This year’s cryptocurrency rally has lost steam, and not even
Bitcoin
‘s most ostentatious conference was able to hide jitters that the original crypto needs help if it’s ever going to regain prior heights.
The Bitcoin 2023 conference in Miami, which ended last weekend, had roughly 15,000 in attendance, less than half of what it saw in 2022. While the conference the last couple of years “felt like a festival,” Needham analyst John Todaro said in a research note, the 2023 edition was more of an “industry conference.”
The muted tone is no surprise. Bitcoin rallied 58% to start the year but lately has hit a ceiling, stagnating at about $26,500, which is well less than half its peak in November 2021. The token was slammed last year as crypto projects reeled from falling prices, bankruptcies, and fraud.
Falling volatility and stagnating prices “has left much of the market feeling like it is stuck in no man’s land,” wrote Fundstrat analyst Sean Farrell in a research note this week.
For Bitcoin to have any hope of hitting new highs in 2023, here are three things that have to happen.
The Fed Has to Stop Tightening
Bitcoin isn’t a safe asset. It’s a risk-on asset, and at least for the time being has more in common with pre-revenue venture-capital investments than it does with havens such as cash or gold.
As the Federal Reserve embarked on its hiking campaign to stamp out inflation, Bitcoin fell with other assets. And as it became clear that the Fed could be near a pause, Bitcoin rose. More than any other factor, a change in Fed expectations will drive the token’s price.
“That’s the main catalyst,” says Riyad Carey, a research analyst for crypto-data provider Kaiko. “If the Fed does shift that would certainly be good for Bitcoin.”
The Bitcoin Halving Needs to Recapture Its Magic
In May 2024, the Bitcoin network will likely undergo a major change. Bitcoin is powered by crypto “miners”—such as
Marathon Digital Holdings
(ticker: MARA),
Riot Blockchain
(RIOT), and scores of smaller companies and individuals—that run computer servers that process transactions and try to rapidly guess the answer to cryptographic puzzles in exchange for tokens.
Roughly every four years, the “reward” for correctly guessing the answer gets cut in half, a process that helps to limit token supply and arguably drive up its price.
Such an event should be priced into the market already. The entire industry and investors already know what’s going to happen and about when it’s going to happen. And yet, every time a halving has approached in the past, token prices have risen.
In the 12 months before Bitcoin’s last halving in May 2020, its price rose about 44%. The halving before that in July 2016, it more than doubled in the prior year.
Institutions Need to Be More Comfortable Owning Crypto
Kaiko’s Carey notes that the year after Bitcoin’s 2020 halving also saw two major corporations—
MicroStrategy
(MSTR) and
Tesla
(TSLA)—add Bitcoin to their balance sheets for the first time. At the time, Bitcoin proponents argued the token was a good hedge against inflation and store of value.
But the great institutional adoption of Bitcoin never materialized, and the lack of interest from companies and professional investors has been a drag on the token’s price.
A series of court cases could soon be decided that would clarify the legal status of Bitcoin and other tokens. In one case, judges are deciding whether the Securities and Exchange Commission erred in its reasoning to prohibit applications for a Bitcoin exchange-traded fund.
But even regulatory clarity might not be enough for companies and institutional investors who have watched Bitcoin’s price cut in half over the past year and a half.
“The fundamental thesis of Bitcoin has been tested a lot, and it’s not necessarily been up to snuff,” says Carey, noting that its price hasn’t managed to keep up with inflation or hold its value.
Write to Joe Light at joe.light@barrons.com
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