underscoring its value as a hedge against inflation and its potential for long-term appreciation. Bitcoin is poised to remain at the forefront of digital assets, even as the landscape evolves with new technological advancements.