Recent months have seen a number of blows to the cryptocurrency industry, including high-profile bankruptcies, the arrest of a prominent figure, and a regulator’s lawsuit against a top crypto exchange. Despite these setbacks, the price of bitcoin, the biggest cryptocurrency, has soared by 65% this year, far exceeding the S&P 500, which has jumped 7%.
Analysts said that bitcoin has benefited from the crises in the cryptocurrency world, as the unrest has driven investors away from lesser known coins and towards the sector’s household brand. Plus, the price is boosted by wider forces in the economy, such as problems with the financial system, and a slowing of interest rate hikes.
The coming months will be uncertain, according to experts, because a looming recession could affect the performance and value of an asset older than 15 years. After a steep decline in bitcoin’s value last year, the digital currency is expected to perform spectacularly in 2023. Bitcoin’s price fell by more than 65% over the past year, worse than the S&P 500, which dropped about 20%.
The distress in the cryptocurrency market triggered a series of failures, including the bankruptcies of Terra and Luna, two coins, and a number of crypto lending companies, such as Block Fi and Celsius. Last year, crypto-exchange FTX filed for bankruptcies after a collapse which was followed by the arrest of its former CEO and founder, Sam Bankman-Fried, who has pleaded guilty to all thirteen counts, including fraud and conspiracies.
Crypto investors flocked to well-known digital currencies after the unrest of last year. An analyst from the investment company eToro told ABC News that “Bitcoin has been the beneficiary of a flight to quality within the crypto industry…This is the crypto name that my mom and your family probably know.”
Ethereum, the second-largest crypto currency in the world, has seen a 52% increase this year, benefitting from the rush towards prominent coins. The rise in bitcoin’s price has coincided positively with the development of the global economy, as the Federal Reserve and the Bank of England have reduced their interest rate hikes. Unrest in the traditional bank sector has also prompted some investors into seeking a digital alternative.
It is hard to find any data that shows depositors are pulling money out of their banks and putting it into bitcoin. However, an expert from CoinShares said that he heard of anecdotes about bank customers who transferred funds to cryptocurrency.
Experts said that if bitcoin does not stop its rate increases, as many investors anticipate, it could continue to rise in the second half of the year. However, they warned of the volatility that could be caused by a potential recession.
An analyst from eToro said that “when the banking system faced threats, a lot of investors saw reason to doubt the financial system. They went looking for alternatives.”
CoinShares’ head of research repeated this point, saying “people are becoming a lot more discerning. There are 50,000 crypto coins out there and a lot of them are rubbish.”
The report acknowledged that there is uncertainty regarding the day-today performance of bitcoin but was optimistic about 2023 even if a recession occurs. “Economic data continues to deteriorate,” said Butterfill. “In that environment, bitcoin would be volatile and perform quite well.”
