Important Lessons from Bitcoin [BTC] in 2022 and what to expect in 2023

Navigating the world of bitcoin and cryptocurrencies in general has been a tough rollercoaster ride in 2022. This chapter is now closed and we have now entered new uncharted territory. Every crypto enthusiast and their dog are now wondering if 2023 will be good news or if it will be worse than 2022.

While short- and long-term predictions are common, Bitcoin’s performance in 2022 demonstrated a tremendous amount of unpredictability. Perhaps a summary of his performance can help put things in perspective. At its current price level, Bitcoin is down about 75.92% from its all-time high.

Source: Glassnode

It’s important to note where most of this drawdown has occurred. It will last approximately from November 2021 to the end of 2022. Why is this important? Well, mainly because of the period in which it occurred.

The Economic Perspective and Correlation of Bitcoin with Risky Assets

If we compare the start of the Bitcoin bear market to the start of the US Federal Reserve’s quantitative tightening, we see a pattern. And this is where the inflation link comes into play.

Numerous factors and events over the past three years have weighed on the global economy and pushed major economies into recession. The COVID pandemic has affected world trade and weighed heavily on the global economy.

The Russo-Ukrainian war added salt to the proverbial wound as economic pressures mounted. The key denominator was inflation. Governments have printed massive amounts of money during the pandemic, which has quickly pushed up inflation around the world. In particular, the dollar, as the global reserve currency, played a central role in exporting inflation around the world.

People had invested heavily in BTC using cheap funds at low interest rates. But the government’s plan to fight inflation included raising interest rates as part of its strategy to eliminate excess liquidity.

Bitcoin got caught in the economic crosshairs and as a result many people started panic selling as quantitative tightening took hold.

The end of cheap money

As cheap money was quickly sucked out of the markets, economic pressures weighed on risky assets. Bitcoin happens to fall into this category despite being considered an inflation hedge. The combined economic factors resulted in strong outflows, which were reflected in Bitcoin’s market cap.

Source: Glassnode

Outflows were strong to begin with, but the pace slowed towards the end of 2022. Now that we have a deeper look into what BTC bulls are headed for in 2022, we can start looking at key factors , to consider and could provide insight into expectations for 2023.

The relationship between bitcoin and the bond market

Bitcoin’s performance in 2022 has proven that there is indeed a correlation between BTC’s performance and the traditional financial market. Before we get into bonds, we need to look at what the FED is currently aiming for.

As previously mentioned, the Fed has waged an aggressive fight against inflation by raising interest rates. However, this strategy may not be effective in the long run.

An analysis by Sean Foo highlights the potential risks markets could face in 2023. Fed Chair Jerome Powell’s target of 2% is quite ambitious and underscores the potential for further quantitative tightening in the future.

Such an outcome means we may see more uncertainty and pressure on risky assets, and this is where bonds come in.

Bonds are preferable when the overall investment landscape is deemed too risky. As a result, investors have turned their attention to the bond market, particularly in the United States. Because investors prefer to invest their money in risk-free investments such as bonds.

Under normal conditions, demand for bitcoin is expected to be low when there is higher demand for bonds. However, the bond yield curve is inverted, meaning there is a high probability that the Fed could cause an economic recession.

More risks ahead, but a potential Hail Mary for Bitcoin

The above scenario (inflation) may make bonds attractive, but then the whole picture starts to look like a house of cards. Because the economic war between the US, China and Russia has intensified.

In 2022 we saw another push towards de-dollarization, particularly from China. Meanwhile, Russia is following a similar path after being hit with heavy sanctions.

The European Union (EU) is pushing to seize billions of dollars in assets under sanctions against Russia. The move could spark fears in other nations and encourage them to reduce the dollar. Such a result could encourage many countries to sell their dollar bonds.

If these events occur, the greenback could weaken. Investors have rushed into gold and this is likely to be the outcome for Russia if its assets are confiscated.

It will likely use its dollar holdings to buy gold, putting more pressure on the US dollar. Bitcoin could also enjoy some demand in this case.

Will Bitcoin See a Demand Resurgence in 2023?

Now that most of the borrowed liquidity that contributed to the 2022 Bitcoin crash has been wiped out, Bitcoin may finally make more sense as an inflation hedge. This is because Bitcoin, like gold, has no counterparty risk. That means the crypto companies liquidated in 2022 could be a blessing in disguise.

Bitcoin addresses have grown steadily over the past three years, with over a billion addresses. On the other hand, addresses holding over 1,000 BTC have declined significantly over the past 12 months.

Source: Glassnode

A resurgence in demand from addresses above 1,000 BTC could help bulls rally as it would indicate a gathering of whales. These optimistic expectations are also consistent with a bitcoin cycle analysis. 2023 could also mark the start of the next Bitcoin cycle.

#Bitcoin A bull run begins.

They start every 4 years.

2011 / 2015 / 2019 / 2023 pic.twitter.com/jKIniBoLnU

— TAnalyst (@AurelienOhayon) December 28, 2022

Conclusion

We could see a resurgence in Bitcoin demand in 2023 if the stars align. However, there is still a lot of uncertainty, especially with the current economic conditions and the risks mentioned above.

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