Historically, the cryptocurrency market has been very cyclical. Long bull market rallies are followed by long bear market pullbacks, and then the cycle repeats itself again. That seems to be what is happening right now, after a long crypto winter led to widespread carnage in the cryptocurrency market in 2022, we are seeing signs of an extended cryptocurrency market rally in 2023.
The big question, of course, is what will happen in 2024. If the โcrypto winterโ phase of the cycle finally ends, it could mean the arrival of โcrypto spring.โ Let's take a closer look at what that means for your portfolio.
The Bitcoin Halving
As a Wall Street firm Morgan Stanley As he recently pointed out to his wealth management clients, several different factors could signal the arrival of the crypto spring. The most important of them is the next bitcoin (CRYPT: BTC) reduce by half. This event, which takes place only once every four years, is scheduled for April 2024. There have been three previous Bitcoin halvings (in 2012, 2016, and 2020), and each of them caused a huge rally in the price of bitcoin.
While some may say that this is just an interesting historical coincidence, or that past performance is no guarantee of future performance, there are several good reasons why the halving appears to have such a strong impact on the price of Bitcoin. Most importantly, the halving introduces an element of scarcity into Bitcoin. It also makes Bitcoin more deflationary over time.
Image source: Getty Images.
In a halving event, the rate of new Bitcoin production is cut in half. At the moment, bitcoin miners They receive a reward of 6.25 Bitcoins for each block they create for the blockchain. In 2024, that figure will increase to 3,125 Bitcoins. And there is nothing anyone can do to stop this: it is literally controlled by an algorithm, which is what makes Bitcoin unique. As Bitcoin scarcity increases, the price should rise.
What to buy after crypto winter
If cryptocurrency spring really is on its way (or maybe it's already here), what should you buy? The obvious answer, of course, is Bitcoin. If you accept the idea of โโthe Bitcoin halving cycle, then it makes sense to start buying Bitcoin now. As Morgan Stanley points out, the biggest gains for Bitcoin have always occurred in a 12- to 18-month period, right around the halving. This is the "growth season" (Morgan Stanley's words, not mine) for Bitcoin. If you enter during this season, you can let the market take care of the rest.
The next most obvious answer is: any stock that is highly leveraged to the price of Bitcoin. This includes companies like Microstrategy (NASDAQ: MSTR), which has a balance sheet full of Bitcoin. And it includes companies like cryptocurrency exchange. Coinbase Global (NASDAQ: CURRENCY). Currently, Bitcoin accounts for approximately one-third of all trading volume on the Coinbase platform.
And to a lesser extent it includes Bitcoin Mining Stocks. At first glance, the Bitcoin halving might seem like a fantastic catalyst for companies like Digital marathon entries (NASDAQ: MARA) either Riot platforms (NASDAQ: RIOT). The problem, however, is that the Bitcoin halving results in the mining rewards they receive being halved. Even if they run their Bitcoin mining facilities at 100% capacity and increase all their mining rigs to 10, they will almost certainly see a direct impact on their profitability unless the price of Bitcoin doubles. Therefore, if you decide to invest in Bitcoin mining stocks, be careful.
Options beyond Bitcoin
Historically, any Bitcoin rally brings the entire cryptocurrency market with it. This means that other cryptocurrencies besides Bitcoin could start to recover as well. Top candidates include people like solarium (CRYPT: SUN)which will increase a sizzling 575% in 2023.
So, to use the โgrowing seasonโ analogy used by Morgan Stanley, it might make sense to plant some seedlings of these cryptocurrencies as well. It really depends on your risk tolerance. Obviously, these cryptocurrencies are much riskier than Bitcoin, but the upside potential could be much greater.
Where are we in the cycle?
Whether or not you accept the idea of โโBitcoin halving, there is no doubt that cryptocurrencies are highly cyclical. Morgan Stanley refers to the "four seasons" of cryptocurrencies. It is his job to determine what season we are in and adjust his portfolio accordingly.
As far as I'm concerned, I'm fully convinced that crypto winter is over and crypto spring is on its way. It may be colder outside, but my wallet is starting to warm up. From my perspective, the Bitcoin halving event in April could be just the catalyst the cryptocurrency market needs to break out of its long winter slump.
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Dominic Basulto has positions in Bitcoin. The Motley Fool positions and recommends Bitcoin, Coinbase Global, and Solana. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
