In Hashdex’s 2023 Crypto Investment Outlook, our team identified seven key themes investors should pay attention to this year. While we are only halfway through the first quarter of 2023, two of these theses—that bitcoin’s investment case will strengthen and crypto will benefit from more “ordinary” macroeconomic conditions—are beginning to take shape.
Bitcoin (BTC) had its best January in ten years, up 40% and nearly quadrupling the return of the Nasdaq 100.1 Year to date, BTC has risen close to 50% while the broader Nasdaq Crypto Index™ is up over 38%.2
This year’s improving macroeconomic landscape, including rosier inflation expectations and a reduction in the pace of central bank rate increases, has lifted risk assets in general. However, bitcoin’s significant outperformance was also buoyed by diminishing fears about FTX-related contagion and expectations that the worst of the crypto winter is behind us.
But is this more than a short-term bump for bitcoin?
Our team has been investing in these markets long enough to temper expectations when it comes to bitcoin’s short-term performance. However, if we look at a bit of market history it’s clear to me that bitcoin has entered its latest recovery phase. Let’s look at the data.
A recovery that rhymes
Bitcoin has historically behaved as a pendulum between fear and greed, following a pattern that repeats across different macro environments and adoption levels. I spoke about this at length last week in our monthly webinar, but in sum this is what we’ve observed: First, there’s a bull phase that lasts around a year from the prior all-time-high (ATH). This is followed by a bear phase that also lasts about a year where BTC falls from its last ATH to a low at the maximum drawdown for that cycle. Finally, this is followed by a roughly two-year recovery phase in which BTC goes from its cycle low to its prior ATH.
I believe we are at the beginning of BTC’s next recovery phase.
Although history doesn't repeat itself, Bitcoin cycles do tend to rhyme since the same human psychology principles are at play in these markets over and over. In fact, the current environment reminds me of the recovery in early 2019. In November 2018, bitcoin was at the worst phase of its last cycle. It was trading around $6,000 and was down about 70% since its last ATH (December 2017). At the end of 2018, the “Hash War” shook the confidence in Bitcoin’s future and BTC fell close to the $3,000 level in a matter of days. Bitcoin’s price remained flat going into 2019, before a significant recovery in February 2019 took it over $10,000.
In the current environment, using history as our guide, it’s fair to expect bitcoin to still have high volatility and price uncertainty, alongside a balance of optimism and pessimism. But these things can, and do, exist during periods of recovery. Moreover, on the horizon is one of the big drivers for the potential next bull market will be the next Bitcoin halving, expected around May of 2024. In the past, these halvings—which cut the number of block rewards in half—have been followed by strong price appreciation.
It’s also important to note that a part of the Bitcoin macro thesis may be playing out. In recent years there have been frenetic monetary policy changes, significant geopolitical issues, and important changes happening at the very core of the global monetary order. As these developments unfold over the longer term, it's fair to suggest that Bitcoin could play a big role as a truly borderless, decentralized, and censorship-resistant network. This possibility will also help to continue to push adoption and growth.
While we don’t anticipate an “up only” environment for bitcoin in 2023, we are expecting its price to be at a higher level at the end of the year with the requisite volatility along the way. As our portfolio manager João Marco Braga da Cunha described in a recent article, trying to time the crypto markets or its cycles is a fool's errand, even for the most serious investors. This recent rally is a good example of why this is true and underscores the importance of following a long-term, disciplined investment strategy that keeps transaction costs low (e.g., dollar cost averaging).
There are many variables that could impact BTC’s trajectory this year, both on the macro front and stemming from any crypto-specific industry issues that may arise. But generally speaking, especially if we avoid a recession or it proves to not be as severe as initially thought, risk assets—including bitcoin—are well positioned to outperform. While it may be a long time until Bitcoin is back on magazine covers and cable news networks, it's clear that its fundamentals remain as strong as ever and its recovery has begun.
 The Nasdaq 100 returned 10.7% in January 2023.
 Nasdaq Crypto Index performance January 1, 2023 to February 15, 2023.
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