The recent sell-off in crypto has sent prices tumbling to levels not seen since before the March 2020 flash crash. Bitcoin (BTC -3.98%), the most valuable cryptocurrency, has not been spared.
As the first cryptocurrency, many investors choose to begin their crypto investment journey with Bitcoin since it’s the most well known. Those that bought Bitcoin at or near the top in 2021 are probably more than disappointed with the lack of returns so far.
Even though Bitcoin has only been around for about 13 years, there is one clear trend that investors should be aware of: Patience produces returns.
Why halvings are important
One way to measure Bitcoin’s history is through what are known as halvings. Halvings are a fundamental characteristic of Bitcoin that make it inherently more scarce.
When a miner successfully mines a Bitcoin block they are rewarded with a specific amount of Bitcoin. Bitcoin’s code is programmed so that after 210,000 blocks have been mined (roughly every four years), the reward for mining a block is cut in half.
So far, there have only been three halvings — the most recent occurring in May 2020. This halving reduced the block reward from 12.5 bitcoins to 6.25.
What halvings can tell us
Halvings serve as an easy landmark to measure Bitcoin’s price action and progression. Typically it is thought that Bitcoin enters a new cycle after each halving. Each cycle usually comes with a high and a low price.
If you plot these halving events on top of Bitcoin’s price, you can see that prices climb the fastest, on average, in the first 365 days after the halving. Similarly, prices seem to hit a low about 365 days before the next halving. To maximize returns, data tell us it would be wise to purchase Bitcoin 365 days before the halving and not sell until 365 days after the halving. These numbers are not concrete, but shed light on Bitcoin’s behavior between halving events.
Let’s use an example. If you bought Bitcoin in May 2019, 365 days before the most recent halving, and sold 365 days after the halving, those two years would have produced a return of roughly 900% when the price jumped from around $5,800 (May 2019) to nearly $60,000 (May 2021).
But let’s say you bought at the top, or roughly 365 days after the halving (May 2021). Assuming you didn’t dollar-cost average and bought all at once, your investment would have lost nearly two-thirds of its value based on today’s price of around $20,000.
Based on Bitcoin’s price action through halving events, one thing is clear: Patience is key. Those who bought at the top in past years didn’t see their investments produce returns until after the next halving.
If you are a newcomer to Bitcoin and have only bought Bitcoin after the halving of May 2020 then you are likely wondering when it will be your turn to see your investment start producing returns. This data proves that those who hold on until the next halving reap the best returns.
The next halving of Bitcoin is set to take place around May 2024. That can feel like a long time, but before you know it the coveted mark of 365 days before the next halving will be here. History shows that those who buy and hold for more than at least one halving event set themselves up for the most success.
Timing a market is impossible. And the 365 day mark before and after halvings is just an average and should only be used as a guide. But while this Bitcoin cycle might not follow this phenomenon exactly, these insights can provide assurance to investors that patience pays. Sit tight and use this time to build up your Bitcoin allocations in preparation of the next halving.