Bitcoin (BTC -0.54%) is an asset most people have heard of but few really understand. Similarly, while it’s easy to say you’re going to buy something and hold it forever, without knowing a few key details to tie an investment’s narrative together firmly in your mind, it’s hard to have enough conviction to hold good investments through hard times.
Therefore, even if you’re not generally interested in Bitcoin’s technical aspects, it’s still quite useful to appreciate one particular metric. Here’s what it is and why it’s so important to the coin’s supply dynamics.
Mining difficulty matters
To produce Bitcoin, it needs to be mined. Mining the coin is essentially equivalent to getting a network of computers to find solutions for fancy math problems. The solutions are called hashes, and the pace of the solutions being produced is called the hashrate.
Generally speaking, those fancy math problems require more computational effort to solve over time, as the solutions that were low-hanging fruit have long since been picked. Therefore, the computational power needed to mine the coin tends to increase over time.
Roughly 800 quintillion calculations are performed every second on the Bitcoin network. But the more important metric by far is that the total mining hashrate has grown by an average of 107% per year since 2016, rising by 55% in 2024 alone.
That implies a couple of things. First, it suggests that miners generally need to consistently invest in faster mining systems, so they must assume that there is a future return for doing so that exceeds their cost of capital. That assumption has consistently proven true over the long term, broadly speaking. So, miners will probably be willing to continue making those investments until there’s a prolonged period where those assumptions are repeatedly disproven. That might never happen.
Second, miners will need increasingly higher Bitcoin prices to justify their investments over the long term. In other words, because Bitcoin is getting harder and harder to mine over time, it’s supply growth rate is slowing, which forces prices higher, incentivizing further mining activity once again. If there’s ever a disconnect between the mining difficulty and what miners are willing to invest, the protocol has a built-in step down to entice them back in.
When paired with another major Bitcoin supply mechanism, the halving, in which the reward for miners is decreased by half roughly every four years, it makes sense why the network’s hashrate increases so rapidly each year. It’s fighting an exponential curve of computational difficulty and decling returns.
Take a look at what this does to the price over time:
Bitcoin Price data by YCharts.
The more you zoom out, the more obvious it is that the coin is a hard-to-extract and increasingly scarce resource. That makes it a good idea to buy and hold, to say the least.
The trend looks great for perpetual holders
Knowing these supply dynamics, holding on to your Bitcoin over the long run is a worthwhile financial decision. The longer you are willing to hold, the more time you’ll gain exposure to its supply pressure. The upside will likely be enormous if you look 10 or 20 years out. Per Bitscreener, one Bitcoin could be worth as much as $318,494 by 2040.
If you have patience, there’s little reason to suggest that Bitcoin’s price will stop increasing so long as there are coins to be mined. It’s true that the price of the coin can fluctuate significantly due to market, economic, and other factors. At least so far, those fluctuations have been temporary and forgettable in the larger scheme of things. Buying the dip and holding through volatility has thus been rewarded very consistently, though that may not necessarily be the case forever.
Allocating as much as 5% of your portfolio to Bitcoin probably is a good move, assuming you’re willing to hold it forever. Remember, based on its history so far, it behaves like a risky asset in the near term and more like digital gold in the long term. There’s no way to get the biggest benefits if you get scared and sell when there’s some choppiness.
