Summary Bitcoin recently surpassed $100,000 buoyed by expectations for favorable policy changes under the Trump administration. The appointment of cryptocurrency advocate Paul Atkins as SEC chair and approval of spot Bitcoin ETFs have boosted institutional interest in Bitcoin. Empirical evidence suggests this could be the beginning of a new price discovery phase, meaning the bull run has more legs. A closer look at Bitcoin's performance in the month of December in each Bitcoin halving year suggests more short-term gains are likely. Bitcoin ( BTC-USD ) recently surpassed the $100,000 mark for the first time ever, proving naysayers wrong. I do not own Bitcoin, but I have exposure to cryptocurrencies through my investment in Coinbase Global Inc. ( COIN ). Bitcoin is up 125% this year while COIN stock is up 104%, and I will take that as a win. For context, the S&P 500 index has substantially underperformed Bitcoin despite rising almost 28% this year. Seeking Alpha Bitcoin's rise to the mainstream has truly been one for history books. I am not planning to dive into Bitcoin's history here, but to determine the future trajectory of prices, it is important to understand some of the recent developments that have paved the way for Bitcoin to reach never-before-seen highs. Below are some of the main reasons behind Bitcoin's bull run in the recent past. President-elect Donald Trump's pro stance on cryptocurrencies. Expected regulatory changes in favor of cryptocurrency adoption. The appointment of cryptocurrency advocate Paul Atkins as SEC chair. The approval of spot Bitcoin ETFs earlier this year which has paved the way for increased institutional ownership. Expectations for favorable tax policy changes with a focus on lower capital gains taxes for cryptocurrencies. Bitcoin faced some selling pressure soon after hitting the $100K mark. According to Investing.com data, the 10% decline in Bitcoin prices after reaching $100,000 wiped out $300 million in long positions and $400 million in futures within minutes, suggesting that investors should look for strong resistance around the $100K mark. As a long-term-oriented growth investor who focuses on the fundamentals of companies (or digital assets for that matter), I will only invest in Bitcoin if its fundamentals can support higher prices. The argument for investing in Bitcoin is quite simple; there is a limited number of Bitcoin that will ever be in supply, and the growing demand will keep on pushing prices here. This is true until it is not. For investors with a long enough investment time horizon, it's important to understand if Bitcoin has what it takes to see sustainable demand growth in the long term when post-election euphoria wanes. The Price Discovery Phase Is Likely To Push Bitcoin Higher Bitcoin is arguably in a price discovery phase after crossing $100,000 as traders and institutional investors try to determine the fair market value of the digital asset in this new environment where Bitcoin has garnered significant media attention. The regulatory environment is also expected to turn favorable with the appointment of Paul Atkins as SEC chair, making it all the more reasonable to believe Bitcoin deserves to trade at new highs. According to Capriole Fund founder Charles Edward, every new Bitcoin price discovery cycle lasts, on average, 4-7 months and the first month of this cycle started in November with Donald Trump's victory. Bitcoin surged more than 1,500% during the 2017 cycle and almost 250% during the 2021 cycle. A fraction of those gains in this cycle would easily push Bitcoin prices close to $200,000, which seems a stretch for now but I would not be naive to rule out the probability of this happening given the strong interest in Bitcoin today. Empirical evidence reveals another reason for Bitcoin bulls to stay bullish in December. In every Bitcoin halving year, December has been a great month for Bitcoin. Bitcoin halved in April 2024, and below are the observed Bitcoin returns in the month of December after a halving event. Period Bitcoin return December 2012 6% December 2016 31% December 2020 47% Source: Author's calculations Even if we look at the bigger picture after a Bitcoin halving event, we find that Bitcoin's bull run is likely to last longer. Below are the observed returns following a Bitcoin halving event. Halving date Return after 100 days Return after 250 days Return after 300 days November 28, 2012 257% 760% 987% July 9, 2016 (3%) 79% 136% May 11, 2020 37% 321% 492% Source: Author's calculations The most recent Bitcoin halving occurred on April 20, 2024, when the block reward for mining was reduced from 6.25 BTC to 3.125 BTC. At halving, Bitcoin was trading at around $64,000. Since the halving, 231 days have passed, and Bitcoin is up 56%. From a historical viewpoint, Bitcoin has underperformed after this halving event, and as we approach the 300-day mark since the halving, Bitcoin will have to surge much higher to reach the historical average returns post-halving. I am not suggesting that Bitcoin prices will rise as much as they did back in 2012 when prices were in double digits, but history suggests this bull run is just getting started. Bitcoin As An Inflation Hedge Bitcoin seems to be showing some inflation-hedging properties, which is a good sign as this would help the digital asset secure an important position in institutional portfolios. A recent study conducted by Harold Rodriguez and Jefferson Colombo of the Sao Paulo School of Economics found that Bitcoin has reacted positively to CPI shocks (differences between estimates and actuals) between August 2010 and January 2023. As illustrated below, gold has also reacted positively to those inflation shocks, which does not come as a surprise given gold is considered an inflation hedge. Sao Paulo School of Economics Since the approval of the first spot Bitcoin ETF earlier this year, institutional ownership of Bitcoin has increased sharply. According to Geoff Kendrick, the Global Head of Digital Assets Research at Standard Chartered Bank, around 3% of the total Bitcoin supply will be held by institutional investors by the end of this year. He revealed that institutions have bought a net 683,000 bitcoins this year. With Bitcoin gaining recognition as an inflation hedge, the demand for the digital asset is likely to remain elevated in the long run as it becomes a key ingredient of every institutional investment portfolio. This is exactly what happened when spot gold ETFs were launched a couple of decades ago. Risks To Monitor Bitcoin is highly volatile, and this is an intrinsic characteristic of the digital asset. Therefore, investing in Bitcoin is only suitable for investors with a strong gut who are willing to weather significant corrections along the way. The good news is that volatility has subsided in the recent past but this is still a major risk investors need to monitor. BiTBO Investors should also keep an eye on regulatory shocks. Recent regulatory decisions have been favorable for long-term Bitcoin adoption, and an adverse development may come as a major shock, leading to a sharp decline in prices. When the consensus is distinctively positive, I try to remain cautious as a minor negative development can often cause chaos by catching investors off guard. Takeaway Bitcoin, after crossing the psychologically important $100,000 mark, seems well-positioned to enjoy more short-term gains as it enters a new price discovery phase. I am also encouraged by the inflation hedging characteristics exhibited by Bitcoin of late, attracting institutional investors. Despite maintaining a generally bullish stance on Bitcoin's prospects, I continue to prefer gaining exposure to Bitcoin and the broad cryptocurrency sector through my investment in Coinbase stock as it opens up the possibility to profit regardless of which cryptocurrency dominates the world in the long run.
