In 2022, navigating the Bitcoin and cryptocurrency worlds in general has been a difficult rollercoaster. We have now finished that chapter and moved on to new, unexplored ground. Everyone who cares about cryptocurrency is now speculating about whether 2023 will bring good news or whether it will be even worse than 2022.
While making predictions for the short and long term is common, Bitcoin’s performance in 2022 showed a wide range of unpredictability. A review of its performance might put the situation in perspective. Bitcoin’s price has decreased by about 75.92% from its peak to the present.
It’s important to note where the majority of this drawdown has taken place. Between late November 2021 and the end of 2022. Why is this crucial? Well, mainly due to the time frame in which it took place.
Exploring the Economic Perspective of Bitcoin and Its Correlation with Risk-On Assets
When we compare the beginning of the Bitcoin bear market with when the U.S. Federal Reserve started its quantitative tightening programme, we notice a pattern. And this is where the connection to inflation is made.
Over the past three years, a variety of factors and events have strained the global economy and pushed several major economies just on the brink of recession. The COVID pandemic had an impact on international trade and put a lot of strain on the world economy.
The conflict between Russia and Ukraine made matters worse as economic pressure increased. Inflation served as the main denominator. During the pandemic, governments printed a lot of money, which quickly increased the level of inflation globally. As the world’s reserve currency, the dollar in particular played a crucial role in spreading inflation throughout the world.
People used inexpensive funds with low-interest rates to make significant investments in Bitcoin. However, the government’s strategy to absorb the extra liquidity included increasing interest rates as part of its effort to combat inflation.
Bitcoin suddenly found itself in the economic firing line, and as quantitative tightening hammered down, many people began selling in a panic.
The End of Cheap Money: Implications for Bitcoin and the Economy
Economic pressure negatively cascaded on risky assets as cheap money was quickly sucked out of the markets. Bitcoin, despite being regarded as an inflation hedge, falls under this category. The market capitalization of Bitcoin showed significant outflows as a result of the interacting economic factors.
At first, the outflows were rapid, but by the end of 2022, the pace had slowed. Now that we have a better understanding of what plagued BTC bulls in 2022, we can start looking at important factors to take into account that could provide information about expectations for 2023.
Examining the Relationship Between Bitcoin and the Bond Market
The performance of Bitcoin in 2022 demonstrated that there is, in fact, an association between BTC’s performance and the conventional financial market. We need to look at what the FED is currently aiming for before discussing bonds.
As was previously mentioned, the FED has aggressively fought inflation by raising interest rates. On the other hand, this tactic might not work in the long run.
Sean Foo’s analysis highlights the possible risks that the markets may face in 2023. The 2% goal set by FED Chair Jerome Powell is quite ambitious and emphasizes the possibility of future quantitative tightening.
In the event of such a result, there may be increased risk-taking and pressure on risky assets, which is where bonds come into play.
When the overall investment environment is thought to be too risky, bonds are preferred. Because of this, investors’ focus has shifted to the bond market, particularly in the US. This is because investors would prefer to invest their money in safe securities like bonds.
If there is a higher demand for bonds than Bitcoin, the demand for Bitcoin is typically anticipated to be low. The yield curve on bonds, however, is inverted, which increases the likelihood that the FED will bring about a recession.
Navigating the Risks Ahead for Bitcoin: Is a ‘Hail Mary’ Play Possible?
Bonds may seem appealing in the aforementioned inflation scenario, but the entire situation is beginning to resemble a house of cards. This is due to the escalating economic conflict between the US, China, and RUSSIA.
We witnessed a stronger push toward de-dollarization in 2022, particularly from China. In the meantime, Russia follows a comparable course after receiving harsh sanctions.
As part of the sanctions, the European Union (EU) is pushing for the seizure of billions of dollars in Russian wealth. This action might incite anxiety in other countries, leading them to de-dollarize. Such a result might entice many nations to sell their dollar-denominated bonds.
The dollar could lose strength if these things do happen. Investors have been flocking to gold, and if Russia’s assets are seized, this is likely to be the result.
It is likely to use its dollar holdings to purchase gold, which will put additional pressure on the dollar. If this occurs, Bitcoin might experience some demand as well.
Anticipating a Resurgence of Demand for Bitcoin in 2023
Bitcoin may finally make more sense as an inflation hedge now that the majority of the borrowed liquidity that caused the 2022 Bitcoin crash has been eliminated. This is so that Bitcoin does not have counterparty risk, like gold does. This suggests that the closure of the crypto businesses in 2022 may have been for the best.
Over one billion bitcoin addresses have been created in the last three years, growing steadily. On the other hand, the number of addresses holding more than 1,000 BTC has significantly decreased over the past 12 months.
The bulls may recover if there is a surge in demand from addresses with more than 1,000 BTC because this would suggest whale accumulation. These optimistic expectations concur with a study of the Bitcoin cycle. It’s possible that the next Bitcoin cycle will begin in 2023.
If the stars are right, 2023 could see a rise in Bitcoin demand. Despite this, there is still a great deal of uncertainty, particularly given the present economic climate and the risks mentioned above.