This cryptocurrency index fund is a good way for investors to diversify their portfolio.
Diversifying your portfolio is a good way to reduce risk. One way investors can diversify their portfolios is with Bitcoin (BTC 1.57%), and the Spot Bitcoin Exchange Traded Fund (ETF), which debuted in early 2024, is making it even easier. I did. These funds allow investors to add direct exposure to Bitcoin to their existing brokerage accounts, while avoiding the high fees and other hassles associated with crypto exchanges.
There are some great options out there, but iShares Bitcoin Trust (IBIT 2.30%) stands out because it’s run by BlackRock, the world’s largest asset manager. According to the Wall Street Journal, it reached $10 billion in assets under management faster than any other ETF to date. And with a below-average expense ratio of 0.25%, you’ll pay just $25 in annual fees for every $10,000 you invest in the fund.
Additionally, several hedge fund managers have purchased positions in iShares Bitcoin Trust. Institutional demand, combined with Bitcoin’s finite supply, could drive its price even higher.
In fact, based on historical patterns, Bitcoin could appreciate by 1,280% by 2032, and if that happens, the iShares Bitcoin Trust will provide comparable returns.
Bitcoin Halving Events Consistently Correlate with Price Rise
The total supply of Bitcoin that can ever be mined is limited to 21 million coins, and the rate at which new coins are put into circulation is controlled by internal protocols, including periodic halving events. In more detail, cryptocurrency miners earn block subsidies (newly minted Bitcoins) by validating transactions and adding them to the blockchain. These block subsidies are reduced by 50% every time a block of 210,000 transactions is completed, which occurs approximately once every four years.
Since its creation in 2009, Bitcoin has experienced four halvings. This means that the rate at which new supply is created has decreased over time. Importantly, Bitcoin’s value consistently increases from one halving to the next, as shown in the graph below.
Year of the halving event
Bitcoin price at halving
Bitcoin price at next halving
return
2012
$12
$675
5,525%
2016
$675
$8,636
1,179%
2020
$8,636
$63,462
635%
2024
$63,462
unknown
unknown
Data source: Morgan Stanley, YCharts.
Bitcoin’s price increase during the halving can be attributed to two factors. First, the selling pressure from miners decreases with each subsequent event. This is simply because miners earn 50% fewer Bitcoins each interval, which means they have less cryptocurrency to sell.
Second, Bitcoin has become more accessible over the years. Investors are no longer limited to crypto exchanges. Instead, you can buy Bitcoin through fintech platforms run by Block, PayPal, and Robinhood. And with the advent of Spot Bitcoin ETF, an even easier means of introduction has been created.
In summary, each halving makes Bitcoin effectively more scarce because new supply is created slower. On the other hand, demand is also increasing due to improved accessibility. Under such circumstances, the stock-to-flow (S2F) model explains the corresponding price increase.
In more detail, the S2F model compares the current supply of an asset (stock) with the new supply created each year (flow). The higher the ratio, the more rare it is and the higher the price. Bitcoin’s S2F value increases with every halving, so the price increase is a natural result.
History says Bitcoin could soar 1,280% before halving in 2032
Although the returns during the halving period are decreasing with each subsequent event, the decay is not linear. For example, the gain in the first interval (5,525%) exceeds the gain in the second interval by a factor of 4.7, while the gain in the second interval (1,179%) exceeds the gain in the third interval by a factor of 1.9.
To understand the relationship, I plotted the returns and added a trend line to the data. The R-squared value for the trend line was 0.998, indicating a good fit. For context, the R-squared value is a number between 0 and 1 that measures how accurately a model predicts an outcome. Trend lines are most reliable when the R-squared value is 1 or close to 1.
Using historical data, we extended the trend line to two halving events, as shown in the graph below.
Historical return data is provided by Morgan Stanley. Projected revenue is an estimate by the author.
When the 2024 halving event occurred, Bitcoin’s value was $63,462. The trend line suggests an additional 332% increase by the event of 2028, bringing the price to $269,889. This trend line also suggests an additional 213% increase to $843,878 by the 2032 event.
Bitcoin is currently trading at $61,000. The trend line therefore implies an increase of 1,280% in just over eight years, which equates to an annualized return of nearly 39%.
Note to investors
Some analysts predict that Bitcoin’s price will rise another 1,280% or more in the coming years. For example, Ark Invest founder Cathie Wood has said that Bitcoin could be worth $3.8 million by 2030, which is more than 6,000% from its current price of $61,000. It will rise. However, investors need to understand the risks associated with Bitcoin.
First, past results are no guarantee of future performance. Bitcoin may never reach the prices described in this article. Second, Bitcoin has historically been very volatile. Cryptocurrencies have fallen by more than 50% on several occasions, and similar crashes are likely to occur in the future.
Investors who are happy with that should consider diversifying their portfolio by purchasing a position in iShares Bitcoin Trust.
