Important lessons from bitcoin [BTC] 2022 and what to expect in 2023

Navigating Bitcoin and cryptocurrencies in general has been a tough ride in 2022. That chapter is now over and we have now entered a new uncharted territory. All the crypto enthusiasts and their dog are now wondering if 2023 will bring good news or if it will be worse than 2022.

Although short- and long-term predictions are common, Bitcoin’s performance in 2022 showed a great deal of unpredictability. Perhaps her performance summary will help set the record straight. At its current price level, bitcoin is down about 75.92% from its all-time high.

Source: Glassnode

It is important to note where most of this shrinkage occurred. It’s from about November 2021 to the end of 2022. Why is this important? Well, mostly because of the time period in which they occurred.

Economic perspective and Bitcoin’s relationship with risky assets

If we review the onset of the Bitcoin bear market and the US Federal Reserve starting quantitative easing, we see a pattern. This is where the inflation link comes in.

Many factors and events over the past three years have stressed the global economy and pushed major economies into recession. The impact of the Covid pandemic on global trade and exerted great pressure on the global economy.

The war between Russia and Ukraine added salt to the proverbial wound as economic pressure mounted. The most important denominator was inflation. Governments printed a lot of money during the pandemic, which quickly raised the level of inflation around the world. In particular, the dollar has played an important role in exporting inflation around the world as a global reserve currency.

People have invested heavily in BTC using cheap funds available at low interest rates. But the government’s anti-inflationary plan included raising interest rates as part of its strategy to dry up excess liquidity.

Bitcoin found itself in the financial crossfire and as a result many people started panic selling as QE hit the house.

The end of cheap money

With cheap money quickly sucked out of the markets, the economic stress has had a cascading negative effect on risk assets. Bitcoin just so happens to fall into this category despite being seen as an inflation hedge. Combined, economic factors led to strong outflows that were reflected in the market value of Bitcoin.

Bitcoin market value

Source: Glassnode

The outflows were initially sharp but the pace slowed towards the end of 2022. Now that we have a deeper perspective of what befell the BTC bulls in 2022, we can start looking at key factors to consider that can provide insights into the outlook for 2023.

The relationship between bitcoin and the bond market

The performance of Bitcoin in 2022 proves that there is indeed a relationship between the performance of BTC and the traditional financial market. Before we get into bonds, we need to look at what the Fed is currently targeting.

As mentioned earlier, the Fed waged a fierce battle against inflation by raising interest rates. But this strategy may not be effective in the long term.

An analysis by Sean Foo highlights potential risks that markets may face in 2023. Fed Chairman Jerome Powell’s target of 2% is very ambitious and confirms the potential for more quantitative easing in the future.

This result means that we may see more uncertainty, as well as an increase in pressure on asset risk, which is where bonds come into play.

Bonds are favored when the overall investment landscape is judged to be risky. As a result, investors turned their attention to the bond market, particularly in the United States. This is because investors prefer their money to be in risk-free investments such as bonds.

Under normal circumstances, it is expected that the demand for Bitcoin will be lower if there is a higher demand for the bond. However, the bond yield curve is inverted and this means that there is a high chance that the Fed will cause an economic recession.

More Risks Ahead But Hail Mary Potential for Bitcoin

The above scenario (inflation) might make bonds attractive, but then the whole picture starts to look like a house of cards. This is due to the intensification of the economic war between the United States, China and Russia.

In 2022, we have seen more push towards de-dollarization, especially from China. Meanwhile, Russia is following a similar path after being hit with heavy sanctions.

The European Union is confiscating billions of Russian-owned assets as part of sanctions. This step may raise concerns in other countries and encourage them to depreciate the dollar. Such an outcome could encourage many countries to dump their dollar bonds.

If these events materialize, the dollar may weaken. Investors rushed into gold and this is likely to be the outcome for Russia if its assets are seized.

They are likely to use what they have in dollars to buy gold, which will put more pressure on the US dollar. Bitcoin may also have some demand if this happens.

Will Bitcoin See a Recovery in Demand in 2023?

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

Bitcoin addresses have grown steadily over the past three years, with more than 1 billion addresses. On the other hand, addresses containing more than 1,000 BTC have dropped significantly in the past 12 months.

Bitcoin addresses

Source: Glassnode

Renewed demand from addresses holding more than 1,000 BTC could help the bulls recover as it could indicate a buildup of whales. This bullish forecast is also in line with the Bitcoin cycle analysis. 2023 may also mark the beginning of the next Bitcoin cycle.

conclusion

We may see a rebound in Bitcoin demand in 2023 if the stars align. However, there is still a lot of uncertainty, especially given the current economic conditions and the previously mentioned risks.

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