Bitcoin underwent its roughly quadrennial halving on April 19, reducing the mining reward by 50 per cent. Following the event, the reward for mining a new block on the Bitcoin blockchain dropped from 6.25 to 3.125 Bitcoins. From approximately $27,500 a year ago, Bitcoin is now trading at around $63,500.
Factors that drove the rally
Two factors contributed to the approximately 131 per cent increase in Bitcoin’s price over the past year. The first is the halving event; Bitcoin has undergone four such events till date, each followed by a price surge. Anticipating this, investors took positions ahead of the event, driving up prices.
“The impact of halving is already factored into the price of Bitcoin,” says Edul Patel, chief executive officer (CEO) & co-founder, Mudrex.
The second factor responsible for the rally over the past year is the introduction of spot exchange-traded funds (ETFs) in the United States (US) in 2024. This development has boosted institutional participation. “After the Securities & Exchange Commission (SEC) approved spot Bitcoin ETFs, massive demand has come from institutions,” says Parth Chaturvedi, investments lead, CoinSwitch Ventures.
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Limited supply
One factor that works in favour of Bitcoin is that it is immune to liquidity injection. Periodic halving reduces supply. “After the recent halving, 3.125 Bitcoin will be released from each block. In a world where currencies are getting devalued because of increased money printing by central banks, Bitcoin’s fixed and reducing supply schedule makes it an ideal store of value for investors,” says Chaturvedi.
Near-term positive triggers for Bitcoin, according to him, include institutional capital inflows in the US via spot ETFs and next week’s launch of spot ETFs in Hong Kong.
Prices may consolidate
Many investors could engage in profit booking to benefit from the massive price surge. “Liquidation by long-term investors could trigger a downward trend in the price of Bitcoin,” says Patel.
The price of Bitcoin could also be affected by geopolitical tensions, changes in interest rates, and elections in the US.
Another potential risk could arise from the crashing of the Bitcoin network. “In its entire history, Bitcoin’s network has gone down only once — in its initial phase. A black swan event of that sort could affect its price,” says Chaturvedi.
Risks to watch out for
Cryptocurrencies are synonymous with volatility. Market fluctuations amplify the chances of losses. Investors are also at risk of falling prey to hacking.
Moreover, cryptocurrencies exist in a regulatory grey area. “In India, even though one cannot invest in cryptocurrency without fulfilling know your customer (KYC) norms, this asset class is not recognised by any of the regulators. By investing in them, the investor takes a big risk: if something goes wrong, he will not receive any support from the regulators,” says Jinal Mehta, certified financial planner and founder, Beyond Learning Finance.
What should you do?
Some experts believe the bull run in Bitcoin has only begun. “Why sell at the start of a bull run? Think long-term and stay the course,” says Rajagopal Menon, vice president, WazirX.
Chaturvedi suggests investing with a long horizon. “Bitcoin has always given positive returns to investors who have held it for at least four years,” he says.
Instead of trying to time the market, entrants should adopt the dollar-cost averaging strategy (buying the same amount every month). “Start with a small amount, maybe around Rs 2,000 every week for the next decade. With every price dip, you will get to buy more Bitcoins,” says Menon.
Financial experts recommend a maximum of 10 per cent exposure to cryptocurrencies. Existing investors should check their allocation. If they have become overweight on Bitcoin, they should book partial profit and rebalance. Investors approaching a goal should do the same. “If you have got a specific need, like a down payment on a house, and you are seeing profits, maybe it’s time to cash in a bit,” says Menon.
According to Mehta, investors with a low to moderate risk appetite should avoid all cryptocurrencies.
“Avoid transacting on international exchanges as they may not comply with local tax laws,” says Ankit Jain, partner, Ved Jain & Associates.