It was a tale of two bitcoins in 2022. One was the hedge against uncertain times — which it showed both as Russia waged war on Ukraine at the start of the year, and after the downfall of FTX, which has been called one of the biggest financial frauds in American history, rocked markets last month. This has been one of bitcoin’s biggest promises. The other was the riskiest of risk assets, whose moves mirrored those of tech stocks. This was bitcoin’s way for most of the year, perplexing and disappointing some seeking a more stable asset in a turbulent market. Bitcoin will probably remain that way in the new year, at least for the first half. But investors and strategists will be watching anxiously not only for its decoupling from macro drivers, but to see how it holds up in the uncertainty. “It’s not going to be an easy year for the economy, and the equity markets will eventually get through it, but there’ll be some choppiness,” said BMO Wealth Management’s Chief Investment Strategist Yung-Yu Ma. “There’s a lot of interest in seeing, now that the price of bitcoin has corrected so much, if from these new levels it can fulfill the promise that it’s held out as a possibility for so long,” he added. “It’s going to be a year where it shows its stripes more.” The washout from the FTX blow-up is setting up a good proving ground for bitcoin. There’s been a huge price correction, but there’s more institutional interest in digital assets than ever, Ma noted. The market is more balanced and realistic, it has more clarity and more stable capital. Much of the speculation has been wrung out, he said. It won’t happen overnight, but investors more than ever 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 for far too long, there was capital flowing to unproductive projects,” said Callie Cox, U.S. investment analyst at eToro. “But I’m hopeful that in 2023 – with the building that’s going on and with scarce capital flowing to productive projects – we will see some progress on that front.” Barclays analyst Benjamin Budish said his team believes “crypto assets are likely to continue to behave like high-beta risk assets going forward.” However, that correlation could start to break “as cryptocurrencies can more clearly demonstrate practical and potentially disruptive use cases.” Similarly, Alkesh Shah, crypto and digital assets strategist at Bank of America Securities, said crypto assets will trade in line with risk assets “over the course of 2023” but that 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 utility and cash flows.” Investing in the next two quarters Bitcoin has fallen more than 60% this year and sits roughly 75% off of its all-time high from November 2021. The steepest one-time drops this year followed the big Terra and FTX scandals, but crypto prices are still largely driven by the macro picture, analysts say. Also, cryptocurrency prices, have remained relatively stable since the summer. Prices have been trading sideways, but some think most of the carnage in the market is done and that while they could still fall, they’ve been at or close to the bottom. “Where we stand right now, there are probably more people looking to sell into rallies, but there are also people clearly looking to buy the dips,” BMO’s Ma said. “That’s why it’s held up and been relatively stable. It’s not clear which side has a stronger impulse right now.” Lyn Alden, founder of Lyn Alden Investment Strategy, said these beaten down levels are a good accumulation point for someone with a three-year view or longer on bitcoin, but they “have to be concerned” in the near term. “I’m still very uncertain about the next two quarters because we still have a declining PMI environment, general risk off conditions, the Fed trying to tighten monetary policy both with rates and with their balance sheet,” she said. Purchasing Managers Indexes, widely used gauges for the direction of economic activity, are her preferred way to track where bitcoin might go next, she said. “Most of bitcoin’s bull runs have been associated with that rising PMI environment, that rising liquidity environment, and most of the bear markets have been associated with the drawdown in those things and this one’s been no different.” In the second half, however, Alden said she expects higher growth in the global money supply, which would be good for bitcoin. When broad money supplies are rising, bitcoin tends to do well. Bitcoin’s bull markets occur in these periods. When there’s a pullback in that growth, as there was this year, bitcoin tends to struggle, Alden explained. Earnings weakness in equities could help bitcoin too, she added. “In 2023, it’s gonna be a different story, which is that earnings are more of the concern for the broader asset space but the overall hardness of the dollar and reduction valuations of some is not going to be the big story,” she said. “That gives assets like gold or bitcoin a chance to potentially do better than what we see in in the broad equity space because the weakness is probably going to be more earnings related.”
