Bitcoin has beaten the market by 80% in 2023. Can it continue?

After an extremely difficult year in 2022, the world’s most valuable cryptocurrency, Bitcoin (BTC 1.15%)has seen its price increase by more than 80% in 2023, with its price topping $30,000 for the first time in 10 months.

It can be compared with the broader benchmark index S&P 500, which is up approx. 9% this year, and even the technology-heavy one Nasdaq Compositewhich 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 had a buy-the-dip appeal. Still, there are two big things that really hurt Bitcoin and most other cryptocurrencies in 2022.

Image source: Getty Images.

First, after inflation rose and the Federal Reserve found itself behind the curve, the central bank began raising interest rates rapidly. Interest rates have gone from virtually zero in March 2022 to nearly 5% now. Rising interest rates have crushed technology and growth stocks because higher interest rates reduce the future value of cash flows and have also pushed up yields on risk-free assets such as US Treasury bills. This makes riskier assets less attractive, 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 the blockchain technology during the Great Recession, claiming it would be an alternative to centralized monetary systems. In 2022, however, the US dollar strengthened thanks to the Fed’s interest rate hikes, and the US dollar index, which measures the value of the dollar against other foreign currencies, rose to its highest level since 2002.

What triggered 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 raising interest rates at 75 percentage points, and investors began to believe that the Fed would soon end its aggressive campaign of rate hikes and perhaps 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 US banks and the major Swiss lender Credit Suisse. Bitcoin has done incredibly well during this time. Over the past month, the price of Bitcoin has risen around 35%.

Proponents of Bitcoin believe that the ability for anyone with an internet connection to transfer Bitcoin – and thus money – could really be a better alternative to the regular banking system, removing the middleman and thus the fees.

Finally, there has been more speculation that Bitcoin could prove to be a form of digital gold – a store of value and a hedge against inflation and economic turmoil. With many analysts and economists predicting a recession this coming year, the price of gold and Bitcoin have both shot up recently.

Can Bitcoin keep the race going?

Obviously, I don’t have a crystal ball, so it’s hard to say whether Bitcoin can keep this run going, especially given the volatility associated with cryptocurrencies, but it seems like the Fed will eventually pause interest rates. hiking campaign, which could also lead to a weaker dollar. Both of these conditions favor Bitcoin.

However, I 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 could prove to be a long-term problem if crypto exchanges cannot find banks to do business with and face stricter regulation.

Ultimately, while Bitcoin may yet stumble this year, it already has a huge lead and therefore looks set to outperform the broader market in 2023. It is also one of the few cryptocurrencies that I believe is a good long-term buy and hold , so I I’m still bullish on Bitcoin, even after this big run.