Is a Bitcoin Sell-Off Imminent? History Suggests a Very Clear Answer.

The world's largest cryptocurrency is Bitcoin, (CRYPTO: BTC) with a market valuation of nearly $1.9 trillion. And as of this writing, the price per Bitcoin isn't far from $100,000 -- it's a value that many didn't think was possible, especially just a couple of years ago.

Then again, other investors predicted a price of $100,000 for Bitcoin a long time ago. In short, Bitcoin is a polarizing subject. Many smart people maintain that the cryptocurrency will eventually become worthless. On the other side of the debate is MicroStrategy found and executive chairman, Michael Saylor, who believes Bitcoin will be worth a stunning $13 million per coin by 2045.

So, is a Bitcoin sell-off imminent or is it on its way to more life-changing gains? Well, this cryptocurrency has followed a very predictable pattern during the past decade. And this historical pattern suggests what's in store for 2025.

The four-year cycle for Bitcoin

Bitcoin is a digital currency and transactions are consequently digital as well. Therefore, the system requires computers to process transactions. And independent third parties use their equipment to voluntarily do this. The process is called mining and they volunteer their services because they're paid in Bitcoin.

How much do Bitcoin miners get paid? Without going too deep in the weeds, the protocol establishes a certain amount of pay for a certain amount of work. But about every four years, the payments get cut in half. This is known as the Bitcoin halving event.

I'll momentarily explain why the halving event has historically affected Bitcoin's price -- that's the more important thing to take away from this discussion. But for now, allow me to simply explain how the halving event has affected the price.

The table below shows the returns for Bitcoin during the calendar year two years before the halving, the year right before the halving, the year of the halving, and the year immediately after a halving. As you can see, the historical pattern is quite clear.

Percentage return data from StatMuse. *Returns as of 11/25/24, according to YCharts.

When it comes to the regular cycle, Bitcoin has made big gains the year before, the year of, and the year after a halving event. The other year of the four-year cycle represents a down year.

Because of the pattern shown in the table above, one would expect Bitcoin to have a great year in 2025 even though it already reached all-time highs in 2024. Consequently, it doesn't seem like a sell-off is imminent.

More to the story

The problem with historical patterns is that they're devilishly deceptive. In reality, investors can never assume that the future will always look like the past. We know this to be true as evidenced by our English word for this phenomena: unprecedented.

"Unprecedented" is what we say when something that hasn't happened before actually happens. Historical patterns go out the window when a precedent is broken.

In other words, one would expect Bitcoin to go up in 2025 because the historical trend says the price goes up during the calendar year after the Bitcoin halving. But there's always room for an unprecedented drop.

In my opinion, the reason returns for Bitcoin have been so predictable historically is because the supply and demand dynamics are predictable. Every four years, the new supply of Bitcoin through mining is cut in half. This disrupts the balance between new supply and new demand, leading to big jumps in price. But demand (often through crypto FOMO) eventually catches back up, leading to sell-offs.

The thing is, Bitcoin's protocol only controls the supply of coins in a predictable way. It can't control demand, meaning that half of the equation has room for something unprecedented. In the past, new Bitcoin highs usually lead to more awareness and more adoption from individuals, companies, and even governments. But this is never a guaranteed outcome.

For example, president-elect Donald Trump campaigned with a pro-Bitcoin message and it's the first time it was a major talking point from a U.S. president -- unprecedented. What happens to Bitcoin in 2025 if adoption from the federal government is put on the back burner after anticipation built up during the election cycle? Investors simply don't know because it hasn't happened before.

In conclusion, investors shouldn't bet on Bitcoin headed higher in 2025 simply because it follows the historical pattern. I believe there are reasons to predict it will rise, including more adoption by businesses and consumers. But as is always the case in cryptocurrency, investors should understand the dynamics at play and have a healthy dose of skepticism before buying anything.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.