For the first time since early 2021, Bitcoin broke above $30,000, leading many investors to question whether the Bitcoin bull market is back. Back then, Sam Bankman-Fried was still the golden boy of an entire industry, and the FTX logo was flying high above the Miami-Dade arena that was home to Jimmy Butler and the Heat. Since then, the market has undergone a radical transformation, and many of the heroes of yesterday are now villains of the great digital assets crash of 2022. However, the first quarter of 2023 has been immensely positive for Bitcoin and digital assets.
Before attempting to determine whether or not the Bitcoin bull market is back, it pays to understand how we got here in the first place. The events of the last year can best be described as a ‘domino effect’ whereby the collapse of a single firm set off a chain reaction that led to many companies shutting their doors as part of an industry-wide meltdown.
Terra Luna was the first domino to fall, creating ripples throughout the cryptocurrency landscape. Founded by Do Kwon, Terra gained prominence due to its innovative stablecoin, UST, which distinguished itself from competitors by maintaining its $1 value without relying on excessive collateral. Instead, UST utilized intricate financial engineering as an “algorithmic stablecoin” to preserve its peg, and even offered an enticing 20% return to investors depositing UST into a platform known as Anchor.
However, the volatile mixture of a flawed stablecoin design, unsustainable high yields, and adverse market conditions eventually led to disaster. Terra collapsed in May 2022, and led to a ripple effect of firms shutting down. Firms like Celsius, Voyager, and 3 Arrows Capital, which had significant exposure to Luna, were not immune to the crisis and subsequently failed. Do Kwon eventually got arrested in Montenegro as he was attempting to flee on falsified documents and charged by a federal grand jury in Manhattan.
Kwon was not the only culprit of the 2022 crashes to find himself on the wrong side of the law. Sam Bankman-Fried, whose exchange FTX was proven to be an outright scam, also faced legal consequences for his fraudulent activities.
Just when it seemed that the worst was behind us, the contagion in the crypto markets extended beyond the digital currency ecosystem reaching traditional banks. These banks had been hit hard by the Fed’s plan to hike interest rates as a response to inflation and began to crumble under the pressure of customer withdrawals and enormous losses on their bond portfolio. One by one, SIlvergate Bank, Signature Bank and Silicon Valley Bank waved goodbye, highlighting the interconnectedness and vulnerability of the global financial system.
Yet, despite 2023 getting off to a rough start with a string of banking collapses, Bitcoin has shown tremendous resilience and strength to climb up 82% since the start of 2023. Not only is Bitcoin far and away the best-performing asset class this year, beating out the likes of gold (up 11% year-to-date) and the S&P500 (up 9% year-to-date), but it is also dominant on a risk-adjusted basis as well.
The attractiveness of Bitcoin and digital assets as alternative investments is receiving a boost from institutional players and their confident moves in the space. If institutions have previously hesitated to jump into the waters due to concerns around Bitcoin custody, today they are tackling this issue head-on. Nasdaq is eyeing Q2 2023 as the launch date for a Bitcoin custody solution, joining giants like Fidelity who already offer Bitcoin custody and trading to customers.
Tokenization, the process of converting real-world assets into digital tokens on a blockchain, is also contributing to Bitcoin’s resurgence. This approach increases liquidity, transparency, and accessibility for various assets, boosting blockchain adoption and interest. With projections from Citi and BCG estimating the market cap of tokenized securities to reach trillions by 2030, the growth in tokenization could drive further demand for Bitcoin and other cryptocurrencies as investors diversify their portfolios. A future of regulated security tokens trading side-by-side with cryptocurrencies like Bitcoin is best exemplified by INX, the only platform where security tokens and crypto trade side-by-side.
At the same time, a couple of indicators point to the long road that digital assets will have to traverse back to the top. Although the total value locked in DeFi, a primary measure of activity in the blockchain-based financial system, has recovered by 50% since the start of the year and now sits at around $65billion, it still has a long way to go before reaching the all-time high of over $200 billion set in 2021. Furthermore, VC investments in the digital asset sector have grounded to a halt. According to data from Galaxy Digital, VCs invested $2.4 billion in the sector during Q1 of 2023, the lowest amount for any quarter since Q4 2020.
While it may be premature to declare the return of the Bitcoin bull market, the cryptocurrency’s impressive performance in the first quarter of 2023 and growing institutional interest suggest that there may be cause for optimism.