main conclusions
Bitcoin ended the year down 64%, its worst year since 2018 This bear market is different in that for the first time in Bitcoin’s existence, the broader economy is also pulling back bullish, proving that it trades as a high-risk asset. Fans are hoping that link can be broken, but currently, it is posing as a scary macro climate for Bitcoin and one that, unsurprisingly, has crushed its price over the past year. Cryptocurrency investors will be happy to close the book on a terrible 2022. Prices across the asset class collapsed as the world transitioned to a new interest rate paradigm, with the interest rate era. low interest and cheap money officially closed. Risk assets have been crushed and there are few investments further along the risk spectrum than cryptocurrencies. Looking at Bitcoin, the world’s leading cryptocurrency ended the year at $16,547, compared to the $46,311 it entered the year. This translates to a 64% drop. But how poorly has it performed historically, for an asset that is notorious for explosive gains and terrifying losses?
2022 was the second worst year for Bitcoin
Looking at annual returns since 2011, the first year that sufficient liquidity and price data was available, shows that Bitcoin’s 64% drop this year was its second-worst number, trailing only the 72% drop in 2018. came after a $20,000 surge in late 2017, the first time Bitcoin really entered mainstream consciousness. In the midst of this context, the numbers show that 2022 may just be another year, right? Bitcoin has crashed many times before and has always recovered. Unfortunately, there’s a catch this time.
Bitcoin experienced a recession for the first time
Satoshi Nakamoto published the Bitcoin whitepaper in 2008, shortly after the Great Financial Crisis. Ingrained in the Genesis Block is a reference to the British newspaper The Times: “The Times 03/Jan/2009 Chancellor on verge of second bailout for banks.” In the first trade of 2009, Bitcoin was therefore propelled into this post-crisis environment, a climate of zero (or even negative) interest rates, a hot money printer and explosive returns on risky assets. A quick look at stock market returns since the launch of Bitcoin shows that, until this year, things were going well. And so, for the first time in its history, Bitcoin is experiencing a downturn in the wider economy. The money printing press was turned off and interest rates were raised, with the Federal Fund rate now at 4.25% to 4.5%. This is vitally important because, despite what some Bitcoin stalwarts might argue, Bitcoin is traded as a high-risk asset. Price data simply proves this beyond a shadow of a doubt, as its correlation with the S&P 500 is sky-high – and it only went up last year after interest rates started to rise in April 2022, as I wrote in this article, and showed in the chart. below.
Previous bear markets are not the same
This is why extrapolating past bear market rallies for Bitcoin is naive. The world is a different place now than at any other time in Bitcoin’s history. The free money-only market couldn’t persist forever, and now it’s time for Bitcoin to show the world what it’s made of. Bitcoin is often compared to gold, but the shiny metal has proven over a long sample space that it can be considered a hedge and a respectable store of value through which investors can preserve their wealth. Plotting gold’s returns historically below clearly shows that it rises in times of uncertainty. This is the type of chart you want to see when we enter a recession. Unfortunately, Bitcoin to this day trades with extremely high correlation with the stock market. Over time, advocates hope that bond will be broken. This is up for debate, but what is certain now is that Bitcoin is as far from being a “hedge” as it could be. If the Federal Reserve turns pacifist and eases interest rate hikes, you can be sure that asset prices will rise again — and those further away from the risk spectrum, like tech stocks and Bitcoin, will be among the big ones. winners. In the longer term, the trillion dollar question is whether this correlation can be broken and whether Bitcoin can achieve the coveted status of a store of value.
