In a note titled “The financial market surprises of 2023” Standard Chartered has predicted that the price of Bitcoin (BTC 1.24%) could fall by another 70% to $5,000 in the new year due to rising interest rates and a continued sell-off in the tech sector.
On the other hand, venture capitalist and early Bitcoin proponent Tim Draper – also an early investor in Baidu and Tesla – recently predicted that Bitcoin will hit $250,000 in mid-2023.
There is a huge gulf between these two numbers, but that spread is what makes a market — especially for a volatile asset like Bitcoin. The true outcome will probably be somewhere in between, but I think it is likely that Bitcoin will fare better in 2023 and beyond than it did in 2022. Here’s why Bitcoin is my top cryptocurrency to buy early in the new year.
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The trouble with centralized exchanges
The collapse of Terra this spring, plus the more recent bankruptcies of high-profile crypto exchanges and lenders like Celsius Network, BlockFi, and ultimately FTX, have dealt a heavy blow to the credibility of the crypto industry. These events shook investor confidence and intensified Bitcoin’s sell-off. But take a step back and you’ll see that these events actually highlight the value of an asset like Bitcoin, which is truly decentralized and trustless, unlike the aforementioned exchanges.
By using a centralized crypto exchange like FTX or BlockFi to purchase or house cryptocurrencies, customers essentially made the decision to trust that exchange and its leadership. But the general public has little visibility into how those exchanges or protocols operate, making it difficult for users to make a fully informed decision. Such platforms differ from banks in that they are not FDIC-insured. And, unlike traditional brokerages, there is little regulatory oversight governing their behavior.
A truly trustless and decentralized asset
Of course, the desire for a peer-to-peer financial system that didn’t rely on banks or regulators was a key catalyst for the birth of Bitcoin in the first place. Indeed, to this day, much of Bitcoin’s appeal is in the fact that it is trustless, open source, and decentralized.
The transparent nature of Bitcoin’s distributed ledger technology means that anyone in the world can look up or verify any transaction on the blockchain. Users who buy Bitcoin and then store it in their own wallets or hardware ledgers don’t have to worry about the risk of losing access to their Bitcoin if a centralized entity like FTX or Celsius files for bankruptcy.
While centralized entities like FTX ran into trouble by taking on too much leverage, Bitcoin has no central authority that would even be able to make a bad decision that might imperil the network. The network is controlled and secured by a decentralized group of miners all over the world who validate blocks of transactions.
Unlike some other high-profile cryptocurrencies, the Bitcoin network had no downtime in 2022, and it remained a leading example of a secure blockchain network with zero hacks or disruptions in a year where high-profile exploits plagued quite a few other cryptocurrencies. With Bitcoin, you don’t need to trust anybody to use it, which was a large part of its appeal in the beginning and remains so today.
Gaining momentum among financial giants
These features make Bitcoin a unique financial asset. But do they mean anything if people aren’t using Bitcoin? Fortunately, Bitcoin adoption is picking up at a steady and noteworthy pace.
Alphabet, for instance, recently announced that it will accept payments for its Google Cloud service in Bitcoin beginning in 2023. Traditional financial institutions are also increasing their support for Bitcoin holders. Bank of New York Mellon, America’s oldest bank and the world’s largest custodian bank, will now allow its clients to hold and transfer Bitcoin using its Digital Asset Custody platform. Bank of New York Mellon found that 91% of institutional investors are interested in investing in “tokenized products” and that 41% already hold cryptocurrencies. Mastercard is working with Paxos to enable traditional banks to offer cryptocurrency trading.
A hedge against hyperinflation
Beyond big tech companies and financial institutions, Bitcoin is also a financial safety valve for people all over the world. In countries like Argentina where inflation has been rampant for years, many people looking to mitigate the effects of local currency devaluation use Bitcoin as a store of value and as a means of exchange. Governments continue to print more of their local currency to make up for the shortfall between spending and the money it collects, which in turn devalues those local currencies. But Bitcoin’s finite supply of 21 million means that users need not worry about a central body eroding the tokens’ value by issuing more coins.
It must be acknowledged that Bitcoin is down 65% year to date, which certainly throws some cold water on its status as an inflation hedge. However, inflation in Argentina is approaching 90% this year, while Turkey’s inflation rate has also surpassed 80%. Even with Bitcoin’s disappointing performance this year, believers in countries with hyperinflation hold onto the hope that the cryptocurrency’s future returns are more promising than that of their local currencies.
The case might be made that people in countries suffering from severe inflation would have been better off buying U.S. dollars or Euros. But around the world, many governments have made it increasingly difficult for citizens to buy foreign currencies, implementing currency restrictions and hefty exchange rates.
Bitcoin had a rough go of things in 2022, but as a trustless, decentralized financial asset powering a truly global network of users, it still offers the same appeal it always has. The problems at FTX brought the shortcomings of centralized entities into focus, highlighting the very case for Bitcoin. It may not hit Tim Draper’s $250,000 price target in 2023, but there is plenty of room for upside between his prediction and the roughly $17,000 Bitcoin is valued at today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Michael Byrne has positions in Bitcoin. The Motley Fool has positions in and recommends Alphabet, Baidu, Bitcoin, Mastercard, and Tesla. The Motley Fool recommends Standard Chartered Plc. The Motley Fool has a disclosure policy.
