After a 59% return in 2020 and a 60% return in 2021, a 67% decline year to date clearly wasn't the type of performance that Bitcoin (BTC -0.66%) investors were expecting in 2022.
But as legendary investor Peter Lynch once stated, "The key to making money in stocks is to not get scared out of them." While Lynch was talking about the stock market at a time before cryptocurrency came along, his advice is equally prescient for crypto investors today. Many investors have sold their crypto holdings, including Bitcoin, during the current crypto winter, but for every seller there is a buyer, and their Bitcoin was purchased by long-term investors who have conviction in Bitcoin's future.
Rising interest rates and the end of monetary easing are the key culprits behind Bitcoin's pullback. However, the future may look a lot more like 2021 than 2022 for Bitcoin based on a number of recent developments. Here are three reasons why the year ahead could look a lot better for the top digital asset.
Image source: Getty Images.
1. The institutions are coming...
First and foremost, more institutional investors are investing in Bitcoin as they come to view cryptocurrency as a legitimate asset class, with Bitcoin as the biggest (with a market cap of $300 billion) and most accessible.
According to the annual Fidelity Digital Assets survey conducted by financial giant Fidelity management, 58% of institutional investors surveyed bought cryptocurrency in the first half of 2022. Furthermore, 74% of those surveyed said they planned to invest in cryptocurrency at some point in the future. This was no small sample size either, as Fidelity surveyed 1,052 institutional money managers across North America, Europe, and Asia. These institutional investors have much more buying power than the average retail investor, and their increasing presence in the market could theoretically drive the price of Bitcoin higher.
Illustrating this increasing demand from large investors, Bank of New York Mellon (BK -0.99%), the U.S. oldest bank and the largest custodial bank in the world, said that it would start offering custodial services for Bitcoin due to high demand from clients. BlackRock (BLK -0.95%), the world's largest asset manager, said it would work with crypto exchange Coinbase (COIN 0.31%) to offer its Aladdin trading platform to clients who also held Bitcoin on Coinbase.
2. ...And so are blue chip companies
At the same time, Bitcoin usage is heating up among major tech companies and financial firms. For years, Bitcoin critics have tried to invalidate its worthiness as an investment by saying that it didn't have many use cases.
That is starting to change, and quickly. Google parent Alphabet (GOOG -2.40%) (GOOGL -2.32%) recently said that it would let customers pay for Google Cloud using Bitcoin as well as several other cryptocurrencies, while Mastercard (MA -0.14%) announced plans to work with crypto firm Paxos to help traditional banks offer crypto trading and investing on their platforms.
3. The Fed easing of rate hikes could propel Bitcoin
The Federal Reserve began aggressively hiking interest rates in 2022 in an effort to combat inflation, with results that have yet to be determined. One thing that the rate hikes did manage to do was crash many speculative, long-duration assets like Bitcoin and tech stocks. After raising interest rates from 0.25% to 0.5% in March to 3.75 to 4% with a series of sharp rate hikes, many market observers think that the Fed will have to eventually slow these rate hikes at some point in the near future. If the Fed takes its foot off the gas and allows rates to stabilize, that should make investors feel more comfortable with getting back into assets like Bitcoin.
Skate to where the puck is going
At the end of the day, 2022 has been a painful year for Bitcoin investors. However, as an early-stage asset class that is still largely a speculative investment at this time, its value has held up better than might have been expected, given the turmoil that traditional financial markets fell into. Looking ahead, 2023 looks poised to be a big year for Bitcoin. At the very least, it should be a lot better than 2022, thanks to increased investment from large institutional investors, growing use by global technology and financial firms, and a more accommodating monetary environment from the Fed. Bitcoin is still a risky investment, but I think that all investors can benefit from having a small allocation toward Bitcoin in their portfolios.
