This is an opinion piece by Chen Fang, the COO of BitGO, a regulated bitcoin-focused financial services and custody company.
A tough 2022 has prompted Bitcoin skeptics to happily say “I told you so” and declare Bitcoin dead and buried. But, to their chagrin, their lap of honor turned out to be premature. Bitcoin came back strong in 2023, ending those premature celebrations and reversing some of its losses from 2022 with a huge gain since the beginning of the year of more than 60% at the time of this writing so far in 2023.
Here are three reasons behind Bitcoin’s resurgence in 2023:
One: Banking sector turmoil and a timely reminder of Bitcoin’s value
In March 2023, turmoil in the banking sector following the collapse of Silicon Valley Bank rocked the market with the kind of problems it hadn’t seen since the Great Recession. It was not a night flight operation; at the time, Silicon Valley Bank (SVB) was sixteenth largest bank in the United States and the bank of choice for many venture capitalists and startups.
This highly publicized implosion and the lack of proper risk management in place at SVB led many to question how safe their money was. Ultimately, the Federal Reserve intervened to reassure the bank’s depositorsbut the event still called into question the health of the banking system.
Although not everyone is rushing to withdraw their money from banks, many more people are now at least aware of the risks of a single point of failure and are trying to diversify their assets by spreading them among several banks or even by 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 who can jeopardize the solvency of the bitcoin network by making a bad decision or bad judgment. . Bitcoin users don’t have to trust any company or management team to use Bitcoin; they can instead verify the open-source code that governs the Bitcoin network. Anyone can see any transaction ever made on the Bitcoin blockchain, giving the network unparalleled transparency.
The price of bitcoin surged in March following the crisis and, in late April, further unrest at First Republic Bank, which reported that it lost more than $70 billion in deposits in the previous quarter has further propelled bitcoin prices higher, showing that investors and savers clearly view it as a port in the storm amid the current uncertainty.
Two: Global dedollarization
In addition to the specific troubles highlighted by the banking crisis, confidence in the dollar itself appears to be waning globally. Bitcoin is not the only indicator here; precious metals like gold and silver explode while the 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 to 47% in April 2022, according to economist Stephen Jen. The yuan is now the most traded currency in Russia while China and Brazil recently reached an agreement to settle transactions in yuan and real rather than dollars. Meanwhile, Malaysia is making similar deals with India and China.
Jim O’Neill, former chief economist of Goldman Sachs — which is the origin of the acronym BRICSreferring to the then-emerging economies of Brazil, Russia, India, China and South Africa — have recently called on these countries to challenge dollar hegemony with a new local currency. That ambition is probably a bridge too far at this point. As an importer of raw materials, China’s economic goals are not aligned with commodity exporters like Brazil and Russia. Besides, tensions between China and India question the likelihood of this merger. Nevertheless, it is another milestone on the road to global dedollarization. It’s not just the BRIC countries exploring their options – US allies like French President Emmanuel Macron have recently warned that Europe should reduce dependence on the US dollar to avoid becoming “vassals”.
While none of this means that the end of the dollar’s reign as the world’s reserve currency is guaranteed or imminent, it paints the picture that individuals and nations are clearly looking for non-dollar alternatives to diversify.
The long-term effects of dedollarization and the effect of the banking crisis on bitcoin are 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 bitcoins. In the aftermath of the crisis, bitcoin went from just under $20,000 on March 10, 2023 to over $30,000 just a month later on April 13, 2023, gaining 50% and adding $200 billion to its market capitalization in the process.
Three: Developing the Layer 2 ecosystem
Along with the rise of ordinals, Bitcoin has benefited from the further development of its layer 2 ecosystem, thanks to projects such as Stacks and the Lightning Network. Stacks is a “Layer 2 companion chain for smart contracts focused on bitcoin (BTC)…allowing the creation of related financial products. As of this writing, Stacks has a market value of nearly $1 billion and is approaching the top 50 cryptocurrencies by market capitalization.
Recent Stacks upgrades allow Stacks users to pledge their tokens to secure the network to earn rewards in a similar way to how networks like Ethereum allow participants to earn rewards by staking their assets. This way, Stacks could finally bring DeFi to Bitcoin.
In addition to Stacks, other Bitcoin Layer 2 protocols like Lightning continue to develop. Lightning aims to make Bitcoin more scalable. Recent research by Glassnode revealed that Lightning is 1,000x cheaper than using legacy payment processors like Visa and Mastercard. Glassnode’s James Check found that the fee to send 1 BTC over the Lightning Network was 3,000 satoshis (the smallest unit of bitcoin), which equates to a fee of $0.84 to send $28,000 in dollars, that’s a tiny fee of just 0.0029%. The Strike payment app uses the Lightning Network to facilitate free transfers from the United States to other countries including Nigeria, Kenya and Ghana and soon to offer it in the Philippines.
Bitcoin’s best days are ahead of us
In addition to these macro factors, the next bitcoin halving will occur in 2024. Halvings occur approximately every four years and reduce rewards for mining new BTC by 50%, essentially increasing the degree of mining difficulty and reducing the supply of bitcoin over time. . Halvings have always been bullish catalysts for bitcoin.
In 2023, between a changing macroeconomic landscape and technical and developmental advancements surrounding the Bitcoin network, Bitcoin has proven that not only has it come back from the dead, but its best days are likely still ahead.
This is a guest post by Chen Fang. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.