3 Reasons Why 2023 Could Be a Big Year for Bitcoin

After a 59% return in 2020 and a 60% return in 2021, a 67% year-to-date decline was clearly not the kind of performance Bitcoin (BTC -7.22%) investors expected in 2022.

But as legendary investor Peter Lynch once said, “The key to making money in stocks is not to be scared out of them.” While Lynch spoke about the stock market at a time before the advent of cryptocurrency, his advice is just as 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 bought by long-term investors who have faith in Bitcoin’s future.

Rising interest rates and the end of monetary easing are the main reasons behind Bitcoin’s retreat. However, the future could look a lot more like 2021 than 2022 for Bitcoin based on a number of recent developments. Here are three reasons why the coming year could look much better for the best digital asset.

Image source: Getty Images.

1. The institutions will…

First and foremost, more institutional investors are investing in Bitcoin as they see cryptocurrency as a legitimate asset class, with Bitcoin being the largest (with a market cap of $300 billion) and the 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 respondents 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 purchasing power than the average retail investor, and their growing presence in the market could theoretically drive the price of Bitcoin higher.

Illustrating this growing demand from large investors, Bank of New York Mellon (BK -1.41%)America’s oldest bank and the largest custodian bank in the world said it would begin offering custody services for Bitcoin due to high customer demand. Black stone (BLK -2.44%)the world’s largest asset manager, said it would work with crypto exchanges Coin base (COIN -9.54%) to offer its Aladdin trading platform to customers who also held Bitcoin on Coinbase.

2. …And there are blue chip companies too

At the same time, Bitcoin use is heating up among large technology companies and financial firms. For years, Bitcoin critics have tried to invalidate its worthiness as an investment by saying it didn’t have many use cases.

That is starting to change, and fast. Google Parent Alphabet (GOOG -1.70%) (GOOGL -1.78%) recently said it would let customers pay for Google Cloud using Bitcoin as well as several other cryptocurrencies, while MasterCard (MA -3.10%) announced plans to partner with crypto firm Paxos to help traditional banks offer crypto trading and investing on their platforms.

3. Fed Easing of Rate Hikes May Drive Bitcoin

The Federal Reserve began aggressively raising interest rates in 2022 in an effort to combat inflation, with results yet to be determined. One thing the interest rate hikes did manage to do was crash many speculative, long-dated assets like Bitcoin and tech stocks. After raising rates from 0.25% to 0.5% in March to 3.75 to 4% with a series of sharp rate hikes, many market observers believe the Fed will eventually have to slow those rate hikes at some point in the near future. If the Fed takes its foot off the gas and allows interest rates to stabilize, that should make investors feel more comfortable returning to assets like Bitcoin.

Skate where the puck is going

At the end of the day, 2022 has been a painful year for Bitcoin investors. But as an early-stage asset class that is still largely a speculative investment at this point, value has held up better than might be expected given the turmoil traditional financial markets fell into. Looking ahead, 2023 looks set to be a big year for Bitcoin. At the very least, it should be much better than 2022, thanks to increased investment from large institutional investors, increasing use by global technology and financial firms, and a more accommodative monetary environment from the Fed. Bitcoin is still a risky investment, but I believe that all investors can benefit from having a small allocation to Bitcoin in their portfolios.