A brilliant index fund to buy, which history says could rise 1,280% by 2032

Diversifying your portfolio is a good way to mitigate risk. One way investors can diversify their portfolios is with Bitcoin (BTC 1.18%)and Bitcoin exchange-traded funds (ETFs) debuting in early 2024 have made it even easier. These funds allow investors to add direct Bitcoin exposure to their existing brokerage accounts while avoiding the high fees and other hassles associated with cryptocurrency exchanges.

There are several good options, but iShares Bitcoin Trust (IBIT 2.30%) it stands out because it is operated by BlackRockthe world’s largest asset manager. It reached $10 billion in assets under management faster than any other ETF in history, according to the report The Wall Street Journal. And the below-average 0.25% expense ratio means the annual fee will total just $25 for every $10,000 invested in the fund.

Additionally, several hedge fund managers have bought positions in iShares Bitcoin Trust. That institutional demand, along with the finite supply of Bitcoin, could drive up its price.

Indeed, based on historical patterns, Bitcoin could rise 1,280% by 2032, and if it does, the iShares Bitcoin Trust would provide equivalent gains.

Bitcoin halving events have consistently correlated with price appreciation

The total supply of Bitcoin that can ever be mined is limited to 21 million coins, and the rate at which new coins enter circulation is governed by an internal protocol that includes periodic halving events. To elaborate, cryptominers earn block grants (newly created Bitcoin) for validating transactions and adding them to the blockchain. These block grants are reduced by 50% every time 210,000 blocks of transactions are completed, which happens roughly once every four years.

Since its inception in 2009, Bitcoin has undergone four halving events, meaning the rate at which new supply is created has decreased over time. Importantly, Bitcoin has steadily become more valuable from one halving event to the next, as shown in the chart below.

Data source: Morgan Stanley, YCharts.

Bitcoin’s price appreciation between halving events can be attributed to two things. First, the selling pressure from miners decreases with each subsequent event, simply because miners earn 50% less Bitcoin at each interval, so they have less cryptocurrency available to sell.

Second, Bitcoin has become more affordable over the years. Investors are no longer limited to cryptocurrency exchanges. Instead, they can buy Bitcoin through fintech platforms operated by Block, PayPaland robinhood. And the advent of Bitcoin spot ETFs has created an even easier means of adoption.

To summarize, Bitcoin effectively becomes rarer with each halving because new supply is created more slowly. Meanwhile, greater affordability has led to greater demand. In these circumstances, the stock-to-flow (S2F) model explains the appropriate price appreciation.

To elaborate, S2F models compare the current supply of an asset (stock) with the new supply created each year (flow). Higher rates correlate with greater shortages and higher prices. Bitcoin’s S2F value has increased with each halving event, so price appreciation is the logical outcome.

History Says Bitcoin Could Rise 1,280% After 2032 Halving Event

The return between halves decreased with each subsequent event, but the decay was not linear. For example, gains in the first range (5,525%) exceeded gains in the second range by a factor of 4.7, but gains in the second range (1,179%) exceeded gains in the third range by a factor of 1.9 .

To understand the relationship, I plotted the returns and added a trendline to the data. The trend line has an R-squared value of 0.998, signaling a good fit. For context, R-squared values ​​are numbers between 0 and 1 that measure how well a model predicts an outcome. A trendline is most reliable when its R-squared value is at or close to 1.

Using historical data, we extended the trend line two halving events into the future, as shown in the chart below.

Historical return data comes from Morgan Stanley. Estimated yields are estimates made by the author.

Bitcoin was valued at $63,462 when the 2024 halving event took place. The trendline implies another 332% gain until the 2028 event, which would take its price to $269,889. The trendline also implies a further 213% increase to the 2032 event, bringing its price to $843,878.

Bitcoin is currently trading at $61,000. So the trend line implies a 1,280% increase in just over eight years, which equates to an annualized return of nearly 39%.

A word of caution for investors

Some analysts predict that the price of Bitcoin will appreciate by even more than 1,280% in the coming years. For example, Ark Invest founder Cathie Wood says Bitcoin could be worth $3.8 million by 2030 — a gain of more than 6,000 percent from its current price of $61,000. But investors should understand the risks associated with Bitcoin.

First, past performance never guarantees future performance. Bitcoin may never reach the prices discussed in this article. Second, Bitcoin has historically been very volatile. The cryptocurrency has fallen by more than 50% on several occasions, and similar declines are likely in the future.

Investors who are comfortable with this should consider diversifying their portfolios by purchasing a position in the iShares Bitcoin Trust.