After an extremely difficult year in 2022, the world's most valuable cryptocurrency, Bitcoin (BTC 1.40%), has seen its price surge by more than 80% in 2023, with the price topping $30,000 for the first time in 10 months.
That compares favorably to the broader benchmark S&P 500, which is up about 9% this year, and even the tech-heavy Nasdaq Composite, which is up more than 17% this year.
Bitcoin and all cryptocurrencies are incredibly volatile and difficult to predict, mainly because they are difficult to value. But can Bitcoin keep this impressive run going in 2023? Let's take a look.
How we got here
Bitcoin fell about 65% in 2022, so heading into the new year, the world's largest cryptocurrency did have that buy-the-dip appeal. Still, two big things really hurt Bitcoin and most other cryptocurrencies in 2022.
Image source: Getty Images.
First, after inflation surged and the Federal Reserve found itself behind the curve, the central bank began raising interest rates rapidly. Interest rates have gone from practically zero in March 2022 to nearly 5% now. Rising interest rates have crushed tech and growth stocks because higher rates reduce the future value of cash flows and have also pushed up yields on risk-free assets such as U.S. Treasury bills. This makes riskier assets less appealing, and few assets are riskier than cryptocurrencies.
Furthermore, Bitcoin tends to do well when parts of the mainstream financial system struggle. After all, developers created the token as well as blockchain technology during the Great Recession, claiming it would be an alternative to centrally controlled monetary systems. However, in 2022, the U.S. dollar strengthened thanks to the Fed's rate hikes, and the U.S. dollar index, which measures the value of the dollar against other foreign currencies, rose to its highest level since 2002.
What sparked the rally
What has really driven Bitcoin higher this year is a shift in sentiment about the conditions mentioned above. Inflation has shown signs of slowing, the Fed stopped doing jumbo 75-percentage-point rate hikes, and investors began to think that the Fed would soon pause its aggressive campaign of interest rate increases and maybe even cut rates later this year.
The dollar index has also fallen in 2023, and there has been turmoil in the banking industry, which included the demise of several U.S. banks and the large Swiss lender Credit Suisse. Bitcoin has done incredibly well during this time. During the past month, the price of Bitcoin is up about 35%.
Proponents of Bitcoin believe that the ability of anyone with an internet connection to transmit Bitcoin -- and therefore money -- can really be a better alternative to the mainstream banking system, removing the middleman and therefore fees.
Lastly, there has been more speculation that Bitcoin may turn out to be a form of digital gold -- a store of value and a hedge against inflation and economic turmoil. With many analysts and economists forecasting a recession this later year, the price of gold and Bitcoin have both shot up recently.
Can Bitcoin keep the run going?
Obviously, I don't have a crystal ball, so it's hard to say if Bitcoin can keep this run going, especially given the volatility associated with cryptocurrencies, but it does seem as if the Fed is eventually going to pause its interest-rate-hiking campaign, which could also lead to a weaker dollar. Both of those conditions favor Bitcoin.
However, I do think there are issues that Bitcoin investors should take more seriously, including stricter regulation and potentially less liquidity in the market after the failure of the crypto banks Silvergate Capital and Signature Bank. These might prove to be a lingering problem if crypto exchanges can't find banks to do business with and face tighter regulation.
Ultimately, although Bitcoin may yet stumble this year, it already has a huge lead and therefore looks poised to outperform the broader market in 2023. It's also one of the few cryptocurrencies that I believe is a good long-term buy and hold, so I'm still bullish on Bitcoin, even after this big run.
