This is an opinion editorial by Chen Fang, the COO of BitGo, a Bitcoin-focused regulated custody and financial services firm.
A challenging 2022 prompted Bitcoin skeptics to gleefully say “I told you so” and declare that Bitcoin was dead and buried. But, much to their chagrin, their victory lap ended up being premature. Bitcoin has come roaring back in 2023, ending these premature celebrations and taking back some of its 2022 losses with a massive year-to-date gain of over 60% as of this writing so far in 2023.
Here are three reasons behind Bitcoin’s 2023 resurgence:
ONE: BANKING SECTOR TURMOIL AND A TIMELY REMINDER OF BITCOIN’S VALUE
In March 2023, turmoil from the banking sector in the wake of Silicon Valley Bank’s collapse rocked the market with the types of issues that it hadn’t experienced since the Great Recession. This was no fly-by-night operation; at the time, Silicon Valley Bank (SVB) was the sixteenth-largest bank in the United States and the bank of choice for many venture capitalists and startups.
This high-profile implosion and the lack of proper risk management in place at SVB led many individuals to question how safe their money was. Ultimately, the Federal Reserve stepped in to make the bank’s depositors whole, but the event still called the health of the banking system into question.
While not everyone is rushing to take their money out of banks, many more people are now at least aware of the risks of a single point of failure and are moving to diversify their assets by splitting them between multiple banks or even diversifying into alternatives like bitcoin and other cryptocurrencies for the first time.
The appeal of a fully decentralized asset like bitcoin is that there is no CEO or management team in charge that can endanger the solvency of the Bitcoin network by making a bad decision or poor judgment call. Bitcoin users don’t have to trust a company or management team to use Bitcoin; they can instead verify the open-source code that governs the Bitcoin network. Anyone can view any transaction ever made on the Bitcoin blockchain, giving the network unmatched transparency.
The price of bitcoin surged in March in the wake of the crisis, and in late April, renewed troubles at First Republic Bank, which reported that it lost over $70 billion in deposits during the previous quarter propelled bitcoin prices higher yet again, showing that investors and savers clearly view it as a port in the storm amidst the current uncertainty.
TWO: DEDOLLARIZATION AT A GLOBAL SCALE
In addition to the specific troubles highlighted by the banking crisis, faith in the dollar itself seems to be dwindling globally. Bitcoin isn’t the only indicator here; precious metals like gold and silver are surging while USD reserve currency held by other countries is at its lowest level in decades: from 73% in 2001 to 55% 20 later, in 2021, and down to 47% by April 2022, according to economist Stephen Jen. The yuan is now the most-traded currency in Russia while China and Brazil recently struck an agreement to settle trades in the yuan and real instead of in dollars. Meanwhile, Malaysia is making similar deals with both India and China.
Former Goldman Sachs Chief Economist Jim O’Neill — who originated the BRICS acronym, referring to then-emerging economies Brazil, Russia, India, China and South Africa — recently called on these countries to challenge dollar hegemony with a new native currency. This ambition is likely a bridge too far at this point in time. As a commodity importer, China’s economic goals aren’t aligned with commodity exporters like Brazil and Russia. Furthermore, tensions between China and India call the likelihood of this coming together into question. Nevertheless, it is another signpost on the road towards global dedollarization. It’s not just BRICs countries that are exploring their options — U.S. allies like French president Emmanuel Macron recently warned that Europe should reduce its dependence on the U.S. dollar to avoid becoming “vassals.”
While none of this means that the end of the dollar’s reign as the global reserve currency is guaranteed or imminent, it does paint the picture that individuals and nations are clearly looking for non-dollar alternatives to diversify into.
The long-term effects of dedollarization and the banking crisis’ effect on Bitcoin is still being written, but it has made more people aware of Bitcoin as a viable alternative to the current system, and it has certainly served as a catalyst for the price of bitcoin. In the immediate aftermath of the crisis, bitcoin climbed from just under $20,000 on March 10, 2023 to over $30,000 barely a month later on April 13, 2023, gaining 50% and adding $200 billion to its market capitalization in the process.
THREE: DEVELOPMENT OF THE LAYER 2 ECOSYSTEM
Along with the rise of Ordinals, Bitcoin has benefitted from the further development of its Layer 2 ecosystem, through projects such as Stacks and the Lightning Network. Stacks is a “Layer 2 companion chain for smart contracts focused on bitcoin (BTC) … allowing for the creation of related financial products.” At the time of this writing, Stacks has a market value of nearly $1 billion and is approaching the top-50 cryptocurrencies in market capitalizaiton.
Recent upgrades to Stacks enable Stacks users to pledge their tokens to secure the network to earn rewards in a manner similar to how networks like Ethereum enable participants to earn rewards by staking their holdings. In this way, Stacks could ultimately end up bringing DeFi to Bitcoin.
In addition to Stacks, other Bitcoin Layer 2 protocols like Lightning continue to grow. Lightning is focused on making Bitcoin more scalable. Recent research from Glassnode found that Lightning is 1,000-times cheaper than using legacy payment processors like Visa and Mastercard. Glassnode’s James Check found that the fee for sending 1 BTC across the Lightning Network was 3,000 satoshis (the smallest unit of bitcoin), which was the equivalent of an $0.84 fee to send $28,000 in dollar terms, or a miniscule fee of just 0.0029%. Payment application Strike uses the Lightning Network to facilitate no-fee transfers from the United States to other countries, including Nigeria, Kenya and Ghana and will soon offer it to the Philippines.
BITCOIN’S BEST DAYS ARE AHEAD
In addition to these macroeconomic factors, the next Bitcoin halving is coming up in 2024. Halvings occur roughly every four years and reduce the rewards for mining new BTC by 50%, essentially increasing the degree of mining difficulty and reducing the supply of bitcoin over time. Halvings have historically been bullish catalysts for bitcoin.
In 2023, between a changing macroeconomic landscape and the technical and developmental advances surrounding the Bitcoin network, Bitcoin has proven that, not only is it back from the dead, but its best days are likely still ahead of it.