Bitcoin has climbed 65% this year despite crypto woes. Experts explain why.
The cryptocurrency industry has suffered a few blows in recent months: high-profile bankruptcies, the arrest of weirdo Sam Bankman-Fried, and a regulatory lawsuit against top crypto exchange Binance.
Despite everything, the price of the largest cryptocurrency, bitcoin, has risen.
Bitcoin has climbed 65% this year, far outpacing the S&P 500, which has jumped 7%. Even the Nasdaq, a tech-heavy index, has delivered only a quarter of bitcoin’s gains.
In fact, bitcoin has benefited from crises in the cryptocurrency arena, analysts said, as the turmoil has pushed investors away from lesser-known coins and toward the sector’s household names.
In addition, the price has received a boost from broader economic forces such as problems in the financial system and slowing rate hikes, they said.
But the coming months pose uncertainty, experts added, as a looming recession could test the performance of an asset less than 15 years old.
Bitcoin’s blockbuster performance in 2023 comes after the digital currency’s price plummeted last year. Overall, the price of bitcoin fell 65% last year, outpacing losses in the S&P 500, which fell around 20%.
The price battles for bitcoin, which spanned much of the cryptocurrency sector, coincided with an aggressive series of interest rate hikes that put downward pressure on many assets, including the major stock indexes.
“It would have been a big bubble,” James Butterfill, head of research at digital asset management firm CoinShares, told ABC News. “The bubble was popped by the Fed.”
The cryptocurrency crisis helped trigger a series of failures. Last May, a major coin, Terra, collapsed along with its sister coin Luna. Meanwhile, several crypto lenders such as Block Fi, Celsius and Genesis filed for bankruptcy last year.
Dramatically, crypto exchange FTX filed for bankruptcy in November after a collapse within days of the arrest of Bankman-Fried, the company’s founder and former CEO. Bankman-Fried has pleaded not guilty to all 13 counts he faces, including fraud and conspiracy.
The turmoil last year sent crypto investors towards well-known digital currencies, says Callie Cox, an analyst at investment company eToro that tracks cryptocurrencies, to ABC News.
“Bitcoin has been the beneficiary of a flight to quality in the crypto industry,” Cox said. “This is the crypto name that my mother and your family probably know.”
Butterfill, of CoinShares, echoed the point: “People are getting a lot more discerning. There are 50,000 cryptocurrencies out there, and a lot of them are junk.”
Ethereum, the world’s second-largest cryptocurrency, is up 52% this year and is also benefiting from the rush to prominent coins, Butterfill said.
The rise in the price of bitcoin has coincided with favorable developments across the economy, as the Federal Reserve has slowed its rate hikes and turmoil in the traditional banking sector has pushed some investors to seek a digital alternative, experts said.
Since March, three of the country’s 30 largest banks have collapsed. Shares of regional lender PacWest Bancorp fell on Thursday after the bank said it lost 9% of deposits last week, suggesting financial instability persists.
“When the banking system faced threats, many investors saw reason to doubt the financial system,” said Cox of eToro. “They went looking for alternatives.”
There is little data available on depositors pulling money out of banks and putting it into bitcoin, Butterfill noted, adding that he had heard anecdotes of bank customers transferring money to crypto.
If the Fed halts rate hikes, as many investors expect, bitcoin could continue its rally in the latter part of the year, experts said. However, they warned that a potential recession could bring volatility.
“There could be nervousness around bitcoin as we approach a recession,” Cox said, noting that interest rates would remain high even after a break. “There are a lot of tailwinds for crypto right now.”
Butterfill acknowledged uncertainty about the outlook for bitcoin’s daily performance, but remained optimistic about the rest of 2023, even if it involves a recession.
“Economic data continues to deteriorate,” Butterfill said. “In that environment, bitcoin would be volatile and perform quite well.”
