Key lessons from Bitcoin [BTC] in 2022 and what to expect in 2023

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Navigating the world of Bitcoin and cryptocurrencies, in general, has been a tough rollercoaster in 2022. That chapter is now closed, and we have now entered new, uncharted territory. All crypto enthusiasts and their dogs are now wondering if 2023 will bring good news or if it will turn out to be worse than 2022.

While short- and long-term projections are common, Bitcoin’s performance in 2022 demonstrated a huge expanse of unpredictability. Perhaps a recap of his performance can help put things into perspective. At its current price level, Bitcoin is pulled about 75.92% from its all-time high.

Source: Glassnode

It is important to note where most of this sampling occurred. This is from around November 2021 to the end of 2022. Why does this matter? Well, mainly because of the time period in which it happened.

The Economic Outlook and Correlation of Bitcoins to Risky Assets

If we cross-reference the start of the Bitcoin bear market and the US Federal Reserve has started quantitative tightening, we see a trend. And this is where the link with inflation comes in.

Many factors and events over the past three years have strained the global economy and pushed major economies into recession in the blink of an eye. The COVID pandemic has affected global trade and put great pressure on the global economy.

The Russian-Ukrainian war added salt to the proverbial wound as economic pressures mounted. The key denominator was inflation. Governments heavily printed money during the pandemic, which rapidly increased the level of inflation across the world. In particular, the dollar has played a central role in exporting inflation around the world as the world’s reserve currency.

People had invested heavily in BTC using cheap funds available at low interest rates. But the government’s plan to fight inflation was to raise interest rates as part of its strategy to mop up excess liquidity.

Bitcoin found itself in the economic crosshairs and as a result, many people started selling in panic as quantitative tightening crumbled.

The end of cheap money

With cheap money being quickly sucked out of the markets, the economic pressure had a negative cascading effect on risky assets. Bitcoin falls into this category despite being considered an inflation hedge. The combined economic factors resulted in strong outflows reflected in Bitcoin market capitalization.

Source: Glassnode

The outflows were strong early on, but the pace slowed towards the end of 2022. Now that we have a deeper perspective of what hurt BTC bulls in 2022, we can start looking at the key factors to take into account that could offer a glimpse of 2023 expectations.

The relationship between Bitcoin and the bond market

The performance of Bitcoins 2022 proved that there is in fact a connection between the performance of BTC and the traditional financial market. Before we get to bonds, we need to look at what the FED is currently aiming for.

As noted earlier, the FED has aggressively fought inflation by raising interest rates. However, this strategy might not be effective in the long term.

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

Such an outcome means we could see more uncertainty, as well as higher pressure on risky assets, and that’s where bonds come in.

Bonds are preferred when the overall investment landscape is deemed too risky. Consequently, investors turned to the bond market, particularly in the United States. This is because investors prefer to place their funds in risk-free investments such as bonds.

Under normal conditions, the demand for Bitcoin should be low if there is a higher demand for bonds. However, the bond yield curve is inverted, which means there is a strong chance that the FED will cause an economic recession.

More Risk Ahead But Potential Hail Mary for Bitcoin

The aforementioned scenario (inflation) may make bonds attractive, but then the bigger picture starts to look like a house of cards. This is because the economic war between the United States, China and Russia has escalated.

In 2022, we have seen a further push towards dedollarization, especially from China. Meanwhile, Russia is following a similar course after being hit with heavy sanctions.

The European Union (EU) is pushing to confiscate billions of wealth held by Russia under sanctions. This decision may trigger fears in other countries, encouraging them to de-dollarize. Such a result could encourage many countries to offload their dollar obligations.

If these events materialize, the greenback could weaken. Investors have flocked to gold and this will likely be the outcome for Russia if its assets are confiscated.

He will likely use his dollar holdings to buy gold, which will put further pressure on the US dollar. Bitcoin could also benefit from some demand if that happens.

Will Bitcoin see an upsurge in demand in 2023?

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

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

Source: Glassnode

A resurgence in demand for addresses holding more than 1,000 BTC could help bulls recover as this would indicate an accumulation of whales. These bullish expectations also align with an analysis of the Bitcoin cycle. 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 aforementioned risks.

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