Bitcoin has seen its fair share of ups and downs over the past few months. Since September, it has been trading in a range between $11,000 and $7,500. Although high volatility is not unusual in crypto markets, the recent price swings are significant for digital currencies.
The last two months have been particularly turbulent. In late September Bitcoin dropped below the psychologically significant $10,000 mark, which triggered a sell-off that caused prices to fall by $1,000 within just one hour of trading. Bitcoin went from above $10,000 to nearly $8,000 within one week of trading. In late October, prices continued to fall below $7,500.
Two days later, Bitcoin shot up, gaining 22% within just one day of trading. What some had prematurely called a bear market resulted in Bitcoin’s most impressive come-back during the second half of the year.
Analysts point to regulatory developments and large trading volumes by institutional investors as the cause of these price swings. Both factors play a crucial role in crypto markets. As liquidity is low – the entire market is worth less than $300 billion – large order volumes can cause massive price movements and result in upward or downward pressure.
The upcoming Bitcoin halving might accelerate price appreciation
Ahmed Jacob, CTO and Dubai based Managing Partner of the Blockchain Investment Company INVAO, believes that in a broader context, Bitcoin has been in an upward trend since December 2018, when it bottomed at $3,200. Since then the asset has increased fourfold in price, today it is still trading at about three times its February valuation.
The reason for the upward trend could be the upcoming Bitcoin-Halving. Jacob explains the mechanism, “Whenever a Bitcoin Miner creates a new block on the blockchain to encrypt transaction data, he will receive a reward of currently 12.5 bitcoins.
This ensures not only the functionality of the blockchain but also the mining of more bitcoins. Every time a miner creates a new block, 12.5 new bitcoins will enter the circulation cycle.”
As per the Bitcoin protocol, the block reward will be cut in half every time the Bitcoin Blockchain has generated 210,000 new blocks, which is approximately every four years. Therefore, the next halving will take place in May 2020 when the block reward is set to 6.25 bitcoins.
“Through the halving mechanism, Bitcoin works like a commodity,” adds Jacob. “Over time, fewer bitcoins will enter circulation, which keeps inflation in check and leads to a more stable price development.”
The last two halvings occurred in 2012 and 2016. Both halvings were accompanied by significant bull markets. In both cases, the bull run started long before the actual halving event and ended about one year later. Jacob says, “Traders are already starting to price in the upcoming Bitcoin halving into today’s price. That’s one reason why we have seen Bitcoin going up in recent months.”
Looking at the past halvings, Bitcoin bottomed at $2 one year before the halving event in November 2012 and entered a bull market. It peaked 135 days after the halving event at $270,84. Likewise, Bitcoin stood at $164 a year and a half before the second halving in July 2016 and peaked at $19,783 in December 2017. Both times, Bitcoin increased at 12,000% to 13,000% within two to three years around the halving event.
If historical data can predict the future, Bitcoin might see a massive appreciation in the next two years. Taking Bitcoin’s bottom of $ 3,200 in December 2017, and assuming history repeats itself, Bitcoin could reach a price of roughly $400,000 in 2022 – but this view might be too simplistic leaving out other relevant factors.
Despite the halving narrative, volatility is where the money is made
Jacob recommends investors to remain cautious of the halving narrative and instead focus on volatility, “It’s not an exact science to predict the future price based on an asset’s past performance. Our take is that the uptrend we have seen since the beginning of the year is partly due to the upcoming halving event. Likely, much of the effects have not yet been priced in, so we believe prices will go up over the next two years. But that doesn’t mean Bitcoin prices will increase by 12,000%. While the halving reduces future Bitcoin supply, it does not affect Bitcoin demand.”
Merely investing in Bitcoin today and waiting for prices to go up might generate capital gains in the long term, but the real money is in the volatility of the asset class, argues Jacob. “I believe Bitcoin is in a long-term upward trend, however that is not where the real money is made. As long as there is no liquidity Bitcoin will remain a highly volatile asset. This high volatility creates risks and it also creates massive opportunities to generate trading profits.”
Most private individuals are not able to consistently monitor their portfolios. That’s why Jacob suggests the asset class is not yet ripe for the average retail investors. “Massive price swings often occur within relatively small time windows of just one or two hours. That’s why it’s paramount for investors to keep an eye on the markets 24/7. If you have a normal job or a family to take care of, it will be hard to invest in crypto. INVAO has launched the IVO – Blockchain Diversified Bond which enables any investor to benefit from the growth potential of the blockchain markets without having to worry about constantly checking their portfolio.”
The IVO Bond (ISIN: LI0471823018) securitizes a diversified and actively managed portfolio of blockchain assets. INVAO takes care of trading and risk management. The approach works: Since December 2018, IVO has generated returns of 119% and outperformed Bitcoin as well as the index of the 30 largest digital currencies.
In a highly volatile market, an actively managed investment vehicle can be exceptionally profitable. “When the market lost 8% in just one day in late October, we were down only 1.5%,” explains Jacob. “The flexible structure of our bond allows us to temporarily withdraw from the market completely and secure our assets in cash positions. As soon as the market turned bullish again two days later we were reinvested in the upward movement. This is how crypto trading is guaranteed to work.”