Last year was characterized by tightening monetary policy as higher interest rates were put in place to fight soaring inflation. As a result, investors soured on risky assets, including growth stocks and cryptocurrencies. Even Bitcoin (BTC 0.24%) was crushed, dropping 65% in 2022.
But things might be taking a turn for the positive, as Bitcoin jumped 37% in the month of January. Can this cryptocurrency reach $100,000 per coin? At under $24,000 (as of the afternoon of Feb. 1), this price target implies a gain of more than 300%. Here's why I think this is a real possibility.
Thawing crypto winter
Since hitting its 2022 low in November, Bitcoin has come surging back. And this impressive performance mimics what we've seen in stocks. The Nasdaq Composite Index, for example, was up 11% in January. And the S&P 500 is having a strong start to the year, too.
While it's usually a futile endeavor to try to explain short-term price movements like this, I think part of the credit goes to inflation trends. In December, the Consumer Price Index increased 6.5% on an annualized basis, continuing decelerating growth with this data point. And this has caused investors to breathe a sigh of relief. In fact, the Federal Reserve announced a 25-basis-point hike at its latest meeting. Loosening monetary policy, or a less restrictive one, is a welcome sign for investors because it can promote economic growth and lead to rising portfolio values.
As the crypto winter thaws and asset prices possibly keep going up, a fear of missing out kicks in. And this will drive newer investors into the crypto space and Bitcoin in particular, providing further price support.
CRYPTO: BTC
Key Data Points
The bullish argument
Besides Bitcoin's near-term catalyst, which is inflation cooling and forcing the Federal Reserve to eventually stop hiking rates, there is another compelling argument for why investors should own the top crypto. And this focuses on the bigger picture, with an eye toward the long term.
The most popular bull case for Bitcoin centers on it becoming a more prominent store of value. Naysayers will quickly point to Bitcoin's plummeting price in 2022 as a clear indicator that it is a poor inflation hedge. But if we look over the past five years, Bitcoin has climbed 154% (as of this writing), compared to gold's 43% increase. Bitcoin's outperformance is more pronounced the further back you look.
Why would anyone want to own Bitcoin, though? It really comes down to the ballooning of debt balances, especially in the U.S. In the third quarter of last year, this country's debt-to-GDP ratio was 120%, about as high as it's ever been. And although that ratio has come down since the start of the pandemic, a study conducted by The Wharton School at the University of Pennsylvania estimates the debt-to-GDP ratio will be 225% by 2050.
Even now, the U.S. government is in a potentially dire situation, as it must raise the debt ceiling once again to avoid defaulting on its borrowings. Owning Bitcoin, therefore, can be seen as insurance against financial catastrophe, as it will no doubt become an attractive place to park wealth should things go downhill.
It's easy to understand that as a widely adopted store-of-value asset, Bitcoin could easily soar to a price of $100,000 and beyond. It really comes down to investor sentiment and education about what Bitcoin is all about, as well as the deteriorating financial situations of governments across the globe.
I wouldn't bet on Bitcoin reaching $100,000 sometime in 2023, as that is such a short time horizon to make any accurate predictions for. If I had to bet on it hitting the six-figure mark over the next five years, however, I'd take that in a heartbeat. It's simply getting to a point that makes it hard to ignore. And the budding ecosystem of financial service providers makes it extremely easy to get exposure.
Consequently, I think investors would be smart to put 1% of their net worth in Bitcoin. It'll certainly be a volatile ride, but the upside is massive.
