The year 2022 has been difficult in the financial markets due to several factors, including geopolitical events, inflation, bankruptcies within the crypto ecosystem. Difficult times can also turn into opportunities. The question for 2023 remains: Is it a good year to invest in bitcoin, cryptocurrency?
Important things to consider before investing
No matter what we want to invest in, the first important step is to determine a number of important elements. The principle of investing is not just to decide on a whim to invest your money. Before going any further, it is important to determine certain details in order to better target your needs and your situation. The major elements to take into consideration are the level of tolerance, the objectives, the horizon.
- The investment horizon: this is the duration of the investment before having access to the funds. Depending on the established objectives, the horizon will adjust. For example, planning for retirement may mean having an investment horizon over several years. Buying a house does not require the same degree of accumulation as buying a car.
- Goals: Why you want to invest to grow your money and get you closer to your goals. They can be quite varied, such as buying a house, planning for retirement, having additional income, etc.
- Tolerance level: your level of tolerance to loss. Not everyone has the same level of acceptance of financial market variations. Investing sometimes involves turbulent times, so we have to consider whether we are comfortable with this aspect. If we are not comfortable with going through the more volatile periods, this can then lead to making irrational decisions.
Then there are several ways to invest, some will choose the passive mode. Passive mode involves either DCA or the one-sum principle. It can be boring but it’s one of the best ways to invest. Active mode requires more experience and knowledge. That said, this method can more actively take advantage of sector rotation and economic cyclicality. However, it is important to note that it is difficult to beat the indices over time but also without having taken more risk. Therefore, the notion of risk versus reward is important, hence the fact that it is necessary to determine its profile. There are no good or bad profiles and there are products for all types of profiles.
The year 2023 better than 2022?
We know that the year 2022 has not been the most successful. For example, for the past year, performance has remained negative on the S&P500 and bitcoin.
Obviously, if its objectives and its horizon are on the long term, it is not really problematic. You have to understand that investing is not linear, there are cycles. The year 2022 has been quite difficult as we have had to deal with several factors. We are talking here about the inflation environment, some geopolitical problems… As a result, this has prompted central banks to be more restrictive.
For now, if we look at the economic leading indicators, we can see that it is still deeply negative with a new low. The performances since the beginning of 2023 are not justified by a significant economic rebound.
Growth accelerations are often significant of sustained bullruns. For now, we are still in slow growth. A slowdown can result in a market decline or a large range.
We can see this MACRO impact especially in small cap stocks.
Besides, just like small caps, altcoins have a harder time. This can be seen with the dominance of bitcoin.
However, even if from a macro point of view there are elements that are not encouraging, bitcoin could benefit from certain factors in 2023.
Factors bitcoin could benefit from
It should be noted that the monetary policy of a central bank can take some time before having an effect on the economy. There is a broadcast time to take into account. The FED has been raising its rates for a year now and we are beginning to see the consequences for the economy. For example, we can see the problems in terms of the risk of bankruptcy of some regional banks in March such as that of the SVB for example. The FED’s rate hike implied a significant drop in bonds during 2022. As banks have significant positions in the bond market, this generated losses. The fact of presenting losses can create panic movements on the part of the depositaries at the banks. It is more commonly called a bank run.
The other important element is the fact that the high rates of short-term treasury bills (0 risk) encourage people to invest in money market funds which offer attractive rates. If deposits fall, it means that this money is not in the banks and that they will look for more attractive rates. This is the case for money market funds and treasury bonds. On the other hand, when this money goes into funds, it is not redistributed in the economy (lending). Therefore, this is the equivalent of being even more restrictive.
If they want to withdraw their money at the same time but the bank shows losses, it may happen that there is not enough cash to meet the demand. Therefore, the US central bank intervened very quickly to avoid further difficulties. Intervening by injecting increased the Fed’s net liquidity. Bitcoin was the first to benefit.
The risks bitcoin could benefit from
The limit of the debt ceiling was reached in January 2023. Since that date, the US cannot issue new US bonds. The debate will have to resurface fairly quickly because there is not enough liquidity in the treasury account (spending account). As the risk of default is present if the two parties do not agree, the US dollar could be weakened. Besides, the breakout of the US Dollar support could support bitcoin since the two tend to have a negative correlation.
The other risk is that which surrounds the banking system as discussed earlier. It can be seen that bitcoin has been acting as a hedge for some time with a negative correlation.
The long-term structure of bitcoin
The long-term trend remains bullish on bitcoin, but it is quite common to go through more volatile periods. This is the risk to take into account so as not to be surprised by the variation. The elastic effect is the same in one direction as in another, so what goes up quickly can go down quickly. The benefits of bitcoin such as the process of producing fewer bitcoins every 4 years (halving) is beneficial in the long term as long as demand remains constant. In the long run, as central bank interventions drive a larger money supply, and bitcoin offers a limited supply, this could be beneficial for bitcoin.
From a more technical perspective, bitcoin is holding above the 10-month moving average as well as a positive RSI. This kind of configuration is positive most of the time.
For now, the situation resembles that of 2019-2020. The support area seems well maintained. The risk of returning there would be a recessionary environment that could affect all asset classes. That said, like in 2020, bitcoin had retested 2018 support levels and bounced back as soon as the central bank intervened. Everything will depend on the speed of intervention by the central banks.
CONCLUSION
The principle of investing remains risky, bitcoin or cryptocurrency remains quite volatile. This is why it remains important to determine what you are comfortable losing to start investing. It is also very important to understand the context and the type of assets in which one invests. There are assets that are more secure under certain conditions, and others that will perform better under other conditions. Before investing, it is necessary to determine its horizon, its objective, and its level of tolerance.
Investing in the financial markets involves many risks. You may incur losses greater than the initial investment and therefore jeopardize your financial health and liability. We therefore recommend that you act on these financial markets with the utmost caution. In addition, it is essential that you know all the mechanisms inherent in the financial markets before starting your transactions on “real” markets. My analyses, research, posts, are for educational and informative purposes, they engage only me and simply show you the techniques and tricks that I use. They are in no way advice and you should always do your own research and seek guidance.
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