It was a story of two bitcoins in 2022.One was the protection against uncertain times – which it showed both when Russia went to war against Ukraine at the beginning of the year, and after the demise of FTX, which is one of the largest financial fraud in US history shocked markets last month.This has been one of bitcoin’s greatest promises.The other was the riskiest assets, whose movements mirrored those of technology stocks.This has been bitcoin’s way for most of the year, which has been confusing and disappointing to some looking for a more stable asset in a turbulent market.Bitcoin is likely to stay that way in the new year, at least for the first half.
But investors and strategists will be eagerly awaiting not only the macro decoupling, but how it holds up in the face of uncertainty.“It’s not going to be an easy year for the economy, and the stock markets will eventually pull through, but there will be some jitters,” said Yung-Yu Ma, BMO Wealth Management’s chief investment strategist.“There is a lot of interest to see, now that bitcoin’s price has corrected so much, whether it can live up to the promise from these new levels that it has been held as a possibility for so long,” he added.“It’s going to be a year where the lake shows its stripes.” The washout of the FTX blowup provides a good proving ground for bitcoin.
There has been a huge price correction, but there is more institutional interest in digital assets than ever, Ma noted.The market is more balanced and realistic, has more clarity and more stable capital.Much of the speculation has been wrung out, he said.It won’t happen overnight, but more than ever investors want to see a crypto market driven by utility rather than speculation.
“What this crypto winter has taught us is that we need to find some real use cases for crypto, and that capital has been flowing into unproductive projects for far too long,” said Callie Cox, US investment analyst at eToro.
“But I’m hopeful that in 2023 — with construction underway and with scarce capital flowing to productive projects — we’ll see some progress on that front.” Barclays analyst Benjamin Budish said his team believes “crypto assets are likely to continue behaving as high beta risk assets going forward.” However, that correlation could begin to break “as cryptocurrencies can more clearly demonstrate practical and potentially disruptive use cases.” Similarly, Alkesh Shah, crypto and digital asset strategist at Bank of America Securities, said crypto assets will trade in line with risk assets through 2023, but he sees the potential for a divergence, “as investors shift focus from speculative trading to the development and adoption of blockchains and applications powered by tokens with utilities and cash flows.” Investing in the next two quarters Bitcoin is down more than 60% this year and sits about 75% below its all-time high as of November 2021.The strongest one-time declines this year followed the major Terra and FTX scandals, but the Crypto prices are still largely driven by the macro picture, analysts say.Cryptocurrency prices have also remained relatively stable since the summer.Prices have been trading sideways, but some believe most of the market carnage is over and that while they may still fall, they have been at or close to bottom.“Where we are right now, there are probably more people who want to sell in rallies, but there are also clearly people who want to buy the dips,” BMO’s Ma said.
“That’s why it has held up and been relatively stable.It’s not clear which side has stronger momentum at the moment.” Lyn Alden, founder of Lyn Alden Investment Strategy, said these lowered levels are a good accumulation point for someone with a three-year or more view on bitcoin, but they “should be concerned” in the short term.“I am still very unsure about the next two quarters as we continue to face a declining PMI environment, general risks and the Fed trying to tighten monetary policy, both with rates and their balance sheet,” she said.Purchasing Managers’ Indexes, commonly used gauges of the direction of economic activity, are her favorite way to track where Bitcoin might go next, she said.
“Most bitcoin bull runs have been associated with that rising PMI environment, that rising liquidity environment, and most bear markets have been associated with the pullback in those things and this one has been no different.” However, in the second half, Alden said she expects higher growth in the global money supply, which would be good for bitcoin.When the broad money supply is rising, bitcoin usually does well.Bitcoin’s bull markets occur during these periods.When there’s a pullback in that growth, like this year, bitcoin tends to struggle, Alden explains.Earnings weakness in stocks could also help bitcoin, she added.“In 2023, it’s going to be a different story, with earnings being more of a concern for the broader asset space, but the overall hardness of the dollar and the lower valuations of some won’t be the big story,” she said.“That gives assets like gold or bitcoin a chance to potentially outperform what we’re seeing in the broader stock market, as the weakness is more likely to be down to earnings.”
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