The cryptocurrency market took a major hit in 2022, losing roughly two-thirds of its value in 12 months. But there are signs of life in the digital asset world, and the market cap of the industry is up 25% since the start of 2023 (as of Jan. 18). Maybe investors are warming up to the extremely volatile asset class once again thanks to cooling inflation.
Bitcoin (BTC +1.55%), the world's oldest and most valuable cryptocurrency, is up 27% so far this year. Here's why it's easily my top crypto to buy right now.
CRYPTO: BTC
Key Data Points
Benefiting from a more accommodative Federal Reserve
Inflation, as measured by the widely followed consumer price index (CPI), increased 6.5% in the month of December on an annualized basis. This figure continues a downtrend that started in July. And the Federal Reserve, whose primary objective in 2022 was to curb soaring prices, is likely preparing to take a victory lap because the data demonstrate that the policy of aggressively hiking interest rates seems to be working.
Consequently, this has some financial and economic experts predicting that the central bank will slow down -- or even stop -- its interest rate increases sometime in 2023. Even the most casual investor knows how important and closely watched the central bank's decisions are.
Why would this kind of monetary policy benefit Bitcoin? It paves the way for the Fed to again take an accommodative stance by lowering rates and finding other ways to stimulate economic growth. And this helps drive the stock market higher and the riskiest assets in particular, a category that includes Bitcoin. More liquidity in the financial system and lower borrowing costs across the economy, coupled with prospects for better corporate earnings growth, result in heightened investor optimism.
The optimism is most visible early on because investors are forward-looking. This is reflected in Bitcoin's price action since the start of the new year.
Bitcoin is the most valuable cryptocurrency, with a market cap of about $409 billion. Thanks to an expanding financial ecosystem that makes buying and holding Bitcoin, it makes sense that the coin could attract new users as its price rises.
A long-term play
Although Bitcoin might have a near-term catalyst based on Fed actions, I believe it makes for a solid long-term bet as well. As the world becomes increasingly digital, Bitcoin provides a new method for people to store their wealth in an asset that isn't controlled by any central authority. Plus, its key defining characteristic -- the fact that there will ever only be 21 million coins created -- is extremely important, particularly in light of how much money printing goes on and how much global sovereign debt there is.
The amount of fiat currency and debt has ballooned, and I see no end to this. The U.S., for example, currently has $31.5 trillion of federal debt outstanding, a figure that has skyrocketed in the past 40 years. This also doesn't include underfunded liabilities, like pensions, Social Security, and Medicare, which will require the issuance of even more debt. This unsustainable situation makes owning Bitcoin a no-brainer decision because it could become a safe haven for those who don't want to own any fiat currency that will keep losing value over time.
To summarize, Bitcoin has some serious momentum right now. And it is poised to continue rising over the next decade. Therefore, it makes sense to allocate a small percentage -- maybe 1% to 2% -- of a well-diversified portfolio to Bitcoin.
